Sony Moves to Solve Its PS3 Woes

Kazuo Hirai, Sony's (SNE) video games chief, is in a fix. In the nearly three years that the PlayStation 3 has been on the market, the gaming console has trailed the competition and led to billions of dollars in losses. The global financial crisis made it harder for the Japanese tech giant to sell a $399 machine to cost-conscious consumers. Now a slimmer design and a $100 price cut this month have energized the console's sales.

Making Sony's gaming division profitable is "my mission in life," Hirai tells BusinessWeek. "We are trying everything humanly possible to get that done." Yet analysts still think the business will bleed money this fiscal year.

Rejuvenating Sony's gaming business would be a huge undertaking for any executive. But Hirai has an expanded role as CEO Howard Stringer's right-hand man in resetting Sony's traditional hardware-centric culture. Since April, the 49-year-old executive has led the newly created networked products and services group, overseeing the e-book Reader, Walkman portable media players, and Vaio laptops. Part of Hirai's mandate is to prove to skeptics that Sony can create easy-to-use software to go with its finely crafted gadgets.

Hirai inherited the problems in the gaming division. When he assumed the top job from PlayStation inventor Ken Kutaragi in late 2006, the division was already in bad shape. Over the three years through March 2009, the business lost roughly $4.3 billion. Sony still loses money on every PS3 machine it sells.

Beefing Up PS3 Content and Technology To turn around the games business, Hirai needs to spur console sales. As Sony's production volumes rise, its cost per machine will approach the break-even point. Analysts estimate that the division's operating losses this year could come in at $400 million to $1.5 billion and that Sony will post an overall operating loss of more than $1.2 billion. But many are optimistic about a comeback in 2010. "The gaming unit should be able to hit breakeven—even with the PS3's lower retail price—next year," says Barclays Capital (BCS) analyst Eric Lee.

The key to attracting more PS3 buyers is content. That's why Hirai is beefing up the PlayStation Network's offerings of games, movies, music, comics, TV shows, social networking, and other online services. Earlier this month, for example, Sony added a media player that lets many of the PlayStation Network's 29 million subscribers watch BBC broadcasts. It's also working on new technologies. At the Tokyo Game Show on Sept. 24, Hirai announced plans to release a wand-shaped, motion-sensing controller by next spring and to offer 3D gaming in the future.

For Hirai, success will depend on how Sony fares during the holiday shopping season. Traditionally the October-December quarter accounts for half of annual PS3 sales. Lately the recession has depressed console and software sales. To reboot sales, Sony, Nintendo, and Microsoft (MSFT) recently cut the prices of their consoles. In just three weeks since Sony released its redesigned, lower-priced PS3 at $299, it has sold 1 million consoles, nearly matching sales in the entire April-June quarter. During this fiscal year, which runs through March 2010, the company aims to sell 13 million machines, up from 10.1 million last year.

Will Final Fantasy XIII Inspire Sales? Still, that's only half what Nintendo is forecasting for its market-leading Wii console. Adding to the competitive pressure, Nintendo said on Sept. 24 that it would lower the price of the Wii in key markets by about $50, to $199. Last month, Microsoft also cut the price of its Xbox 360 Pro by $50, to $249.99.

One upcoming game for the PS3 that analysts think has potential is Square Enix's much-anticipated Final Fantasy XIII, a role-playing franchise that is already generating buzz months before its December release. "I do think we'll see some blockbuster games come out later this year that will help invigorate the market," says market researcher NPD's analyst Anita Frazier.

Hirai's challenge over the long term will be to develop the PlayStation Network as a steady source of income. Revenues from the service are still a fraction of the overall games business but are growing quickly. Hirai predicts that sales from downloads could triple, to $500 million, this fiscal year, compared with last year. But expanding it further won't be easy. Many countries haven't upgraded to the broadband Internet connections that are needed to download sizable movie and game files. And plenty of PS3 owners either haven't hooked their consoles to the Net or still prefer to own games on disc. "For those who are connected, they may download some content. But what does it take to make sure [consumers] will download content that is not free?" Hirai asks. "We still need to understand what resonates with consumers and what doesn't."

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