Sony Seeking Rescue for PS3

Two pieces of news came to my attention about Sony Computer Entertainment in late October. The first is music to gamers’ ears: Sony decided to cut the price of the 80 GB hard drive PlayStation 3 from $599 to $499. Also a 40GB model for $399 will go on sale on November 2^nd to catch the holiday season in the US.

The price cut came at no surprise considering PS3’s lagging sales. While Microsoft is reaping the benefits of Halo 3 and Nintendo’s factories are still burning the candle at both ends to meet consumer demands, Sony is desperate to narrow down the gap between itself and its competitors. The new prices will make PS3 more comparable with the other two consoles.

The second news is Sony confirmed it will sell its PS3 chip production to Toshiba, which is another major manufacturer for game console chipsets. Sony has invested at least $1.7 billion in this business; the divestiture of this expensive division will release some of its capital and potentially grant Sony access to lower priced chips, thus reducing the total cost of PS3.

The question is whether these moves will change Sony’s position as the “underdog” in this cycle of console war. While the long-term winner is still undetermined, the price cut will surely ignite the fuse in the short run. Need evidence? Since Sony cut the price in the same proportion in the UK, sales of the PS3 have gone up more than 150%. In the week of October 23^rd in Europe, Sony sold more than 64,000 units of PS3, just 6,000 units short of Nintendo Wii during the same period of time.

Historically Sony has been a long distance runner, not a sprinter. In the previous generation, PlayStation 2 sold more than 90% (still counting) after the first two years, compared to 79% for Xbox and 56% for GameCube.

Lower pricing is key to driving adoption initially but a good variety of quality games will be crucial in the long run. The problem is high quality game development for PS3 can be challenging because PS3 is very technologically advanced for the developers to digest and many third party developers have turned their attention to Wii. So what Sony will have to do is to first rely on the first-party games such as Heavenly Sword to showcase the power and versatility of the machine and wait for third-party developers to catch up and help spur PS3 sales in 2008-2009 timeframe. We are expecting an inflection point of PS3 sales in 2008, driven by lower prices and better games, the two main factors that contributed to the runaway success of PS2.

Meanwhile, Sony is in a perfect position to leverage its media assets to ramp up the offerings of video, music downloads and PVR to boost the average user spending per month, provided it can orchestrate the interests of its different divisions. Although it has been slow to bring the meals to the table, digital media distribution is likely to contribute to its bottomline in the future. I am also holding my breath for its highly expected virtual world Home and casual MMO Free Realms. Both of these initiatives are scalable and have the potential to be played on multiple platforms. They can help attract a diverse group of gamers, among other benefits.