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Boom or Bust For Sony?

Sony Electronics has developed an unfortunate reputation for developing amazing technologies and then dropping the ball when it came time to actually sell it. Normally, the consumer electronics giant fouls up one product at a time (Betamax, MiniDisc). But now it seems like Sony could drop the ball on several big initiatives.

In May, the company held a press conference at the Electronics Entertainment Expo (E3) that was politely described as disastrous by the gaming press. The starting price for the PlayStation 3 console ($499) was much higher than the competition ($399 for Microsoft's XBox 360. Nintendo's forthcoming Wii doesn't have a set price but it's rumored to run around $249) and the demos were considered unimpressive.

Powering the PlayStation 3 is a pair of Sony  gambles, the Cell processor it co-developed with IBM and the Blu-ray DVD drive Sony developed along with numerous consumer electronics companies. Blu-ray is in a format war with the Toshiba/Warner Bros.-developed HD-DVD as both jockey to be the replacement for standard DVD.

Blu-ray has been delayed, and as a consequence, so was the PlayStation 3. Warner has been first to market with the competing HD-DVD by a few weeks.

Other troublesome rumors: the yield for the Cell chip was hovering around 20 percent. Yields for Intel  and AMD  are normally in the 90 percent range.

On top of all this negative background, a recent report from DFC Intelligence questioned whether Sony would go "from first to worst" and lose its dominant position in the gaming market. The major problem, though, isn't Cell yields, developer complaints about the learning curve for writing games, or the head start for Microsoft's  XBox 360, it's the price, said DFC president David Cole.

"We're talking about a price point outside what's been successful in the videogame industry, especially when the competition is looking very strong with a much more consumer-friendly price point," he said.

Guess who Sony blames for concerns about the price? "The main thing we've noticed is there's been a lot more media concern [over the price] than consumer concern," said Sony Electronics spokesperson Kim Otzman.

"The research we've been able to show is that given the product provides the next generation in high definition technology for gaming, it's a value price. Our responsibility is to better communicate to the consumer what they are getting with the price for PlayStation 3," she said.

Sony's second problem is its loss of exclusive titles, such as the Grand Theft Auto franchise, which has popped up on the XBox. "Third-party developers that supported Sony exclusively in the past are showing more willingness to support the competition," said Cole.

The analyst was more understanding of the problems with the Cell chip. "Clearly the Cell processor is a big new effort, and a lot of times it's not uncommon to have manufacturing issues, and it can take them a year or more to get worked out," he said.

He also notes that many of these problems and complaints emerged in the run-up to the PlayStation 2 launch. Developers complained it was too hard to develop on the PS2, there was a shortage at the time of launch and no decent games for months after. It went on to sell 100 million units worldwide.

Still, a new console essentially means starting over and building your audience all over, and Sony has to win customers all over again. "They need a price and a compelling reason why this system is better than the others. I don't think they got that message across yet. Right now it's just another PlayStation," said Cole.

However, Michael Pachter, a game industry analyst for Wedbush Morgan Securities, said Sony is going to "finish first by a wide margin." He said that when comparing the $499 PlayStation 3 to the $399 XBox 360, you have to include the fact you're getting a Blu-ray  DVD player (which is backwards compatible with standard DVD) for $100. Blu-ray decks are currently selling for $1,000 although the price may come down to the $500 range by Christmas.

"That's not cost prohibitive, that's a bargain, betting on Sony winning the high definition format war, and the studios know Sony's going to win," he said. Sony is projected to sell 10 million PlayStation 3 consoles in its first year, HD-DVD will sell around three million players, according to Pachter, and studios will go for the console with the largest installed base.

He predicts the Japanese game developers will stick with Sony, given Microsoft's non-presence in Japan, which will keep the bulk of developers with the PlayStation. And it's in IBM's best interests to fix any Cell problems quickly because the company has many plans beyond just the PlayStation 3.

"IBM cares a lot about the Cell processor because they want it to be the standard for a host of consumer electronics, including PCs," said Pachter. "IBM and Sony both have a stake in the development of the processor, this is not Sony's problem alone."

Otzman said Sony is on track to meet its initial plans to ship two million units worldwide in November, when the PlayStation 3 launches, with another two million by the end of December and another two million by March 2007.