PlayStation3: All About the Games

Can new Sony gaming chief Kaz Hirai's focus on games help close the gap on Microsoft and Nintendo? A price cut might help

Kazuo Hirai is repeating himself—again. He has been asked about Sony's (SNE) marketing plans for the PlayStation 3 video game console, the prospect of movie and music downloads, and his strategy for catching rivals Microsoft (MSFT) and Nintendo (7974.T), and every time his answer is the same. It's all about the games. "The most important message as we go into the holiday season is to communicate to consumers that the PlayStation 3 is a video game machine," Hirai said in an interview with BusinessWeek, leaning forward in his chair to emphasize the point.

Since taking over in June as the company's gaming chief, Hirai has gone after the 18- to 35-year-old diehard gamers who are most likely to spend $499 to $599 on a PS3. That has meant beefing up the console's relatively skimpy library with must-have games. This fiscal year through next March, Hirai expects to triple the number of titles, adding 200 new games, including 180 for download-only, to the 100 available. The hope is that hotly anticipated games such as Metal Gear Solid 4, Lair and online-only titles like SOCOM: Confrontation will drive console sales.

To speed in-house game development, Hirai announced on Sept. 28 that Sony had bought Britain's Evolution Studios and its subsidiary Bigbig Studios. And taking a page from Linden Lab's hit online world Second Life, Sony has plans to let users create avatars—or digital three-dimensional versions of themselves—that will inhabit an interactive online space, called Home. (Home was supposed be ready this year but has been delayed until next spring.)

Anything Is an Improvement

Many analysts applaud his efforts. Yet despite Hirai's focus on games, some developers remain skeptical. The problem, they say, is that after its launch in November, Sony initially sent out mixed signals about the PS3, suggesting the console was an all-around entertainment system, complete with a high-definition Blu-Ray DVD player and Internet browser, while rivals Microsoft and Nintendo made it clear their machines were all about gaming. "[The PS3's future] will be tough if its marketing strategy isn't straightened out," Yoichi Wada, president of Japanese game company Square Enix, told reporters last month.

Almost anything the 43-year-old marketing whiz (BusinessWeek, 4/30/07) does will improve the mess he inherited from his predecessor and PlayStation founder, Ken Kutaragi. The division's $2 billion operating loss last fiscal year marred what otherwise might have been an impressive company-wide comeback. And while the gaming unit's finances will improve this year, NikkoCitigroup reckons losses will still top $1 billion. Sony's other divisions are making money.

Turning around the games division will take time. As Sony sells more consoles, it should benefit from incremental savings on production costs of chips and DVD drives. But the PS3 could use a big jolt. Nintendo's Wii is still way ahead thanks to its innovative motion-sensing remote controller that translates physical action into on-screen game play, and Microsoft Xbox 360 sales are enjoying a second wind after the release last month of the blockbuster game Halo 3. Hirai may have to entice buyers with discounts to narrow the $150-plus price gap with rivals. "We think a price cut is coming" this year, perhaps in late October, JPMorgan's (JPM) Yoshiharu Izumi wrote in a recent report.

Mixed Message Confuses Consumers

The hard part for Hirai will be sticking to a consistent marketing message. Games will have to stay central, but he'll also want to highlight the PS3's expanding online universe. Other Sony divisions will want to have a say as well. Executive Deputy President Katsumi Ihara said on Sept. 12 that he hopes to advertise the PS3 as a Blu-ray player. That could sell more Blu-ray DVDs and give the format an edge in the war against the competing next-generation DVD standard, HD DVD. A recent survey by market researcher NPD found that only half of PS3 owners knew they could watch DVDs in the new super-crisp video format. "Blu-ray will be a part of the messaging for the holiday," said Hirai.

But Hirai risks falling into the same trap as Kutaragi. Kutaragi's insistence that the PS3 was an entertainment supercomputer—not a gaming machine—sent mixed messages to consumers and alienated some hard-core fans. "Most people buy game consoles to play games," said Paul Erickson, an analyst at market researcher DisplaySearch.

By far the PS3's biggest untapped potential is online. IDC (IDC) analyst Billy Pidgeon predicts that online games, ads, and other services in the $30 billion global video game market will account for nearly 19% of the business by 2011, from 2.5% this year. Microsoft's Xbox Live, with its 7 million online members, remains the console industry's frontrunner for Net-connected multiplayer gamers and video downloads. But Sony has no lack of things it can sell. In addition to new and classic games, Hirai could sell movies and TV shows from Sony Pictures Entertainment and songs from recording label Sony BMG Music.

A Unique PlayStation Vision

So what's stopping Hirai? One possible explanation is that Hirai is waiting until he can deliver a full-service site. He'll have that chance once Sony's online community, Home, is up and running. "I'd like to think that when we offer up an experience to consumers we do it in a very unique and PlayStation-esque way," said Hirai. Sony officials say Home will let gamers easily jump from the 3-D setting to games. It also could work like a social networking site, where users might swap music, home videos, and photos, or post links to Web sites.

A few other PlayStation-esque projects are in the works. A new version of SingStar, which rates gamers as they sing to music videos, comes out in November and might let users download music videos or songs that could then be transferred to another Sony gadget, like the checkbook-sized PlayStation Portable gaming console.

With Gran Tourismo 5 Prologue (available in Japan in December), gamers will be able to take a break from racing cars in the virtual world by downloading real-world car ads or catching up on the latest episodes of car-related TV shows like the British Broadcasting Corp.'s Top Gear. "What makes it different is that you're doing it in the context of a game," said Hirai. "It's not just here's a TV program for cars that you can get anywhere else."

Nobody thinks Hirai's changes will immediately reverse the PS3's poor showing. This fiscal year through March, 2008, Sony hopes to ship 11 million consoles to retailers worldwide, after last year's lower than expected 5.5 million. By then, Nintendo's cumulative tally could exceed 25 million and Microsoft will likely be closing in on 20 million. But IDC's Pidgeon thinks PS3 annual sales could eventually surpass those of Xbox 360 and Wii in 2009 and will continue to grow through 2011 even as the others' drop off. That's a big motivation for Hirai to work fast.

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