Posted by: Kenji Hall on August 18, 2009
Damned if you do, damned if you don’t. That sums up how Sony executives must have felt as they debated whether to lower the price of the PlayStation 3 video game console. Lowering the price might add to the console’s allure, but it would also make it harder for the company to turn around its money-losing gaming business.
In the end, Sony decided on a price cut. On Aug. 18, at Gamescom, Europe’s biggest show for interactive entertainment, in Cologne, Germany, the Japanese electronics and entertainment giant took the wraps off the PS3 Slim, a new, lighter, more compact version of the console that will boast all of the same features. It will appear in U.S. stores on Sept. 1 and will cost $299 for a machine with a 120-gigabyte hard disk drive. The price is $100 less than the previously available 80-gigabyte machine and $200 less than the $499 160-GB version. (The older models will be discounted, as well.)
Hours before the announcement, Kmart and Sears jumped the gun and began taking pre-orders in the U.S. for the PS3 Slim. There were other clues that Sony would unveil an overhauled console: Online retailer Amazon discounted the 160-GB PS3 by $50, to $449.99, on its Web site, and British supermarket operator ASDA said it had slashed the price of the PS3 and would continue the sale until its inventory ran out.
For weeks, the market had been rife with rumors of an imminent PS3 price cut. Most analysts thought that Sony had to drop the price in order to boost sales and broaden the machine’s appeal beyond the hard-core gaming crowd. Until today, the PS3 was the priciest of the gaming machines: It sold for $399 in the U.S., compared to $250 for Nintendo’s Wii and $299 for Microsoft’s Xbox 360. And that, say analysts, hurt its chances of gaining a following early on. One possible reason Sony waited so long: It was losing money on the PS3.
Since the day Sony and Nintendo released their consoles in November 2006, PS3 cumulative sales (23.8 million) have paled in comparison to the Wii’s (52.6 million). Worse, Sony is behind in its goal of selling 13 million consoles in the fiscal year through March 2010, up from 10.1 million last year. In the first quarter, Sony sold 1.1 million units, down from 1.6 million in the same period the year before. This year’s October-December quarter will be huge: Sony traditionally does roughly half of its annual console sales during this period.
But the decision wasn’t a no-brainer: Sony can hardly afford to give discounts on a machine that’s been a money-loser from the day it hit store shelves. (Sony profits from selling games it develops in-house and from licensing fees it gets from other game publishers that sell games for the PS3.) When the PS3 was launched, an iSuppli analysis estimated Sony’s “bill of materials”—the total cost of all the components used to build it—at more than $840 for the model that sold at the time for $599, and $805 for a low-end version that sold for $499. More than two years later, iSuppli took the machine apart again and declared that, while losses had shrunk to about $50 per machine, Sony still wasn’t making a profit.
This year the PS3 was finally supposed to earn money. Losses from video games and TVs have been a headache for Chairman and CEO Howard Stringer, who took over four years ago to revive the ailing tech company.
The company’s efforts to design smaller chips and use fewer parts were expected to help lower costs. Problem is, even if the PS3 is no longer a drag on earnings, Sony’s games business still has a ways to go before it stops hemorrhaging cash. And revenues from Sony’s online sales of game, TV and movie downloads through the PlayStation Network are only expected to top $500 million—peanuts for a $73-billion company, according to Barclays Capital Japan’s analyst Eric Lee.
Another problem: In the coming months, Microsoft and Nintendo might lower their console prices, too, making the PS3 the most expensive option for recession-hit shoppers. And as prices of ordinary high-definition Blu-ray DVD players fall, the PS3—with its built-in Blu-ray player—loses its appeal to the early tech adopters who might have bought the console as an all-around entertainment system.
Most analysts I spoke with said Sony Computer Entertainment, the gaming unit, might briefly turn profitable in the October-December quarter but would probably end the fiscal year in the red. Sony is clearly hoping that a lineup of new games slated for later this year will attract buyers. “I think they’re going to lose money anyway at this rate so they probably figured, ‘Why not do something more proactive about jump-starting the gaming business?’” says KBC Securities’ analyst Hiroshi Kamide.
But would a price cut help Sony sell 30% more PS3 consoles than it did last fiscal year? Skeptics abound.
Note: The original item has been updated with details from Sony’s announcement in Germany.