Could the Playstation 3 Kill Sony? (article)

[Sebastiano]

Could the Playstation 3 Kill Sony?
Category: Industry Buzz - February 09, 2006

As we quickly approach E3 in May, many people are eagerly anticipating more details on the Sony PS3. Since Sony burst onto the gaming scene with the original Playstation, they have been the company to beat in the console wars. As a matter of fact, while the rest of Sony has struggled, the Playstation division has been a cash cow that the rest of the company has relied on. With Microsoft having already launched the Xbox 360 to overwhelming demand, many are wondering what the counter from Sony will truly look like, hype set aside. It wouldn't be exaggerating to say that Sony is betting a large hand on the Playstation 3. It's not just the Playstation division that's making the bet, either. With the next-gen Hi-Def format war still raging, Sony is betting a substantial portion of it's future on Blu-Ray. While most analysts agree that HD-DVD will not likely win, some analysts are openly wondering whether Blu-Ray will as well. If it doesn't, Sony could be in serious trouble.
Isn't This Thing Supposed to Play Games First?

In order for Sony's Trojan Horse strategy with Blu-Ray to work, the Playstation 3 has to succeed as a gaming console. As a game console, the Playstation 3 has to deliver on several fronts. In pure horsepower and graphical ability, there's little doubt that the console will impress. There are serious reservations as to Sony's online strategy (compared to Xbox Live) and we'll cover that in a bit. However, one aspect of gaming that is often ignored, but can become a major issue is load times. Ask any Sony PSP owner what annoys them most about the portable console and you are sure to hear about it's dreadful load times. Gamers are an impatient breed and if Sony frustrates hardcore gamers - and developers, for that matter - it could greatly damage it's reputation with the group that will comprise PS3 early adopters.

Until now, it's been widely assumed that the Blu-ray drive that will make it's way into the PS3 will be single-speed. If true, this choice could be disasterous. Blu-ray single speed transfers data at a constant rate of 36Mbps (Megabits per second) or 4.5 MBps (Megabytes per second). Sound impressive? Think again. DVD single speed is rated at a little over 1.32MBps max. A 12X DVD, such as the one in the Xbox 360, transfers data at rates between 8.2 and 16.5 MBps for an average of around 13MBps. This article from Gamespot provides all the details on transfer speeds, but simple math should show that there are some serious concerns looming with a single speed Blu-Ray drive. So, all things being equal, a 20 second load-time on the Xbox 360 would equate to just under 60 seconds on the PS3!

In order for Sony to bring load times into the same range as the Xbox 360, it would have to use at least a 2X drive (which would transfer a little faster than a 12X DVD's minimum speed) or a 3X drive (which would closely resemble a 12X DVD's average transfer rate). Since Blu-ray is a new technology, it's a certainty that the faster speeds will increase the base cost of the PS3, which leads into the next point.
Money Doesn't Grow on Trees
The Playstation 3 will lose money for at least a few years. How much and for how long is key, and recent projections from Merrill Lynch Japan suggest that the PS3 could lose a tremendous amount of money for Sony in the first few years. Merrill Lynch is projecting losses of 1.18 billion in year 1, 730 million in year 2 and 457 million in year 3. By comparison, Sony's profits in the past three years has been about 1.86 billion. If the PS3 doesn't start turning a serious profit in year 4, Sony's bank accounts could start drying up. There's no indication if these losses also anticipate the costs involved with setting up the massive infrastructure for an Xbox Live competitor, which most people think Sony will provide. If not, Sony's losses could skyrocket even more as it looks to create a brand-new online presense.

Sony could try to offset these losses by launching the PS3 with a higher price point, but anything above $500 is considered too high for wide adoption. Will consumers agree with Ken Kutaragi's assessment that you will want to work an extra job to have one? Kutaragi has even lamented "…the PS3 can't be offered at a price that's targeted towards households."

Additionally, Sony is stil having to compete with HD-DVD, which is getting significant backing from Microsoft (and their 37 billion in cash). Whereas Microsoft has little to lose if HD-DVD fails, Sony has everything to lose. Additionally, recent announcements at CES in January indicate that the least expensive Blu-Ray drives will start at $1000 while HD-DVD is hitting the market with players starting at $500. Many analysts saw these changes as giving HD-DVD a second-wind that could ultimately hurt Sony more than it helps HD-DVD, which leads to another point.
Tell Me Why I Need Blu-Ray More Than DVD?

Unless you have an HDTV set, you'll never see the difference between Blu-Ray and DVD. And considering that Hi-Def adoption is currently at 24% and more than half of consumers are waiting for price drops, the target market for Blu-Ray is not as lucrative as one might believe. When DVDs hit the market, there were several reasons to purchase them. For one, the quality far surpassed VHS. Additionally, menus and extra features made DVD content easier to access and gave it more value. Also, DVDs don't degrade in quality over time, making them a better long-term investment. The jump from DVD to Blu-Ray (or HD-DVD) is not as significant, unless you're an HDTV owner. Even then, the question remains: Is Blu-Ray content going to be compelling enough to make me say "I have to have it?"

Recent announcements also suggest that Blu-Ray disc prices will come at a significant premium over existing DVD prices. With broadband adoption growing rapidly, one also has to ask if a physical format has a long life ahead of it. Bill Gates has publicly stated that he thinks the format war is the last we'll see, because hi-def content will be soon be delivered over the Internet instead. HD-DVD may not win the war, but it doesn't mean that Blu-ray will.

Games, Games, Games
The Playstation 3 has wide support right now. However, rumblings have been surfacing that the PS3 is hard to develop for, due to the complexity of a brand new processor with multiple cores. Similar criticisms arose with the PS2, and while Sony was able to overcome the same hurdles then, there is one major difference now that may keep history from repeating itself: the Xbox 360.
Since the original Xbox came into the game a good bit later than the PS2, developers had to stick with Sony because it was the clear market leader. This afforded Sony liberties that it may not have had otherwise. Now, Microsoft has the head start. Additionally, the Microsoft unit has already been praised by the likes of John Carmack (creator of Doom, Quake, etc...) for it's great development environment, while Hideo Kojima of Metal Gear Solid fame has expressed some concerns that development for the PS3 could be more difficult than for the Xbox 360. Sony must have strong 3rd party support so that licensing fees will help recoup the costs of putting the PS3 into the market. Just being Sony may not be enough anymore.

Conclusion
While I don't think we'll see Sony close it's doors for good, I have some concerns about the affect the PS3 could have on Sony's financials over the next few years and into the future. Microsoft has created an impressive console with the Xbox 360 and while Sony has a strong history in the Playstation line, there are key components for concern. Blu-Ray, an online service like Xbox Live and a hard development environment create additional areas for financial loss that may not be recouped. For the sake of competition and a strong market, let's hope Sony can address these concerns

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[xbdestroya]

Oh man...

[woundingchaney]

You dont know what you have done, do you Seb

[Sebastiano]

You dont know what you have done, do you Seb

I personally don't agree with the article, but I figure this would be a good place to dissect it LOL

[Infernal]

These articles pop out faster than babies... Anyway i'm not even going to bother to comment, I will just say that there is so many flaws in that article that its not worth a comment.

[Viper]

It has some validity but it needed to clarify on much of it. It leaves readers with a less rosy picture than it should have.

True, Sony could be in trouble if things go south but some of those factors aren't as bleak as made out to be.

[xbdestroya]

Well, the article is built up on a lot of specious premises - the Merrill estimates, Carmack's console preference, etc etc...

I mean I have to say the guy seems to be a big Microsoft fan - not that that automatically would deem anything he says incorrect mind you - it's just I don't see what Bill Gates saying digital distribution is around the corner actually has to do with digital distribution being around the corner.

I *will* say this: it is far more important to Sony that Blu-ray be included inside PS3 than it not be, so if this entire article is more or less focused on the 'boon-doggle' that is Blu-ray inclusion, they are really approaching it from a misguided direction.

[Coded-Dude]

While I don't think we'll see Sony close it's doors for good, I have some concerns about the affect the PS3 could have on Sony's financials over the next few years and into the future. Microsoft has created an impressive console with the Xbox 360 and while Sony has a strong history in the Playstation line, there are key components for concern.

Sounds biased......like someone regergitating old all too familiar rhetoric

[Viper]

I think they went for the Sony low margin for error angle and kinda missed.

They went with the easily referrence data instead of digging deep. Some concerns were legit but not really given an real reasons why. Others were obviously just BS and speculation.

[HighOnSunoco]

first of all ehomeupgrade.com I have never heard of it. I am so sick and tired of all this bs by the media. All these what if statements.

Here are the facts:

1. First of all, Sony builds all the parts in house (ie Cell, RSX, Blu-Ray drive, etc) The statement of not being profitable for 4 years. Is totally BS.
2. It has already been stated that the drive will atleast be a 2x possibly being a 4x.
3. and finally, If the Xbox 360 is so much better well then why is it not in stock?

I know that last one didn't make sense but I'm pissed.

But hey it'll be all cleared up in a couple weeks.

[xbdestroya]

I don't know, I mean *of course* PS3 could tank and drag the company down with it, but the case for that argument is based on too many unknowns. What's known though is that Sony finds themselves in a very competetive environment right now on a number of fronts, and in that light I think Sony's 'all-out' strategy with PS3 makes perfect sense; there's simply too much opportunity there to help out other divisions to leave it alone.

I find it interesting that the author is not concerned at all about the Home and Entertainment division's obstacles and historically high losses; it's enough for him to say Microsoft has built a "good console" and be done with it. I mean... and they have built a "good console" - and I also agree that Microsoft can weather the pain in a way Sony can't. But I think if the financial performance of the console division is his ultimate end-point with the article, there is a lot of cognitive dissonance going on to raise Microsoft up as the exemplar and Sony as the student.

[Phryne Astynome]

Microsoft doesn't have 37 billion dollars in cash reserves. They have been giving out dividends recently and right now they are only sitting on 5 billion in cash. The balance sheet shows they have only 5 billion in cash while their cash flow show their dividends. Their dividends are gigantic to put it simply.

Here is the balance sheet: http://www.hoovers.com/microsoft/--I...-balance.xhtml

Cash Flow Statement:
http://www.hoovers.com/microsoft/--I...fin-cash.xhtml

Lots of errors in this "business" article and it is obvious he does not even have a basic accounting background. They should know that Microsoft recently (in 2004) began paying dividends. In fact that 37 billion dollars cash reserve is long gone.

PS. Please don't say Sony has 60 billion dollars in debt.

[Viper]

If they are down to $5 billion and the x360 has one or two repeat years of the Xbox, it's history.

Even Nintendo has $9 billion in cash.


XBD, I agree that Sony has a form of checks and balances that if one end fails, the others can keep it afloat. It would take a bad fall from pretty much the whole thing to really hurt them.

[xbdestroya]

XBD, I agree that Sony has a form of checks and balances that if one end fails, the others can keep it afloat. It would take a bad fall from pretty much the whole thing to really hurt them.

Well that's not really what I was saying even, just rather that the upside potential of a broad PS3 strategy is a lot higher than the downside potential is low.

[NoZ]

Its mainly all speculation. Like alot of articles it is biased.

[version]

ps3 kill m$ not sony

[Viper]

EDIT@XBD
Oh, well yeah, that's true. It's obviously got more potential to do well than to fail. I don't even think that article was trying to say it was more possible to fail that be successful.

[xbdestroya]

EDIT@XBD
Oh, well yeah, that's true. It's obviously got more potential to do well than to fail. I don't even think that article was trying to say it was more possible to fail that be successful.

Right that's along the lines of what I was saying... and even beyond that, if PS3 fails, wouldn't it have failed anyway? If PS3 fails, I'm pretty sure it won't be because Blu-ray was included, but just because it failed in general. And then what Sony will be doing is eating the extra expense of Blu-ray drives - so a bigger loss than otherwise, but I mean...

Now... if PS3 succeeds and includes Blu-ray, LocationFree, etc... that has the potential to truly springboard those various initiatives, and it's a potential that IMO totally justifies their inclusion in the system, even though some might consider it 'non-gaming fluff.'

[jaxmkii]

yea... about that.... once i saw his sorces for info i stoped reading

[Phryne Astynome]

The thing that really angers me about some of these articles is that most use second hand sources for their arguments. I would prefer it if these writers go to the SEC website or etc. and look at the financial statements to analyze the situation on their own.

To Viper:
I will admit I am not a big Nintendo fan but I do recognize Nintendo won't be exiting the market anytime soon. Their biggest problem is a falling market share in the home console market but other than that, their financial status is fine (that is if you bother to read their statements).

To Everyone:
If anyone here is planning to invest in securities, I HIGHLY HIGHLY suggest that you learn basic accounting principles so you can invest in them on your own. You need to learn these principles so you can invest wisely and not be misled by the sensationalistic media. That is IF you don't know these principles. If you do, you are fine.
To some of the people, companies can fail and shut down even if they are profitable FYI. Why does this happen: check the cash flow statement and you can gauge why it happen. It happened during the dot-com boom.

Sorry for going off-topic I just wanted to give my 2 cents on these financial articles and etc. and give advice to people who read them.