The fall of the Playstation 3 (part one)

the fall

I haven’t written about video games in quite a while, and certainly nothing substantial since the analysis of the Nintendo Wii before its release. In the three-part series (Part 1, Part 2, Part 3), I examined why I thought that Nintendo’s strategy of competitive differentiation and PR-focused marketing had them poised for a surprising success.

I don’t like to toot my own horn or anything, but I pretty much hit that sucker right on the head. A runaway smash that is still almost impossible to find in stores, the Wii has sold over 6.6 million units worldwide as of last month. More importantly, the system hasn’t lost any momentum in the New Year despite being supply constrained (shipments that do arrive at retail usually disappear within a few hours). In 2007, Nintendo has sold more Wiis between North America and Japan (the two biggest videogame markets) than the Playstation 3 and Xbox 360 have sold combined.

Having already told the story of what inspired the Wii’s success, I want to turn my attention to the other surprising story in the videogame industry these days: the failure of the Playstation 3. In this two-part essay, I’m going to look at the product decisions that Sony made with the PS3 that doomed it to struggle in the marketplace. And then later on in the week I’m going to return to the Wii to look at the problems Nintendo faces in the coming months if their system is to become more than just a short-term flash in the pan.

But first… the Playstation 3.

Third Generation Blues

Those who follow video gaming occasionally bring up the rule of threes: no console manufacturer has ever dominated the market for three straight generations (a generation is a time period, usually 4-5 years, when all the different companies have comparable systems in the market). Atari ruled the game during its early years but fell off the radar when the market collapsed in the mid-1980s. The Nintendo brand was synonymous with console gaming with the NES and SNES but became a minority player a decade ago.

Sony’s Playstation brand has been the biggest game in town ever since. The first Playstation – created after a deal to make a CD-Rom system for Nintendo fell through – took over the market by catering to the increasingly-older gaming audience, selling 102 million systems worldwide to Nintendo’s 33 million. Sony’s dominance became even more impressive during the last generation, where the Playstation 2 sold 115 million systems to Microsoft’s 24 million and Nintendo’s 22 million. Those sorts of sales have made Sony the destination of choice not just for gamers, but for developers and publishers. Heck, it could be argued that the Playstation 2 features the most robust, diverse body of games since any system in the modern era (at the very least since the SNES).

If you asked most analysts going into this next round of the “console war,” they would certainly have said that the Playstation 3 would emerge as the winner once again. Why wouldn’t it? It was following two of the most successful systems of all time, had huge brand recognition and brought with it wide support from the industry. Anticipation was huge, and with word getting out that Sony was having supply issues, customers lined up to buy the system.

But a funny thing happened on the way to the PS3’s success, and it was best demonstrated by following the “grey market” on EBay. Take a look at this chart, compiled by the good folks at Kotaku:

ups and downs

As you can see, right around the time that the PS3 went on sale, EBay auctions for the system (and before its release, pre-order coupons) were going for thousands of dollars, over three times the purchase price of the system. Some people cashed in at this point and did very well for themselves, but many of those who bought the system on launch day held onto them, expecting the market to only get better when Christmas rolled around and desperation set for those who wanted the system for the holidays.

But this never happened. No one got desperate. The grey market plummeted, to the point where selling a PS3 on Ebay before Christmas netted only the slightest of profit. It wasn’t that Sony all of a sudden had more systems in stores, as it was still ridiculously hard to find at this point. No, the grey market plummeted because the forecasted demand for the PS3 didn’t appear. There were anecdotal reports that the majority of people waiting in line for the system on launch day hoped to hawk their PS3s on EBay – that alone should have set off warning signs that this was a bull market just waiting to crash.

Now that Sony has survived the Christmas rush and is actually in a position to get systems into stores, the lack of demand has hit and hit hard. While Wiis are flying off the shelves, you can walk into pretty much any electronics store and find PS3s readily available, not a great sign for the brand only six months into the system’s lifespan. The sales numbers are rather miserable – to date the PS3 has sold 3.2 million systems worldwide, compared to 6.6 million for the Wii in the same time period. What’s worse, the PS3 is consistently finishing well behind the Xbox 360 (its closest competitor specs-wise) in North America month after month, and that system has been out for well over a year now. Japan is even worse – a market that the Playstation brand has absolutely dominated now sees the system falling way behind Nintendo.

What the hell happened here? How did the market leader find itself struggling to even sell a fraction of its competitors? I’m not about to suggest that the PS3 is a complete failure yet – there’s still a good 3-4 years left in this round of the console wars – but there’s no question that its first 6 months have been pretty much a disaster. And much like Nintendo’s success, the story of the Playstation 3’s failure starts right at the project’s very foundation.

The Trojan Horse

You may not give much of a damn about the next generation DVD format war between HD-DVD and Blu-Ray, but Sony sure does. Even though there really isn’t much market demand for a high-definition DVD format yet, electronics companies are banking that in the next 10 years the popularity of HD televisions is going to lead to a boom market in advanced video formats (I think they’re wrong, but hey, what do I know?). Like VHS and Betamax before them, HD-DVD (made by Toshiba) and Blu-Ray (Sony) are engaged in a format war, each trying to become dominant format while rendering the other irrelevant in the process. At stake are billions of dollars in royalties from licensing the technology to the different movie studios and production companies, and Sony wants the spoils.

So someone at Sony had a light-bulb moment. What do they have to leverage their next-gen DVD format that Toshiba doesn’t? Answer: the most popular videogame system in the world. Instead of using traditional DVDs, like the PS2 and Xbox (and Xbox 360), Sony would use a Blu-Ray processor and discs for their next system. It would be the ultimate Trojan Horse, with people buying the system for the games but also getting a high-definition DVD player in the process. When the time came to go to the DVD store and buy a movie that would look great on their HDTV, customers would obviously pick Blu-Ray. Heck, upon its release the PS3 would actually be the cheapest Blu-Ray player on the market. From a corporate perspective, this was a stroke of genius.

From a videogame perspective, though, things got sketchy. By all accounts, the Blu-Ray processor is the biggest variable that pushed the PS3’s price to a staggering $600 in the States, making it the most expensive mainstream console in history, even accounting for inflation (a few never-rans like the 3DO were higher). But as you’ll see time and time again throughout this two-part essay, that price is the single greatest variable that is keeping the PS3 chained down in the lower end of the market. It’s not that people don’t want a PS3 – they don’t want a PS3 that costs $600, and that price comes directly from the decision to focus on Blu-Ray technology.

In case you’re curious, Blu-Ray appears to be eclipsing HD-DVD in the format war. So Sony might still win out in the long run, but their videogame division is hurting in the meantime.

Tomorrow…part two of the fall of the Playstation 3, with two more reasons for its poor sales performance.

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5 responses to “The fall of the Playstation 3 (part one)

  1. I’ve been following the video games lately, and I wanted to add something about the HD-DVD / Blu-Ray war.

    1) Sony (as far as I know) has had absolutely no luck with proprietary devices. According to one blog I found (http://dubiousquality.blogspot.com/2006/07/sony.html) Sony has in fact, failed to launch a successful proprietary device in the last 15 years.

    2) Blu-Ray sales, while beating HD-DVD sales, are still completely underwhelming. One report shows that it only requires about 1000 units sold to make the top ten (http://www.highdefdigest.com/news/show/564).

    3) People are already working on making discs that work on both Blu-Ray AND HD-DVD players, which could really hurt Blu-Ray (http://www.electronichouse.com/article/hd_dvd_and_blu_ray_learn_to_play_together/)

    4) Sony’s biggest enemy this Christmas? It might be Wal-Mart! (http://blog.wired.com/games/2007/04/walmart_hddvd_a.html)

    – Eddie

  2. Pingback: ...in which McNutt examines the fall of the Playstation 3 (part two) « McNutt Against the Music·

  3. Pingback: …in which McNutt punts on his Nintendo Wii analysis « McNutt Against the Music·

  4. Pingback: …in which McNutt makes his notes about the Blu-ray “victory” « McNutt Against the Music·

  5. Ps3 will hopefully die so the smart video GAME companies microsoft, and nintendo can actually make good games without the annoyance of the ps3 which is essentially a webbrowser and a blu ray player. If blu ray would have lost against HD-DVD the ps3 would have been dead like it deserves.

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