Sunday, May 27, 2007

Sony, PS3, Blue Ray….what’s happening??!

There has been significantly important information circulated recently on Sony’s PS3. First, Sony’s is discontinuing the 20GB version of the PS3 and introduced an 80GB for Korean market only. Then the rumor mills are churning with that Sony plans to cut prices of PS3. Is this a natural product evolution cycle or a defensive move that may relate to sales?

Sony operates like any other company; they abide by the manufacturing and industry rules. The rules of the gaming industry was defined almost 15 years ago when Sony unveiled its PS1. Consoles were sold below cost but good margins made on software. As production capacity increased, consumers enjoyed further price cuts on the console. This was obviously made possible by reduction of key production material costs.

Industry rules are generally driven by product roadmaps and component costs. Both new and End-Of-Line(EOL) models are decided in advance taking into consideration market demands, competition and component roadmaps. Manufacturers negotiate with suppliers in advance to secure production materials suppliers at low prices. Finally, various components and price combinations are evaluated to determine the one that best suits the market and consumer needs whilst preserving a profit margin for the company.

The question then arises as to why new models are being introduced 6 months after the first.

During the launch of PS3 in Europe, Sony announced that 600,000 units were sold in 2 days. This was view as a disappointing launch from a event perspective (source: TF1, LCI, Launch of Playstation 3 in France). If sales to do meet expectations, it is crucial for manufacturers to make quick decisive measures based on market needs. In this case, consumers opted to purchase the 60GB version of PS3 as the price difference with the 20GB unit was $100 only. The 60GB unit came equipped with Wifi capabilities as well. We can safely assume that the entry-level unit was meant to drive people to stores.

Another possible factor is the contract between Sony and its hard drive suppliers. Component issues or shortages would mean Sony has to review its product roadmap. Sony announced that the demand for its 60GB unit is much higher and they are assessing how best to address the consumer needs. However, the fact that the 20GB units are discontinued is not good news at all.

PS3 is one of the best and most powerful gaming unit in the market today. The question is whether Sony has found its right audience. Microsoft’s XBOX is continuously increasing its presence in the market. I am not referring to market shares but ‘love shares’ and ‘technological shares’. Their games are getting better and providing new experiences for the consumers. GRAW II and Halo III is an example. It has even introduced the HD DVD and an Elite edition XBOX 360 with HD support. In addition, they are now binding the console with Home Theater, taking the fight full on with Sony. More recently, they announced linking XBOX with Windows Live Messenger, which is definitely a good way to attract additional audiences.

Let not overlook Nintendo’s Wii. Nintendo continues to produce great games for gamers. They focus less on technology compared to its competitors. They fight on a different front. Nintendo survived with its GameBoy while many of competitors folded or faded away. Lynx from Atari, GameGear from Sega and the fantastic portable PC Engine from NEC are now all defunct. Nintendo continues with its success on Nintendo DS and now Wii is making heads turn and raking up the cash register. This is despite they fact that Wii has nether great games nor HD or Blue Ray support. It does have, however, games that entertain.

So where does Sony fit into all of this? The Blue Ray battle that has started on the Home Theater market will be fierce but Sony using the PS3 as a primary advantage to promote its format. By introducing entry-level units, it is enticing consumers to take up its format. Discontinuing the 20GB unit, may displace Sony from some markets. Unless Sony immediately introduces a higher capacity PS3 model at a lower cost.

Some of the more recent announcements seem to suggest that Sony is taking greater defensive actions. Though PS3 may not be as successful as they anticipated, it appears the new PSP model will help strengthen its dominance. Sony has to continue to innovate to survive. It cannot afford to lose the battle in the HD format as they did in the Betamax many years ago.

We can probably expect Sony to react aggressively in the coming months and years. The PS3 is just one of its ammunition from the arsenal. Hang on, sit tight…the battle is getting interesting.

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