I found a very interesting Read on VGN, Enjoy:
Sony’s gamble to put Blu-Ray into the PS3 was a risky one. When Sony’s other product lines have done poorly, the gaming division was there to produce enough profits to keep the stock holders Happy….
However, the PS3’s final design was so expensive that Sony was having a hard time justifying selling it at all. They didn’t have much choice though. Microsoft was already in the market with a game console of similar power and Sony risked losing the next generation race entirely if they launched any later than they had. Even still, it took them a full year to launch after the Xbox 360. Traditionally, a console will be more advanced by a year due to the way technology becomes better year on year. But in Sony’s case the PS3 wasn’t delayed because of a need in new hardware, but that the hardware that they had chosen hadn’t been finalized yet. Specifically Blu-Ray, which hadn’t been finalized by the Blu-Ray Group, and CELL which was not being produced in sufficient quantities to make it affordable enough to sell.
This meant launching an expensive game console with similar performance to one that was much cheaper to produce. Sony had to close the gap with Microsoft by taking heavy losses on each PS3 sold. While no one knows the true numbers, the figures that Sony released in March of 2007 said that the PS3 Manufacturing had given them a loss of 2 billion dollars. As technology has become cheaper, the month to month loss has shrunk, and Sony hopes to start profiting on the hardware sometime in fiscal 2008. It’s safe to assume though that Sony has lost somewhere between 2 and 3 billion on PS3 hardware alone.
Any investor will tell you that a loss of this size will be very difficult for a company to make up. Especially one in last place against well entrenched consoles. You would have to sell a massive amount of games to make up the losses. While certainly possible if Sony is expected to sell 120 million units of the PS3 over its lifetime like the PlayStation 2 sold. It comes into question if they’ll be able to do that now with such stiff competition from Nintendo and Microsoft.
Sony’s management knew that going into this. They knew the PS3 would take huge losses. They’ve gone to great lengths to keep the game division running and pushing the PS3 out the door regardless of the cost. They sold off their CELL chip manufacturing division to Toshiba (Their enemy in the High Definition Disc war) to regain profit and stop the massive losses their hardware divisions continue to take. And they’ve worked with Nichia to cut costs on the violet (blue) lasers for the Blu-Ray players and the PS3. Finally, after taking a terrible beating in sales, they reworked the PS3 to strip out any pieces they could (Backwards Compatibility, Memory Card Reader, USB Ports, etc) to get the console into more people’s hands and sell it at an attractive price in comparison to Microsoft and Nintendo’s offerings.
In many ways Sony’s manufacturing had given them a lot of bad luck in trying to keep prices down. But they were not alone here as Microsoft had their own string of bad luck that gave Sony some breathing room. Because Microsoft had rushed out the door with the Xbox 360, the manufacturing process had been subpar at best. A massive 1 billion dollar write-off came to the Microsoft games division to cover the expensive of warranty repairs and expanded warranties for three years on all 360’s sold. This added replacement and repair cost was now part of the profit and loss cycle of Microsoft’s games division, and in order to make a profit, the company would have to slow down their ability to cut their own prices and make the 360 more attractive to buyers.
To look at it another way. Had the warranty repair issues not happened, and Microsoft followed a similar price reduction as the PS3. The Xbox 360 Pro edition would be selling for $250 today. Unfortunately the system is still close to its original launch price of $399. With only a mild $50 price cut in two years of sales. Microsoft chose to go for profit rather than marketshare, and that gave Sony a chance to get the PS3 out of last place.
Sony’s management isn’t trying to win the console war for this generation. They never have been. Had they really wanted to win this thing, they would have dropped Blu-Ray and launched the PS3 earlier and much cheaper. That would have seriously crushed Microsoft’s attempts at gaining marketshare over Sony, and possibly derailed Nintendo’s impressive adoption numbers for the Wii. But that was not to be. Sony figured they could forgo the console war, the PlayStation 3 losses, and lack of profits, if they could get Blu-Ray to become the new High Definition Disc standard among movie watchers.
There is far more money to be made in licensing Blu-Ray technology than there is in winning a console war. The markets aren’t even close. If the PlayStation 2 sold 120 million units in its lifetime, the DVD player has sold well over a billion units in almost the same amount of time. Every DVD player sold today has an added fee strapped to it that goes to the creators of the DVD. (Most notably Philips) And Sony has always wanted a piece of that money. Think of it this way. If Sony received $10 for every Blu-Ray player sold, and they manage to sell 1 billion Blu-Ray players worldwide, they’ll have made 10 billion dollars. The losses from the PS3 are inconsequential when looked at from those numbers. And that’s not including the profits made from the sale of each disc, Computer attachments and Discs and the future growth potential of the same technology that they’d also get a piece of. The amount of money involved could easily reach into the hundreds of billions over the lifetime of the format.
The PlayStation 3 being the sacrificial lamb for greater profit and strength. As it turns out, Sony’s gamble appears to have paid off. Blu-Ray is all but assured to be the new High Definition format. With that, the interest in the PS3 will only increase as more homes look for a way to adopt a High Definition disc player and choose the PS3 to be that device. Blu-Ray’s added cost will now be PlayStation’s added benefit. The marketshare lost will be gained back, primarily because Microsoft failed to aggressively lower their prices as much as Sony had, and didn’t have the taste to keep losing money with the same expectations towards profit that Sony could realize. It would take the 360 a lot longer to make their lost money back, because they don’t have a licensed technology like Blu-Ray to make up for the losses. They had to draw the line, and that allowed Sony to catch up and they’ll soon surpass Microsoft’s console in sales unless Microsoft has an ace up their sleeve.
That’s always possible. However, removing speculation, what we do know is that Sony’s apparent game line-up is stronger for 2008 than Microsoft’s. Blu-Ray has established itself as the next generation format of choice. And Sony’s aggressive price reductions have made the PS3 very competitive for the consumer to choose when comparing systems. Their only missing piece has been a spartan library of good titles, and a lack of system software that compares with Xbox Live. For most consumers, however, that won’t be persuasion enough to ignore it. Most people will see the PlayStation name and choose it based on the past two generations of quality gaming they had with the original PlayStation and PlayStation 2. That market will be enough to catapult the PS3 into a second place position by 2009.
The end has not been written yet. Sony is still in last place as of this writing. And Nintendo appears to be unstoppable in the #1 position. And Microsoft may yet choose to aggressively lower their console’s price. All of which could impact Sony’s ability to reclaim their former glory. However, it appears that a bit of luck, a lot of financial loss, and an ability to make it work regardless of what the nay-sayers have shouted has allowed Sony to persevere. Whether or not the PS3 manages to become the #1 game console in units sold or overall profit matters not. At the end of the day, Blu-Ray has won. And so too has Sony’s gamble on the PS3.
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