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This PlayStation May Play Too Much


Picture this: You plug your TV into a box the size of a phone book and go online to check headlines. You get bored and click over to a Giants game. Later you download Casablanca, play Metal Gear Solid against an opponent in Seoul, then chat with a friend in Seattle. What sort of box is this? It could be a PC, but Sony Corp. (SNE) hopes it will be a PlayStation 3, the video game console it plans to introduce this spring.

Six years in the making, the PS3 is a crucial component of Sony's strategy to dominate the digital home with a full lineup of super-sharp TVs and other gear. To attract teens and parents alike, the console plays high-definition games and movies from Blu-ray DVDs. It boasts a huge hard disk to store photos, music, and TV shows. And it can connect to the Net for play against far-flung rivals, while a new multimedia chip called "the Cell" -- developed by Sony, IBM, (IBM) and Toshiba at a cost of $400 million -- juggles the workload.

If that seems like a lot to pack in, it is. But there's a lot at stake. Sony is banking on the console to lift its consumer-electronics division out of trouble, and the Blu-ray drive is expected to give a boost to that Sony-backed format, one of two competing to become the next-generation standard for videos. "PS3 is very important for us," says Sony Chief Financial Officer Nobuyuki Oneda. "There are so many key devices from the electronics group that will go into it."

Some question whether Sony is trying to cram too much into the new box. The PS3 is expected to cost $350 to $400. While it has the potential to be a megahit, Sony's message might get muddled in the process of going after too broad a market, says Deutsche Securities Ltd. analyst Takashi Oya. "It would be difficult to sell PS3 initially as anything other than a game machine," Oya says. Sony declined to comment on such concerns.

Spearheading the PS3 assault is Ken Kutaragi. The 55-year-old former engineer heads the game division and is the mastermind behind the smash-hit PlayStation and PlayStation 2 machines, which have made Sony an unstoppable force in the industry. Last year the game unit earned $365 million and accounted for roughly 38% of Sony's operating profit, compared with a $290 million loss at the electronics division.

But Kutaragi's Midas touch has let him down before, especially when it comes to creating multipurpose machines. Exhibit A: the PSX. Released in Japan in 2003, it was designed to appeal to a broader audience than the hard-core gamers attracted to the PS2. It comes with a 250-gigabyte hard drive and a simple Web browser and plays games, movies, and music. But the PSX bombed as consumers were confused by the hybrid and put off by its $800-plus price tag. "If Sony wants PS3 to be a hit, it has to avoid the marketing mistakes it made on PSX," says Reiji Asakura, author of Revolutionaries at Sony, a book about the development of the PlayStation.

Another risk is that Sony could undermine software sales by positioning the PS3 as something other than a game machine. The company makes the bulk of its game profits not from consoles but from games, which can cost $50 or more. Even when Sony doesn't design the games, it picks up royalties from each sale.

FEWER GAMES

If consumers buy the PS3 as a multimedia machine, they might not purchase as many video games. Sony ought to know: The handheld PlayStation Portable (PSP) has been a success since its debut in December, 2004. But since the PSP also plays music and movies, fewer people are buying games designed for it. In the PS2's initial year on the market, players bought more than three games for each machine that was shipped. For the PSP, that ratio slipped to 2 to 1.

Sony hasn't set a launch date, but analysts expect the PS3 to be released in Japan by June and hit U.S. stores in time for Christmas. With all its features, the PS3 might indeed help Sony in its battle for the living room as rivals roll out their own digital entertainment hubs. Unless, of course, all consumers really want is a simple game machine.

By Kenji Hall, with Cliff Edwards in San Mateo, Calif., and Ronald Grover in Los Angeles


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