Sony's Surprising PS3 Price Cut

The 17% cut aims to woo buyers from Nintendo's popular Wii. Will Microsoft follow suit with the Xbox 360?

by Cliff Edwards

In the latest sign Sony is stumbling in its battle for control of the $30 billion video game market, the electronics giant slashed the price of its PlayStation 3 game console by $100, to $499, after just seven months on the North American market.

The 17% price cut comes days after a company executive denied a change was imminent and will probably increase financial pressure on an already unprofitable division at Sony (SNE). The move could put pressure on Microsoft (MSFT) to cut prices on the Xbox 360, itself plagued by an unusually high number of glitches. It also serves as a reminder that Sony's console—feature-rich as it is—carries too high a price and lacks enough exclusive games to woo buyers from Nintendo's popular Wii. On the eve of the E3 games expo in Santa Monica, Calif., the pricing move is a nod to the increasingly important role independent developers will play in deciding the outcome of the three-way game console battle.

After the introduction of new consoles over the past two holiday shopping seasons, it has become crucial for each company to deliver innovative and exciting games that will entice shoppers to buy its system over another. Sony plans to release more than 400 games from now until the end of March across all its game platforms, though it has yet to offer a breakaway exclusive with the PS3.

Unexpected Timing

Meantime, the company is showing it is willing to stomach further losses in its gaming business and, in particular, the PS3, which includes a high-end Blu-ray DVD player, wireless Internet access, and a powerful custom processor, to keep wavering developers from jumping to those rival systems. "This is good for everybody—but, potentially, our competitors," Jack Tretton, president and CEO of Sony Computer Entertainment America, says of the cut.

While widely expected to happen sometime before the important holiday shopping season, the announcement was nonetheless surprising after a top company official in Japan on July 6 denied a price cut was in the offing. Sony has been reluctant to reduce the price too quickly in part to avoid appearing desperate this early after the introduction of a console.

Another reason for reluctance to trim prices: The game division is a drag on earnings. Last fiscal year, Sony's operating profit tumbled 68%, to $598 million. That's due in part to gaming division losses that exceeded $1.9 billion. (The previous year, the division booked a $72.5 million gain.) Morgan Stanley (MS) analyst Masahiro Ono reckons the gaming division will lose another $240 million this year despite an expected 50% rise in sales.

Software Key to Profitability

Much of the blame lies with PS3, which is failing to meet expectations. Sony Chief Financial Officer Nobuyuki Oneda said in May the company failed to reach its PS3 sales targets (see BusinessWeek.com, 5/16/07, "Sony's PS3 Problems Cast a Long Shadow"). Although Sony had forecast global shipments of 6 million machines by the Mar. 31 fiscal yearend, its factories made and sent off just 5.5 million.

When the PS3 launched in November, 2006, analysts estimated Sony lost more than $200 for every console sold (see BusinessWeek.com, 11/16/06, "Nothing Cheap About the PS3"). Console makers typically are willing to take huge losses in the first two years after the introduction of a new model. They often recoup the investment and post big profits as the cost of components falls sharply and as they grab huge profits from the software that accompanies the systems.