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:
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.
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:
- Customers must wait for its release, without jumping ship to Microsoft's XBox 360 or Nintendo's Wii.
- Game developers must faithfully develop PS3 games.
- Customers must be willing to accept the steep price tag of $600.
- 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.
posted by Bernie at 10:26 AM
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