Sony's Samurai

Games guru Kutaragi is looking far beyond his latest PlayStation

On the eve of the Japan debut of the PlayStation 2, the world's most eagerly awaited DVD game console, master creator Ken Kutaragi was a nervous wreck. The president of Sony Computer Entertainment Inc. had just spent a sleepless night dealing with a software glitch on his company's new online order site for the PS2. Then he began to fret about problems that could thwart the launch. "What if the deliveries are delayed, or if we can't sell the machines we've prepared?" Kutaragi says. So at dawn on Mar. 4, he set out to check initial sales. With several aides in tow, he drove through Tokyo's main shopping districts, ending up in Akihabara, Japan's digital-electronics bazaar. There, he saw tens of thousands of young people lined up to buy the first PS2 consoles. "It's all so amazing," a relieved-looking Kutaragi told an aide.

As it turned out, there was nothing to fret about. So great was demand for the new 128-bit wonder--which can double as a DVD movie and audio CD player--that all 720,000 units available to retailers sold out. Combined with online orders, the weekend tally came to nearly 1 million machines, an industry record and 10 times the number sold when the original PlayStation launched in 1994. If Sony can keep pace with Japanese demand and release the PS2 as planned in the U.S. and Europe in the fall, shipments could reach a blockbuster 10 million consoles by the end of the year. Analysts predict the PS2 could eventually outperform the first PlayStation, whose sales total 75 million.

But the 49-year-old Kutaragi isn't about to sit back and bask in glory. He and his engineers are already working on the PS3, which is set to roll out in four to five years. By then, Kutaragi hopes, the world will be ready for a true network appliance to serve as a conduit for digital games, movies, and music flowing into the home over broadband networks.

In the meantime, PS2 is nothing to sniff at. For $370, users get clear graphics that zip along at a dizzying pace and convey details of shadow and light never before offered in video games. Moreover, starting next year, PS2 owners in the U.S. will be able to plug their consoles into cable- TV networks to download games, and later engage in multi-player challenges online.

With this network future in mind, Kutaragi is rapidly making deals. Last month, he set up, a joint venture with Japan's leading game software developers and convenience store chain Seven-Eleven Japan, to sell PS2 hardware and software over the Internet. That's just a start. In the months ahead, he hopes to forge alliances with computer and communications companies to create the infrastructure for a high-speed broadband network that will handle games and other services for PlayStation as well as other clients. His goal is to establish the PlayStation as a separate brand, and not part of a dedicated Sony network for the online distribution of music, movies, and TV shows. "We'd never be able to attract game developers to a Sony site," he points out. "Only an open platform will work." It's still an open question how this model will make money. But so far, investors love it, doubling Sony Corp.'s stock price to around $300 in the past six months.

And so far, Sony has given Kutaragi freedom to make big decisions. That's remarkable, considering that Sony President and CEO Nobuyuki Idei doesn't normally grant autonomy to his chieftains. But Sony owes its profitability to the PlayStation, and so Idei owes Kutaragi a long leash. Initially snubbed by Sony executives as a lowly toy when Kutaragi came up with the idea in 1989, the PlayStation is Sony Group's most profitable product, outranking even the Walkman and Trinitron TV. In the first nine months of fiscal 1999, it contributed 38% of Sony's $2.6 billion operating income, on par with the entire electronics division. Says Shigeo Maruyama, president of Sony Music Entertainment Inc., who helped launch the PlayStation venture: "Sony believes in Kutaragi and expects him to succeed."

As evidence of that, Sony has put more than $1.2 billion--money generated by the PlayStation itself--in chip facilities to manufacture a new 128-bit microprocessor and a state-of-the-art graphics synthesizer chip. With margins steadily declining on its traditional audiovisual gear, Sony is desperate for Kutaragi to keep the gold mine going.

Brash and confident, Kutaragi revels in the attention. His colleagues call him a real techie, a hands-on manager uncomfortable with delegating authority. Yet his ability to create a 10-year vision in his head and implement it has brought him legendary status not just within Sony but far beyond the game industry. Hollywood directors George Lucas and Steven Spielberg seek him out to discuss the future of computer graphics. And Silicon Valley semiconductor execs sound him out about the chip technology needed to power home information appliances of the future.

His competitors, though, show no signs of giving up. Tokyo-based Sega Enterprises Ltd., long the underdog in Gameland, appears to be one step ahead of Sony in its online strategy. It's investing $45 million and tying up with portals and carriers of online games and content. Nintendo, which dominates handheld game machines with its Game Boy, is working on a DVD-based machine it hopes will demolish all others.

The biggest threat could be lurking in the Microsoft Corp. fortress, where a hush-hush project is under way. Microsoft Chairman William H. Gates III is expected to announce details of the machine, code named X-Box, at a conference in the U.S. on Mar. 10. Koji Furukawa, president of Kyoto-based game developer Video System, which was approached by Microsoft, says it's a $500 network device: "It'll be fun and easy to use, and aimed right at the living room."

That makes it imperative for Kutaragi to get PS2's games network going strong. Sony Computer loses money on every console it sells, so the strategy is to build market share and then reap profits through the sale of game software, a business model that was devised for the first PlayStation. While new games are being developed, fans can still play old games on the new PS2. "We need to sell a lot of content before we can start making money," says Kutaragi, "so it will take time."

The steady buildup of PS2 is just part of the master plan to Kutaragi. If history is any indication, expect his next vision to become reality.

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