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BNP Paribas SA
Electronic Arts Inc
For almost two decades, Sony’s (SNE) PlayStation video game console has been the pride of the company’s engineering legion. With innovations such as DVD and Blu-ray movie players and the supercomputer-like Cell processor, the PlayStation has sold more boxes than the company’s Trinitron televisions and rivaled its iconic Walkman music players. Yet the PlayStation 3, Sony’s aging rock star launched in 2006, needs a makeover. On Feb. 20, Sony is expected to reveal in New York the first details of a powerful new machine that pushes the boundaries of gaming and entertainment. “See the future,” the company teases in a short video on its blog.
The question facing Sony is whether this iteration of PlayStation is in sync with the current rage for mobile computing. Consumers can game on their smartphones and tablets in the kitchen, the bedroom, or in transit. Nor are they in awe of the Sony brand as they once were. Kazuo Hirai, tapped to be chief executive officer last year because of his success running the PlayStation business, has said he considers the console to be the centerpiece of a universe of exclusive content, Sony phones, tablets, and TVs operating throughout consumers’ homes. That kind of waterfront strategy has been largely abandoned by Panasonic (PC) and Samsung Electronics and is hard to sustain with the rise of low-cost Chinese manufacturers, says Wedbush Securities analyst Michael Pachter. “Sony refuses to acknowledge they don’t have a market like they had 20 years ago,” Pachter says. “They’re desperately clinging to the notion they can get it back.” Hirai declined to comment for this story.
Sony needs to get its PlayStation strategy right. After eight years of losses in the TV business, it projects a $215 million profit this year—only after selling its New York headquarters for $1.1 billion. As Hirai culls ancillary business such as chemicals and display-making, he wants to generate 70 percent of Sony sales and 85 percent of operating profit by 2014 from just three businesses: digital imaging, mobile devices, and games.
The PlayStation 4 faces a challenge similar to Sony’s struggling TV business, where margins are squeezed by Samsung’s efficient manufacturing and lower-cost Chinese products. In games, Apple (AAPL) iPads and Samsung Galaxy devices have battered console makers’ time-tested strategies for turning a profit. Many mobile phones are heavily subsidized by U.S. wireless carriers. And as consumers watch more shows and play games on portable devices, they find they no longer need the pricey features offered by top-end TVs and game machines to have the graphically rich experiences once unique to the console world. The PlayStation 4 “will show whether Sony still has the power like Apple to surprise consumers with its products,” says Hiroshi Yamashina, a Tokyo-based analyst at BNP Paribas Securities (BNP).
Hirai has said he expects the new PlayStation to boost demand for Sony’s online music and video service and Xperia phones and tablets. To succeed, Sony must also bring in casual gamers who are as likely to buy a console to watch movies on Netflix (NFLX) as to play games. Just two months after rival Nintendo tried to tap the same group with its new Wii U console, it slashed its sales outlook to 4 million units through March, from 5.5 million forecast earlier. Researcher NPD Group says sales of packaged games shrank 21 percent last year, while games downloaded to PCs and mobile devices rose 16 percent.
Nick Earl, a senior vice president at Electronic Arts (EA), says game developers still consider home consoles the best platform for cutting-edge games and entertainment. Nowadays, though, EA is focused on following the mobile money. “The core gamers that have traditionally been buying a packaged-goods game every week, they’re really starting to shift their buying and playing to games on iPads and other mobile devices,” Earl says. “We believe the future of gaming is so much tied to these devices.”
Analysts say keeping game developers on board is one reason Sony will reveal the new PlayStation’s secrets—it may allow users to share video of their game play, and may add a touchscreen to the controller—more than six months before it will probably go on sale. The approach, which Sony used in 2011 when it announced the PlayStation Vita portable player, is designed to get developers interested in creating unique games that best show off why it’s worth buying the console. But the Vita, stuffed with every kind of wireless technology, controller scheme, and capability to keep people amused, hasn’t delivered, and Sony recently cut its sales forecast.
Hirai has said Sony is best-positioned to capitalize on its engineering roots and use cloud-based services to give customers a more personal user experience. “At the end of the day, we need to turn out great products,” Hirai said in January. The question remains whether Sony’s reputation for quality hardware will be enough to make consumers take notice.
The bottom line: Sony, which has lost money on televisions over the past eight years, wants to jump-start results with the mobile-defying PlayStation 4.