PlayStation2: Killing the Competition

Is the game over? A year ago, consumer-electronics giant Sony spent the holiday season smacking down rumors that it would be supplanted by two new video-game consoles, Microsoft's (MSFT) Xbox and Nintendo's GameCube. This year, Sony is sitting pretty. Its PlayStation2 is still the hottest-selling game machine. To date, Sony has shipped 40 million PS2s worldwide. Compare that to Microsoft and Nintendo, which have each shipped about 4 million consoles.

What's Sony's secret? For one, PS2 launched in October, 2000. That extra 12 months on retailers' shelves earned Sony the largest installed base, which has given game designers strong incentives to build their hottest offerings for PS2. Sony's speed to market also allowed it to cut prices on its console long before its competitors did the same.

On Oct. 29, BusinessWeek Online technology reporter Jane Black talked with Sony Computer Entertainment's Executive Vice-President Jack Tretton about how Sony plans to keep PS2 ahead of the pack. Following are edited excerpts of the interview:

Q: Analysts had great expectations for the gaming market this Christmas -- until, that is, game publisher THQ (THQI) warned it wouldn't match its own bullish projections (see BW Online, 8/22/02, "It's 'Gold Rush' Time for THQ").

A: Absolutely, [the holidays will be bullish for Sony]. We expect to bring in $6.5 billion at retail on our platform in North America [this Christmas season].... The consumer is on board. We continue to get more people jumping on the bandwagon. I don't envision anything happening in the near future that could derail that.

To your point, THQ is now coming in at 15% growth, the low end of their projections. But that's not necessarily bad news in this economy. If you do the math, we have about 70% of the market. Nintendo and Microsoft share the other 30%. If we deliver our numbers and exceed a little bit, 70% of the market delivers on target. Even if the other two come in a little bit [down], the gaming industry as a whole will do just fine.

Q: Who's buying PlayStation2? How have gamers changed over time?

A: When we launched PlayStation1 in 1995, most gamers were teenage boys. But if you look at our platform today, only 30% are under the age of 18. The sweet spots are 22 to 25, and 25 to 35. Those two demographic segments represent almost half of all gamers on our platform. The PlayStation2 really has brought mature gamers to the marketplace by offering them compelling storylines and sophisticated graphics.

Q: Microsoft's Xbox also targets mature gamers. What have you done to compete with Xbox?

A: The onus was really on Microsoft because they were going after the exact same demographic as we were. They had to take our strengths and show consumers that they had more beyond [what we had].

If you look at their early ads, they tried to do that by going into explanations of processors and polygons. But the consumer couldn't care less about that. Their attitude is: "I don't care what's inside the box. Just show me the game." So Microsoft focused on the game library. And it wasn't a bad start. But they never built on it. Over time, they've failed to offer anything compelling enough to convince people to buy a second gaming system -- or to choose Xbox as their primary console. And it only gets harder to do that as time goes by.

Q: Why?

A: People buy consoles for the games. As we pull significantly farther ahead, we're the de facto standard. Third-party publishers [such as Electronic Arts (ERTS), Activision (ATVI) and THQ] are going to build games for our platform first because that's where the dollars are.

Q: So will this year be a better year for Sony than last year?

A: I'm a big believer in comparing products in reality. The most frustrating experience for me last year was selling the reality of PlayStation2 against the promise of Xbox and GameCube. The reality of Xbox and GameCube was never anything I was really concerned about. But it was hard to compete against the hype.

Q: This holiday season was also supposed to be the time when online gaming took off. What trends have you seen?

A: So far, 400,000 PlayStation2 players have signed up to participate in online gaming. It's still a small percentage of the millions of gamers, but it's a start. In fact, at nearly half a million, we now have the largest online-gaming community in the world.

One of the reasons we've seen our online games take off is...simplicity. All you need to play online with a PlayStation2 is buy a network adapter for $39.99. You don't have to have a broadband connection as you do with Microsoft. You don't have to subscribe to an ISP [Internet service provider] as you do with Microsoft. Any gamer who bought PlayStation2 since October, 2000, is a potential online player for us.

Microsoft's mistake was limiting online gaming to broadband users. In our experience, there are fewer hard-core gamers with broadband than you might think. Of the first 100,000 or so people who bought our network adapters in August, 43% are playing with a narrowband connection. So almost half of the early adopters, the ones you'd think of as hard-core gamers, don't have broadband at all. That group would be cut off if they were Xbox players.

We've also generated interest in online games through one of our hottest selling titles, SOCOM U.S. Navy Seals. In this game, you don't only use the controller. The game lets you deploy your troops through a headset. In the online environment, you can communicate with other players through the headset to decide who should send which troops where.

Steve Ballmer, Power Forward
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