Why Sony, and the PlayStation brand, could be in more trouble than you think
The video game industry is competitive, and you often have to be willing to lose vast amounts of money before you begin to turn a profit. Sony, Microsoft, and Nintendo all have different strategies to deal with this reality, but Sony is in a uniquely poor position heading into this holiday season and may have already all but given up on the PlayStation 3. Of the three companies that are creating and marketing gaming consoles, Sony has the most challenges heading into the next generation. Let's dive into what Sony has to overcome in order to gain dominance in 2013.
The challenges Sony faces
There may be a new version of the PS3 hardware coming soon, but as we noted in a previous article the price has actually been raised above the existing generation hardware, and the absolute price matters to the holiday market far more than features or bundles. Sony is doubling-down with this strategy, as executives argue that people want more in the box rather than a low price. “…We looked at the market and we started seeing a lot of gift card and price wars happening at retail. Our consumer keeps asking us for games. They keep asking us for value,” Sony’s John Koller said to VentureBeat. “That’s why a lot of our bundles move through retail so quickly. We decided to have an evergreen SKU, our base SKU, which will always have games in it. That’ll launch on September 25, next week, with Uncharted 3 Game of the Year, as well as with our first free-to-play game, Dust 514. We want to use the new design as a kickoff point for a strategy that our consumers have been asking for quite some time.” This is spin, pure and simple. Sony has lost this generation, and there is no reason to lower the price and lose more money than necessary. Sony's focus is on next year, and its next generation console; they are aware that there's little that can be done to fight off the competition this holiday season. Microsoft has offerings at a lower price backed with expected strong sales of the new Halo title, alongside a new Call of Duty game, a series that has historically performed much better on Microsoft hardware. Sony’s own list of exclusives for the holiday season is weak at best, including a fighting game that all but demands you already be a Sony fan. The next big-name Sony title is the Last of Us, which is arriving at some point in 2013.
The price of the Vita, and what it will cost Sony
The design of the Vita is also going to come back to haunt Sony. The $250 system, complete with expensive, proprietary memory, is sold at a loss, with Sony hoping to recover that money in game sales and volume. The system has hit a rough patch at retail and, once again, it’s likely Sony is simply unable to lower the price to take advantage of the strong software support that's on the way. How bad are Vita sales? Sony hid the sales numbers of the Vita in its financial report by combining the sales of the PSP with the Vita. The results were still dire. “In a newly released earnings report [PDF] for the quarter ending in June, Sony revealed that the PSP and Vita combined for just 1.4 million sales worldwide. That's less than the 1.8 million units the aging PSP sold by itself a year ago at this time, and less than the 1.86 million 3DS systems Nintendo sold in the same quarter this year,” Ars Technica reported. That's not to say that Nintendo is in the free and clear, as both Sony and Nintendo are scared shitless of Apple's market penetration when it comes to gaming. Neither are likely to repeat the successes of past portable systems, but Nintendo is at least in a better position with lower-priced hardware that isn't trying to replicate functions of your smart phone. Sony itself doesn’t see much hope for the short term. “Primarily due to the lowering of the annual unit sales forecast for portable hardware, sales are expected to be significantly lower than the May forecast,” Sony’s earning statement said about the games division. “Due to the above-mentioned decrease in sales and the impact of unfavorable exchange rates, operating income is expected to be significantly below the May forecast. Sales are expected to be essentially flat and operating income is expected to decrease significantly year-on-year.” Sony is coming into the holiday season with an overall weak software lineup, hardware that’s more expensive than it should be for the current market, and little hope that either can change in the short term. That’s a recipe for disaster, as Nintendo will likely sell every Wii U unit it can get into the hardware channel and Microsoft is going to be buoyed by high hardware sales due to their lower pricing and the monster that is Halo 4, a game that is also published by Microsoft. This is in addition to the fact that the big blockbuster games - and the market will be choked with them in the coming months - almost always do better on the Xbox 360. Microsoft is in a good place heading into the holidays. Sony has suffered from four years of operating in the red, and every aspect of its business faces strong competition. The company is getting battered in everything from cameras to televisions, with almost all of Sony’s divisions losing money. When the 3DS began to flounder, Nintendo made the right call and dug in its heels with a rapid price cut and free software to try to ease the sting on early adopters. Sony doesn’t have the same options due to the non-existent margins on the Vita and the company’s long-term sales slump. Microsoft is operating with a few bright spots in the distance, including the launch of Windows 8 and the launch of its new line of tablet PCs. Sony, on the other hand, has struggled to innovate in any of its core product lines and that stagnation means that all divisions must operate under tighter, more aggressive conditions. That’s a hard sell in gaming, especially when Sony continues to release expensive, feature-heavy hardware that is sold at a loss. Gaming is a brutal, scrabbling business. It’s hard to make money without first losing heart-stopping amounts, especially during launches. How’s Microsoft doing? “Microsoft took a one-time charge this quarter of $6.2 billion to write off its 2007 acquisition of aQuantive, an online ad service that did positively nothing for the company,” VentureBeat reported. This lead to the company being in the red for the quarter, but if you dig deeper into the numbers you’ll see that revenue is actually up, and many divisions are posting profits. Microsoft has the money to play dirty during the holidays and launch of its next-generation system, while Sony has been backed into a very tight corner in terms of pricing. Sony is still in the process of laying off 10,000 employees, including shutting down one of the PR offices for Sony Computer Entertainment of America. “You have to wonder what the hell PlayStation was thinking laying off more than half of their software PR team going into the holiday season,” Will Powers, one of the laid off workers, said via Twitter. “In typical fashion they're sending titles out to die, because they have no PR support—[LittleBigPlanet Karting], Sports Champions 2, Wonderbook.” Powers isn't exactly impartial, but he's also right: Sony PR has always seemed to be stretched awfully thin, and that problem will only get worse. The last thing Sony needs is a lack of press support during the Christmas buying rush. “Worst part is, the PR department was already under-staffed. I feel sorry for those that remain there, because their workload just doubled,” he stated.
There is no easy path out
Microsoft enjoyed increased revenue and multiple successful divisions in the last fiscal year, and Nintendo has the buzz of new hardware and an insane war chest of cash to draw from to launch it. Sony is faced with no clear path to profitability in home electronics or games. Sony may also be sitting on substantial cash reserves, but with so many divisions losing so much money, something has to give, and soon. The PlayStation 3 and Vita are going to be low sellers during the North American holiday season. Full stop. That lack of momentum going into 2013, mixed with Sony's ongoing financial problems, puts Sony in a defensive position in 2013. We won't be seeing many bold moves when it comes to hardware; Sony doesn't have the power at the moment to take risks with the proprietary architecture and bleeding edge components that led to the PlayStation 3's high launch price. This may make it hard to differentiate the console from its competitors, and create even more of a marketing challenge for Sony. Sony has already conceded the 2012 holiday season, and the company has to make some big moves in 2013 if it hopes to stay relevant in the gaming space. Buckle up.