Sony's PS3 Gamble: Many Risks But Many Possibilities

I started writing this post saying how risky Sony's PS3 strategy is, but it morphed into an article describing all the possible ways PS3 can become successful. I'll go ahead and publish it the way it was written.

It is becoming more and more evident that Sony's game console gamble is an all-in play on a very risky pair of pocket cards. If all goes well, Sony could dominate the next storage format with Blu-Ray DVD while retaining its foothold in game consoles. However, any one of several missteps (not all in Sony's control) could doom the profitabiliy of the Playstation 3 (PS3).

Four things must happen for the PS3 to be a success:

1. Customers must wait for its release, without jumping ship to Microsoft's XBox 360 or Nintendo's Wii.
   
2. Game developers must faithfully develop PS3 games.
   
3. Customers must be willing to accept the steep price tag of $600.
   
4. Sony must offer a compelling reason for customers to choose PS3 over XBox 360 or Wii.
   

Xbox 360 sales started in late 2005, at price points of $300 and $400. Predictably, the initial shipments sold out very quickly, but I haven't heard much news about the success of Xbox 360 sales since then. On the contrary Xbox 360 sales in Japan have been disappointing. My own research suggests that the current Xbox 360 sales rate is nothing to brag about. None of my geeky friends have them. None of the random strangers I've asked have them. The only place where I can find an Xbox 360 is in the stores!

This tells me that many people are waiting, but waiting for which alternative? Nintendo's Wii has a very low-risk strategy of providing moderately increased computing power with a revolutionary new motion sensing game controller at a downright inexpensive price of $200 - $250. Wii and PS3 should be released around the same time, the 2006 holiday season. Which one will customers choose: a $200 Wii or a $600 PS3? The answer depends on Sony's ability to offer a compelling reason for the customer to shell over the extra $400 for the PS3.

One possible compelling reason is game developers presenting must-have games on the PS3 that customers cannot have on the Xbox 360 or Wii. One thing PS3 can do that Xbox 360 cannot is provide incredible computing power with it's Cell processor. Because of the new programming paradigm of the Cell processor, that must-have game may not be immediately available, as it will take time for game companies to learn to harness that power and figure how best to use it. This gaming article points out a chicken and egg problem: consumers need compelling games to buy the PS3, but gamers need compelling reasons to develop compelling PS3 games. The burden is on Sony to convince customers that the must-have games are coming while convincing the developers that the customers are waiting for the must-have games.

One factor that Sony must overcome is customer resistance to the $600 price tag. Will customers pay double or triple the competitors price for Sony's game console? Certainly, some will, as some have paid even $1,000 for marked-up Xbox 360s on Ebay.

What is a customer going to buy for $600? Perhaps not a game console, but a Blu-Ray DVD player instead. Sony's claim to success is that its game console is really a Blu-Ray DVD player, at less than the cost of a Blu-Ray DVD player, and with gaming capabilities. Here, Sony faces the same chicken-and-egg dilemma as with games. For customers to buy PS3 as a Blu-Ray DVD player, they must want a Blu-Ray DVD player, and for publishers to publish Blu-Ray DVDs, they must be convinced that customers want them.

A third market for Sony is computer geeks who want a Cell processor based computer. This customer base includes graphics and animation professionals, and possibly, the scientific/engineering/research community. It doesn't look like Apple's going to be offering a Cell solution (more on that later). It does look like Sony will offer software packages targeted at this community. But even if Sony succeeds in selling to this group, will it be as profitable as the licensing they would get on games? If Sony follows the iPod business model and makes low-profit software a compelling reason for customers to buy high-profit hardware, computing power hungry graphics professionals may add to PS3 profits, with or without game sales.

I've already presented evidence that the scientific/engineering/research community is interested, in a previous blog entry. If this group of professionals were to buy a Cell workstation from a conventional vendor, in a conventional form factor, it could cost upwards of $3,000. Could Sony present the PS3 as a $600 version of a $3,000 scientific workstation? Would the researchers buy it?

I started this blog entry by saying Sony is gambling on many things for the PS3 to be a success. But do all of these things have to work out for PS3 to be successful? I'm beginning to think that Sony has a robust product, that may fail in one market, but not in all markets. Xbox 360 may have Xbox Live and some rudimentary Internet capabilities, but it is still just a game console. Wii may have a revolutionary game controller and some rudimentary Internet capabilities, but it is still just a game console. PS3 is also a game console, but it has possible uses for the graphics/animation and scientific/research/engineering communities, as well as a possible market for Blu-Ray DVD users. These are three markets in addition to the gaming market. At $600 per console, Sony may actually be making a profit on the PS3, in which case any one of the four target markets has the potential to make PS3 a success, even if losing the gaming market will change the identity of the PS3.

Even if you rule it out as a gaming platform, don't rule out the PS3.

IBM Global Services in Trouble?

I was surprised to read an I, Cringely column on the imminent implosion of IBM Global Services. Apparently, the highly touted services arm of IBM is no better than any other IT consulting firm. Cringely cites lack of training, overwork, underbid, and overcharge practices. This reminds me of some old IT consulting friends who told me that no IT consulting firm would be profitable if it delivered on schedule, on budget, without overworking its employees. I had always thought that IBM would not fall victim to such practices, given its mainframe roots. Perhaps I was wrong.

One piece of evidence to support Cringely's claim is Sprint Nextel's recent lawsuit over its outsourcing contract with IBM. If this is just one public example of many failing IBM service contracts, IBM Global Services really is in trouble.

Cell Processor for Scientific Computing

Slashdot has an article summarizing a Lawrence Berkeley National Lab paper on the usefulness of the STI Cell processor for scientific applications. In summary, the Cell processor makes a good compromise between programming complexity, performance and power. Compared to a vector architecture (Cray), superscalar architecture (AMD Opteron), and VLIW architecture (Intel Itanium2), the Cell processor performed 10x as fast on several common scientific operations. Similar improvements were found in power efficiency. The cost of this performance improvement is that the core computations require about 10x as many lines of code, at least when hand coding for the Cell processor. This is not a big deal, as the lines of code for the core computations are a small fraction of the lines of a complete program. Presumably, an auto-optimization by a compiler may eliminate the need for special code.

One of the deficiencies of the Cell is that it is not optimized for double precision (DP) floating point operation, although its DP speed is still several times faster than the other architectures. The authors include a few sections describing minor modifications that could be made to the Cell to bring its DP performance up to par with the single precision (SP) operations.

This paper should put to rest any doubts about the real-world benefits of the Cell architecture. Here, we have the nation's top technical researchers writing a paper describing the performance benefits of the Cell processor for scientific computing, and going on to recommend further improvements. Furthermore, the paper reveals that a team of several researchers at a government sponsored national lab spent over a month on this project. This means that serious researchers are seriously interested in the Cell processor.

While Cell performance is the explicit subject of this article, there is another very important implication. The researchers used IBM's freely available Cell simulator software to test their analytic Cell performance model. I don't think their research would have been possible if these tools and other Cell related documentation were not as openly available as they are. IBM has set up a Cell Broadband Engine Resource Center that makes it easy for even hobbyists like me to learn about the Cell processor and tinker with the Cell Simulator (I haven't actually done that, yet. I still need to get my hands on a computer suitable for running this simulator).

I foresee the a Cell processor based system making it into the Top 500 Supercomputer Sites list within a year or two. I expect most of these systems will be made by IBM, the current leader in the Top 500 list. I would be amused if a cluster of Sony Playstation 3's also makes it into the list.

The Other 10%

In my previous entry, I stated that 90% of PC users spend 90% of their computing time on Web and email. This supports my assertion that the platform is the Web browser and the operating system is a minor detail. So, what about the other 10% of people and other 10% of activities?

The other 10% of people are people for whom the operating system IS important. This includes UNIX geeks, Visual Basic programmers, and creative professionals. These folks insist on the use of Linux, Windows, and MacOS, respectively. These users won't care that Google is now preloaded on Windows.

The other 10% of activities includes things like word processing, photo/video editing and archiving. Photo editing is already included in Google software in the form of Picasa. It may not be as easy to use as iPhoto, but it's good enough for the 90% of users who don't care what operating system they use. Your typical home computer users wants to use their PC for photo management, and those that aren't using iPhoto will want to use Picasa because it comes preinstalled on their Dell computer. Dell and Google have really turned the tables on Microsoft.

So, Microsoft may lose the photo editing software mindshare to iPhoto and Picasa. So what? That may not matter much to Microsoft, but Picasa is just the beginning. Surely, Google is not going to stop there. So what else does Google have planned for the Dell desktop?

One of the Microsoft incentives Dell may lose by going with Google is favorable pricing on Office applications, like Word. Solution? Give up Word altogether and preinstall a link to Writely, the self-described Web Word Processor. And Writely just happens to have been bought by none other than Google!

Nah, nobody's going to replace Word with Writely, right? Think again. Why is it that nobody replaces Windows or Office with better alternatives (back when there were alternatives, at least to Office)? It's because what came with the computer was good enough for the 90% of people that didn't care to look beyond what came with their computer. That 90% of computer users is alive and well today, and if Writely is the word processor that comes with their computer, it is good enough!

Besides, Writely lets the user "publish on the Web", and "post on my blog", and remember the Web is 90% of what 90% of people do with their computer. Sure, Word can do that, too, but is Word going to be the obvious Web publishing solution when the Dell computer comes preinstalled with a Web-based word processor provided for free by the most recognized Web presence in the Internet world?

Let's not get too carried away, though. This will not convert 90% of people off of Word and onto Writely overnight, but it does put a crack in Microsoft's Windows-Office strategy. Eventually, Microsoft will release upgrades to both Windows and Office. At that time, users will have to deal with the cost and hassle of upgrading. By that time, users will have heard all about Writely from their friends who recently bought a Dell. The migration will proceed like bacterial reproduction. The first person to use Writely might convince two others to switch, but then those two will convince four more and so on.

The "other 10%" of what 90% of people do on their computers is going to change the future of the personal computing landscape.

Google Preinstalled on Dell

First the Mac moves to Intel, then Dell moves to AMD (partially). What next? Next is Google preinstalled on Dell. This small step for Google and Dell will have profound consequences for Microsoft and the PC industry.

For over a decade, the most powerful force behind the dominance of the MS Windows operating system has been preinstallations of Windows on virtually every PC sold. Microsoft's ability to coerce PC vendors to preinstall Windows was so strong that even mightly IBM could not preinstall it's own OS/2 operating system on it's own PCs (in the few exceptions, OS/2 was offered as a less-than-default choice next to Windows).

That was then and this is now. What's changed? What's changed is the platform. Back then, the platform was the operating system. You either ran Windows or MacOS. That choice largely dictated your computing environment. Today, there is still diversity in operating systems (Windows, MacOS, and Linux, to name the most popular). But for most people the operating system is not the platform. It is merely what the platform runs on.

Today, the platform is the Web browser. People use their Web browser to see the content of the Internet and to read email. For 90% of computer users that's 90% of what they do on their computer. The operating system underneath the browser is now an insignificant detail. What matters is which browser people use to access the Internet and which portals (i.e. search engine) they access it through. The desktop operating system revenue has largely been ceded to Microsoft (although that is changing) but the new revenue comes from the search advertising.

The brilliance of Dell and Google's agreement is that Google is NOT fighting Windows preinstalls. Instead, Google software will be preinstalled on top of Windows! In the past, such actions would be countered with retaliatory licensing by Microsoft. In the Microsoft antitrust hearing, IBM executives testified that IBM was the last PC vendor to obtain a Windows 95 license because Microsoft was using that as a bargaining chip against IBMs marketing of Lotus Notes and SmartSuite. Past Windows licensing practices made it cheaper for the PC vendor to preinstall Windows on every computer sold, even if the customer wanted a different operating system. I have to believe that Dell will lose some Microsoft incentive with its most recent move.

The article linked above mentions that the preinstallation of Google software on Dell computers will bring revenue to both companies. My best guess is that Dell will get a cut of Google ad revenue coming from Dell's preinstallations of Google software. This just may be enough to offset the lost incentives from Microsoft. Dell may break even, financially, with this deal. At the same time, Google gains an important foothold at Microsoft's expense, preventing Microsoft from using Windows preinstallations against Google on a large portion of computers sold.

So that's all good and well for Google and Dell, while being a blow to Microsoft. What does this mean for the computer user who buys the Dell preinstalled with Google software? Stay tuned....

Apple Switched to Intel to Go Head-to-Head with Microsoft

I've been seeing more speculation on the Web about the motivation for Apple's switch to Intel's CPUs and the reasons why they shouldn't have switched. Ars Technica gives one more reason why Apple could have stayed on PowerPC if it wanted to, although Apple would have had to wait another year for a new processor if it had, in fact, gone with PA Semi. The more I think about it, though, the more I think Apple deliberately switched to the x86 architecture, with every intention of competing head-to-head with Microsoft.

Imagine how green with envy (or mad with jealousy) the folks at Yellow Dog Linux must have been. Yellow Dog Linux has struggled to remain compatible with Apple computers for years, with no direct support from Apple. It would often take months for Yellow Dog Linux to cobble together support for the latest changes in Mac hardware. And now, with the switch to Intel, Apple provides its own official (beta, but still official) product for dual-booting.

Apple knows its products are cool. Apple knows that no Mac user is going to give up Mac just because they can now run Windows (those cowards left the Mac a long time ago). Many Mac users already run Windows through emulation using products like VirtualPC. In other words, Apple has nothing to lose.

What can Apple gain? Simple: any Windows user that thinks it will be cooler to run Windows on a Mac. Any gamer that thinks it will be cooler to play their Windows games on a Mac. Any iPod user who is attracted to the Mac by the ease of use of the iPod.

So, Apple will have a bunch of previous Windows PC users running Windows on a Mac. What's going to happen to this demographic over time? They'll experience all the frustations of running Windows. Apple says as much on their Boot Camp Public Beta Web page:

Windows running on a Mac is like Windows running on a PC. That means it’ll be subject to the same attacks that plague the Windows world.

After experiencing the frustations of using Windows one final time, these users will give MacOS X a try and they'll get hooked!

Don't think this will happen? Think again! PC Mall, a large online PC vendor, has already started selling Intel Macs with Windows XP installed. Go to their Web site and do a search on mac windows and you'll get hits on Intel Macs preinstalled with Windows XP. Yes, these product are about $100 more than the same Mac without Windows, but to a buyer who is sick of generic, unreliable PC hardware, $100 buys them the reputation and style of Apple.

Funny thing is, the short-term effect of this may be that Microsoft's Windows XP license sales may temporarily spike from all the users deciding to run Windows on their new Intel Mac.

With Windows Vista being delayed yet again and Apple gaining mindshare through the iPod, there has never been a better time for Apple to challenge Microsoft head-to-head. This is it. They are doing it now. You read it here first.