Bloomberg News

Sony Revamps Aging PlayStation in Bid to Recapture Cool

February 14, 2013

Sony PlayStation 3

Visitors play games on Sony Computer Entertainment Inc. PlayStation 3 consoles at the Tokyo Game Show 2012 in Chiba, Japan, on Thursday, Sept. 20, 2012. Photographer: Tomohiro Ohsumi/Bloomberg

For almost two decades, Sony Corp.’s PlayStation gaming console has been the pride of the company’s legions of engineers. Now President Kazuo Hirai hopes a makeover can keep it from tracking other Sony hardware hits into obscurity.

By featuring innovations such as DVD and Blu-ray movie players, Sony has sold more PlayStations than Trinitron TVs and about as many as the Walkman music player. Yet the latest iteration, the PlayStation 3, launched in 2006 -- a year before Apple Inc. (AAPL:US)’s first iPhone -- has seen sales slow as it ages.

On Feb. 20, Sony will announce a new version of the console with more realistic game play and more entertainment options, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. Pachter cited game developers and retailers for saying Sony “is 100 percent certain to announce the PlayStation 4” during an event next week in New York.

The question facing Sony and rival Nintendo Co., which released its Wii U console last year, is whether the new devices are in sync with consumer preferences for mobile computing on devices from Apple and Samsung Electronics Co.

“Sony and Nintendo refuse to acknowledge they don’t have a market like they had 20 years ago,” Pachter said. “They’re desperately clinging to the notion they can get it back.”

Apple, Samsung

Hirai, 52, named chief executive officer last year partly because of his success running the PlayStation business, has said he considers the console to be the centerpiece of a universe of exclusive content running on Sony phones, tablets and TVs.

Speaking to reporters in Tokyo last month, Hirai said Sony is working to improve its position in mobile gaming.

“We’re trying to leverage past expertise in the traditional video-game business and bring that experience onto the smartphone,” he said. “So we’re actually playing in both fields, which I think is very strategic.”

Sony needs to get its PlayStation strategy right because it hasn’t made money in the TV business since the 12 months ended March 2004. This month, it reported an eighth straight quarterly loss as Apple’s iPad and iPhone and Samsung’s Galaxy smartphones tilt the games business away from consoles by Sony, Nintendo and Microsoft Corp., which makes the Xbox 360.

Profit Forecast

Sony shares are down 10 percent in Tokyo trading over the past 12 months, compared with a 25 percent increase in the benchmark Nikkei 225 Stock Average.

Sony’s games unit made money, though operating profit fell 86 percent to 4.6 billion yen ($49 million) as sales of consoles and software slumped.

The value of games downloaded to computers and mobile devices rose 16 percent last year, according to researcher NPD Group Inc., while titles for dedicated consoles fell 21 percent.

The PlayStation 4 faces a challenge similar to the struggling TV business, where margins are squeezed by Samsung’s efficient manufacturing and lower-cost Chinese products. Many mobile phones also are subsidized by U.S. wireless carriers.

Sony projects a 20 billion-yen profit this year after selling its New York headquarters for $1.1 billion. As Hirai culls ancillary businesses such as chemicals and display-making, he aims to generate 70 percent of revenue and 85 percent of operating profit in Sony’s electronics operations by March 2015 from three businesses: digital imaging, mobile devices and games.

Nintendo Outlook

The PlayStation 4 “will show whether Sony still has the power like Apple to surprise consumers with its products,” said Hiroshi Yamashina, an analyst at BNP Paribas Securities in Tokyo.

Hirai 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 from Netflix Inc. (NFLX:US) as to play games.

Two months after Nintendo tried to tap the same group with the new Wii U, it cut its sales outlook to 4 million units through March from an earlier forecast of 5.5 million.

Game developers still consider home consoles the best platform for cutting-edge games and entertainment, said Nick Earl, a senior vice president at Electronic Arts Inc. Now, though, EA is focused on following the mobile money.

Luring Gamers

“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 said. “We believe the future of gaming is so much tied to these devices.”

Osaka, Japan-based Capcom Co., creator of the “Resident Evil” and “Street Fighter” video games, is stepping up development of games for mobile devices even though improvements in smartphone technology are making development more expensive.

Creating a multiplayer game for mobile devices now costs at least 100 million yen ($1.1 million), Chief Operating Officer Haruhiro Tsujimoto said in an interview. That compares with “a few tens of million” yen for games on basic mobile phones, he said.

Keeping game developers on board may be one reason Sony will reveal the new PlayStation more than six months before it will probably go on sale. That 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 why it’s worth buying the console.

The Vita, featuring wireless technology, has yet to deliver. Earlier this month, Sony lowered its forecast for combined sales of the PSP and PlayStation Vita consoles to 7 million from the 10 million it forecast in November -- and the 16 million it expected last May.

Hirai has said Sony is best-positioned to capitalize on its engineering roots and use cloud-based services to give customers a more personal experience.

“At the end of the day, we need to turn out great products,” Hirai said in January.

To contact the reporters on this story: Cliff Edwards in Los Angeles at cedwards28@bloomberg.net; Mariko Yasu in Tokyo at myasu@bloomberg.net

To contact the editor responsible for this story: Michael Tighe in Hong Kong at mtighe4@bloomberg.net


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