By Cliff Edwards Nothing would shake up the $24.5 billion video-game industry more than if Sony Computer Entertainment suddenly withdrew from the market. Yet such a seismic shift became a very real possibility on Mar. 24, when a federal judge ruled that the maker of the PlayStation and PlayStation2 game consoles is widely infringing on patents owned by a small Silicon Valley company, Immersion (IMMR), which announced the decision in a Mar. 28 press release.
The dispute is over so-called haptics technology -- software and hardware that makes a game controller shiver and shake when you slam a car into a wall or get shot by a bad guy, or makes a steering wheel veer out of control when you bump into an object.
U.S. District Judge Claudia Wilken, in upholding a jury's findings, ordered Sony (SNE) to stop selling its already hard-to-get PlayStations, as well as nearly four dozen games it has made or allowed others to sell on its systems, including the popular Gran Turismo racing games and Take-Two Interactive's blockbuster Grand Theft Auto series. Wilken granted a stay on her order, pending Sony's appeal.
ADVANTAGE, XBOX? Sony is likely to face enormous pressure from game makers such as Electronic Arts (ERTS) and Activision (ATVI) to settle the case post-haste. With more than 30 million PlayStations on the market, Sony is far and away the biggest fish in the game pond right now. And many companies have tied their fortunes to PS2 over competing platforms. Whole development teams and production schedules are geared toward winning in the PlayStation market.
For Sony, the ruling couldn't come at a worse time. It has been trying to maintain momentum for the PS2, even as wandering eyes start looking toward the introduction of a new generation of consoles, beginning later this year with Microsoft's (MSFT) next Xbox (see BW Online, 12/7/04, "Inside Microsoft's Consumer Strategy").
Most pundits believe the PlayStation3 and Nintendo's Revolution will be at least six months behind the new Xbox. Uncertainty surrounding PS2's future, and even potential implications of the ruling on PS3, could prompt game developers to shift additional resources to Microsoft or Nintendo. "PlayStation2 had a lead-time advantage in the last cycle, and that really helped them," says Standard & Poor's analyst Jonathan Rudy. "If there are any delays caused because of [this ruling], it could be really a boon for the Xbox."
SEEKING A BREAK. The lawsuit is no surprise. Friction often results as game-console makers try to negotiate better deals from technology suppliers. Sony, Microsoft, and Nintendo attempt to balance producing cutting-edge equipment with rock-bottom prices designed to woo the consumer. Such systems usually sell for a loss for years after they're introduced, with the companies eking out profits only after achieving heavy volume and years of licensing deals with game developers. Microsoft in mid-2003 settled a similar lawsuit by agreeing to pay $20 million and taking a $6 million equity investment in San Jose (Calif.)-based Immersion.
Sony may be gambling for better terms. In a trial late last year, a jury ordered it to pay Immersion $82 million in damages, or the equivalent of 1.37% in licensing fees on each product sold over a three-year period. Immersion typically charges 5% for licensing its technology, company CEO Victor Viegas says. With interest, Sony was ordered to pay $90.7 million.
Even as Sony appeals the outcome, it must pay royalties of 1.37% a quarter on any product sold going forward. With Sony widely expected to continue using the disputed technology in its next-generation console, Immersion figures to gain a handsome take.
THE CLOCK IS RUNNING. That fast-growing company has been steadily licensing its feedback technology to BMW and other car makers, medical-equipment manufacturers, and, most recently, cell-phone makers such as Samsung. Immersion contended it demonstrated its force-feedback technology to Sony in the early 1990s and that the Japanese giant adopted its technology months after Immersion published scientific papers on the subject.
A Sony spokeswoman declined comment, citing the continuing litigation. Immersion CEO Viegas says he expects Sony's appeals to be exhausted within 18 months. "If they lose, they run the risk of being taken off the shelves," he says.
That may be understating the case. If Sony drags its feet too long, it runs the risk of being knocked out of the game. With Burt Helm in New York
Edwards is a correspondent in BusinessWeek's Silicon Valley bureau