Sony praying PS3 gamble will pay off

By Tim Webb

Sony's futuristic PlayStation 3 games console is the most eagerly awaited gadget of recent years.

It is already selling by the planeload in the United States and Japan since its launch this month, and is expected to do well in Europe and New Zealand when it appears in March.

But although retailers and consumers can't get enough of the sleek US$500 ($745) black machines, Sony is suffering a huge financial loss.

Analysts believe the company will lose US$3.29 billion on its PS3 business over the next two years.

The launch in the US and Japan will barely make a dent in these losses. Analysts predict that, partly because of manufacturing difficulties, only 750,000 consoles will have been sold in the US by the end of the year, despite Sony chartering planes to airlift new orders in from Asia.

To rub it in, its arch-rival Nintendo launched its own console this month in the US, the Wii.

Analysts at Lazard Capital Markets estimate that Nintendo could ship up to 200,000 of these consoles every week until the end of the year, the most important period for retailers.

Sony is taking a gamble that its investment in PS3 and the step in technology that it represents will pay off.

In particular, it hopes that by incorporating Blu-ray technology - which allows the console to play high-definition DVDs - it has backed a winner.

Research by Thomson Scientific for the Independent on Sunday shows that developing, assembling and transporting the console to the shops has been a huge global undertaking, involving dozens of component suppliers and partners, mainly in Japan and the US.

Some say the scale of its ambition could prove to be Sony's downfall. As analysts like to point out, the video battle of the 80s - VHS vs Betamax (championed by none other than Sony) - shows that picking a winner is not always straightforward.

Betamax was technically superior, yet lost out to VHS and so became obsolete. So has Sony bitten off more than it can chew?

As the name suggests, the PS3 is the third in the PlayStation series and competes against Microsoft's Xbox 360 and Nintendo's new Wii.

The top-of-the-range PS3 model, which comes with a 60GB hard drive, is 40 times more powerful than the PS2, allowing it to play ever more data-intensive games.

Its Blu-ray technology offers higher resolution than any other technology, including the rival HD television platform promoted by Microsoft and Toshiba.

For owners of high-definition televisions, this enhances the picture for games as well as for movies, because the console - like the Xbox 360 and Wii - also doubles as a DVD player.

But DVDs made for HD TV are not compatible with Blu-ray, and vice versa. At the moment, most film studios produce two versions of DVD, which are compatible with the competing technologies.

But this is unlikely to continue indefinitely and Sony hopes that - unlike Betamax - it is Blu-ray that emerges as the triumphant format.

Sony is taking a different approach to Microsoft, whose Xbox 360 does not come with a built-in high-definition disc-playing capability (an external add-on HD DVD drive has just been introduced).

Because high-definition television has yet to take off, in the short term most buyers of PS3 will not see the full benefits of Blu-ray. But Sony is taking the long-term gamble that incorporating Blu-ray into PS3 will give the technology a head start.

As Paul Jackson, of Forrester Research, says: "Sony is playing a long-term game for consumers' living rooms and future entertainment beyond gaming."

The incorporation of Blu-ray has held back the introduction of PS3. Problems with the Blu-ray laser diodes have restricted production.

Jackson adds: "Sony is pushing the envelope of innovation here. In terms of production it has made a rod for its own back. The newness of the technology makes the console expensive to assemble and means that components are in short supply."

In comparison, the components in the less innovative Xbox 360 are much simpler to find, even though Sony has been trying to reduce the amount of component suppliers used.

Some critics have questioned whether Blu-ray is necessary. They say that having a dual role for the PS3 is holding Sony back.

But Phil Harrison, president of Worldwide Studios at Sony Computer Entertainment Europe, defends its inclusion.

"Including Blu-ray is an indication of our determination to make PS3 future-proof. We need Blu-ray as game designers to feed the hunger of PS3's powerful Cell and RSX processors [the graphic chip of the PS3]. Adding support for Blu-ray movie discs makes it even more attractive to consumers."

If initial sales are anything to go by, the PS3 is a big hit. Demand has been so high that more than one in 10 consoles have been resold on the auction website eBay for three times as much as the price in the shops.

In Japan, some intrepid gamers queued for days to make sure they got their hands on the prized console. When it launched in the US, one man was shot by robbers as he queued outside a Wal-Mart store in Connecticut at 3am.

The biggest headache for Sony is meeting this demand.

Keen not to raise expectations, Harrison is reluctant to be drawn on when production will meet this demand.

"We are confident of being able to more closely align supply with demand for the European launch."

Colin Sebastian, an analyst at Lazard Capital Markets, says the delayed launch of PS3 puts Sony further behind the Xbox 360, but the battle will not be won or lost in one year.

"It's important to remember this is a cyclical business with a five-to 10-year product cycle," he says.

Harrison is bullish about PS3's prospects, despite all the problems.

"If we can continue the trend we saw with PS1 and PS2, where both systems sold in excess of 100 million machines and expanded the market for games, I can't see why we can't get an installed base of over 100 million PS3s."

- INDEPENDENT

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