Sony Hopes the PS3 Slim Can Beef Up Sales

Could a new, cheaper PlayStation 3 video game console breathe new life into Sony's gaming business? The Japanese electronics and entertainment company is about to find out. On Aug. 18, Sony (SNE) took the wraps off a lighter, more compact version of the PS3—dubbed the Slim—that will cost at least $100 less than existing models. Sony games czar Kazuo Hirai, who made the announcement at Gamescom, Europe's biggest show for interactive entertainment, in Cologne, Germany, said the PS3 Slim will be in stores in Japan, Europe, and the U.S. in early September and that older consoles would be sold at a discount.

Sony badly needs the PS3 Slim and a roster of new games to attract buyers ahead of the holiday shopping season. The reason: Traditionally the October-December quarter accounts for half of annual PS3 sales. Luring holiday buyers is also crucial because Sony is trying to meet ambitious annual sales targets. This fiscal year through March 2010, the company has forecast sales of 13 million consoles, up roughly 30% from 10.1 million last year. So far its numbers are below last year's. In the fiscal first quarter, Sony sold 1.1 million units, down from 1.6 million a year earlier.

Sony's latest move comes as the global recession has hit the gaming industry—once thought to be recession-proof. Market researcher iSuppli forecasts a 4.4% fall in console sales to 52.9 million units this year, from 55.3 million in 2008.

The tech giant has a lot riding on the PS3 Slim's success. The gaming division has lost $4.3 billion over the past three years and is expected to be in the red again this year. Analysts say Chairman and CEO Howard Stringer can't fix what ails Sony until he can turn around the company's TV and games units. The PS3 was supposed to showcase the company's leading technologies when it was released in November 2006 but instead has hobbled Stringer's efforts at reforms.

Pricing Hindsight Analysts blame the PS3's high price for its failure to match the Nintendo Wii in appealing to consumers who might not normally play games. Before this week's announcement, the PS3 sold for $399 in the U.S., vs. $250 for the Wii and $299 for Microsoft's Xbox 360. Sony and Nintendo launched their consoles within days of each other in '06, but by the end of June 2009 the PS3's cumulative unit-sales were 23.8 million, less than half the Wii's sales of 52.6 million. That has strained Sony's relations with independent game publishers that pay licensing fees to Sony and spend millions developing games for the PS3. Many of them had expected the PS3 to do better than it has, say analysts and industry insiders.

Sony probably would have sold more consoles if its prices had been more competitive, says iSuppli analyst Pamela Tufegdzic. But even now, Microsoft (MSFT) and Nintendo (7974.T) could blunt the effect of Sony's price cut with one of their own. Wedbush Morgan Securities gaming analyst Michael Pachter predicts Microsoft will lower the Xbox 360's price before February and that Nintendo will likely follow suit.

Why didn't Sony slash its prices sooner? Doing so might have added to the gaming division's massive losses. Back in 2006, iSuppli estimated that Sony was losing roughly $240 on every 60-gigabyte PS3 sold, and $305 on a 20GB model, not including marketing expenses. The company's efforts to design the console with smaller chips and fewer parts likely helped lower costs. Last December, iSuppli reviewed the PS3's costs and found that Sony was still selling the machines for a loss of about $50 per machine. The PS3 Slim likely narrows that loss further. Shawn Layden, president of Sony Computer Entertainment Japan, declined to discuss the console's cost.

Some analysts think Sony's gaming division could eke out a profit in the October-December quarter. Any profits are likely to be short-lived, though: The gaming unit likely will post another operating loss this fiscal year, says Macquarie Securities (MQG.AX) analyst David Gibson. Adds KBC Securities' analyst Hiroshi Kamide: "I think they're going to lose money anyway at this rate so they probably figured, 'Why not do something more proactive about jump-starting the gaming business?' "

Sony hasn't run through its arsenal of new gadgetry. In 2010, it may release a new technology, shown at the E3 gaming conference in Los Angeles in June, that captures a gamer's movements and does away with the handheld controller. (Microsoft has demonstrated its own motion tech for game play, called Project Natal.) Sony executives are also working to improve the PS3's digital distribution platform. The company's PlayStation Network already boasts 25 million subscribers who can go online from a PC or PS3 and play games and buy game add-ons, TV shows, movies, and other digital content. In recent months, Sony has made it easier for users to transfer data from the PS3 to the PlayStation Portable console, and executives have hinted that they are working to make other Sony gadgets more compatible with the gaming system. Still, digital downloads may only bring in $500 million for Sony this year—peanuts for a $73 billion company—according to Barclays Capital Japan analyst Eric Lee.

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