The fall of the Playstation 3 (part two)

part deux

In this second part of a two-day essay, I give two more strategic decisions that led to the PS3’s struggles to date (you can read part one here).

Over-estimating the Brand

This decision to bet the house on Blu-Ray was only enabled by another critical miscalculation on Sony’s part: overestimating the value of the Playstation brand. Sony figured that after two generations of dominating the market and after 217 million systems sold that their audience was with them to stay and would follow them wherever they went. So they did what big companies so often do – they took advantage of their customers’ goodwill and patronage.

Now I’m sure there are perfectly content PS3 owners who feel otherwise, but had Sony been in Nintendo’s shoes going into this round of the war – a third place niche player – there’s no way in hell they would have tried to put a $600 system into the marketplace. The only way they could ever justify such a ridiculous decision is if they had a ridiculous amount of confidence in the loyalty of their audience. “If we build it,” they thought, “they will come, no matter what we charge.”

Wrong. So very wrong. Customers are not sheep that can be led out to pasture, nor are they a devoted puppy that will follow its owner to the ends of the earth. There comes a point where brand loyalty stops and common sense takes over, and a $600 videogame system is several steps beyond that point. A company should never presume brand loyalty; instead, they should always seek to earn and maintain it. Sony presumed it and are now paying the price.

The most interesting part, actually, about the PS3’s failure is that it’s being outsold by the PS2 every month, a system that’s almost seven years old but only costs $130. It isn’t that customers don’t want to buy Playstation or a Sony product, but that the Playstation 3 just isn’t worth its list price to them.

If It Ain’t Broke…

Here’s what might be the strangest thing about the PS3 relative to Sony’s history in the videogame market: for the last two generations, Sony has had arguably the weakest systems going. Though it had its advantages over the N64 because of its CD format, the Playstation’s best games couldn’t keep up with the most groundbreaking stuff that Nintendo was doing. In the last round of the console wars, the original Xbox was the most powerful system, with the Gamecube in second. The Playstation 2, the system that sold more than any system before it, was actually less powerful than its competition.

Sony didn’t win the last two generations by being having the biggest and most powerful system – they won it because they had the games, the brand value and a mass-market price. Both the Playstation and the Playstation 2 launched with a price tag of $300 in America (only $50 more than the Wii is currently destroying all comers with), and they were able to drop that price within two years to keep up with the competition.

When they unveiled the PS3, Sony abandoned that strategy for something entirely different. When talking about their new system, Sony started sounding like Microsoft, explaining how they wanted their system to be the complete home entertainment centre of the household. Developers all have made it clear that the PS3 is far and away the most powerful system of the big three, even if it isn’t showing it yet (right now most games look similar on both the PS3 and Xbox 360). Sony’s executives have discussed how their goal with the PS3 was to give gamers the high-end home entertainment supersystem that they’re asking for.

Umm…who exactly is asking for a $600 videogame system? Maybe the hardcore videogame audience, the one that you see visiting blogs and message boards and who are able to spend hundreds of hours each year playing games (sometimes on each GAME). But mass success in the gaming industry doesn’t come from the hardcore gamers – it comes from the casual ones, those who may only buy a few games a year but invest in the system and help increase that all-important marketshare.

Casual gamers don’t want a home entertainment megacentre – they already have DVD players, music players, etc. They just want to play games. And (with good reason) casual gamers have absolutely no interest in paying $600 to buy a system to play games, and that’s not even counting the games themselves! Making matters worse is that with its one year head start, Microsoft has successfully made the Xbox 360 the console of choice for hardcore gamers, scooping up established franchises left and right. So Sony is abandoning the casual audience for an audience that a competitor has already claimed.

When I wrote about the Nintendo Wii I talked about a blue ocean strategy, how important it is to differentiate yourself from your competitors and find new markets to compete in. Sony decided to swim in water that’s already tainted red, with no fish left to hunt. No wonder it’s starving.

The proof is in the price

The simple answer to the PS3’s problems is easy: it’s just too damn expensive. But hopefully I’ve been able to get across that Sony didn’t just wake up one morning and say “hey, let’s charge $600 for the PS3.” That price is a direct consequence of a number of strategy decisions that Sony made at the very highest levels: to use the PS3 as a Trojan Horse for Blu-Ray, to take advantage of its brand name to do so, and to abandon affordability and, by extension, the casual audience in the process. And the entire experience has been a disaster.

Now PS3s are widely available across North America, but no one is buying. Most famously (and hilariously), Sony’s American president Jack Tretton claimed that he would pay $1200 to anyone who could find a PS3 on shelves in America; the online comic Penny Arcade responded brilliantly. The mainstream press has picked up on the story of the PS3’s downfall, regularly writing articles about how Nintendo is wiping the floor with its rival.

Not all hope is lost for Sony, but things are still pretty bleak. For one, Sony’s online system of social networking called “Home” and a related game known as LittleBigPlanet look like they could possibly turn into system-sellers when they arrive later this year. Most important of all is Sony’s exclusives, those games that aren’t available on any other system; they’re the biggest differentiator in the videogame market. Sony has yet to bring out its biggest guns that (likely) will be exclusive: the next big games in the Metal Gear Solid and Final Fantasy franchises (not to mention any new exclusives that we might not know about yet).

But Sony’s biggest asset last generation – Grand Theft Auto – is going to be released simultaneously on the Xbox 360, as are other former exclusives like the Devil May Cry series. Some commentators are declaring that we’re starting to see the end of exclusives, where game production costs are so huge now that it doesn’t make financial sense to limit who can buy them. When you combine this with the fact that the PS3 is selling at a massive loss already (maybe up to $300 a system, according to reports), thus making it near impossible to cut prices, then the future is looking anything but bright for the former console champion.

Rule of threes indeed.

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

  1. I can’t help but think of Nothin’ Fancy Furniture when I hear “The Proof is in the Price”, just so you know.

    It’s really only left to FFXII and MGS4 for Sony…and the latter has been a non-starter in Japan as of late and the prior is going to have to be huge to make too much of a dent. In short, Sony’s a teensy bit screwed.

  2. Myles is right about the current exclusives’ prospects in Japan. What Sony needs is a Dragon Quest game, and while Square-Enix is hedging their bets with IX on the DS, all current signs would indicate that DQ X will end up on a Nintendo platform, be it Wii or DS.

    I’m curious how Microsoft will handle the marketing of Blue Dragon and Lost Odyssey in the US. If they can really drive home that these RPGs are designed by the creator of Final Fantasy, they may be able to blunt the edge that FF XIII gives the PS3.

  3. I think that Blue Dragon and Lost Odyssey are an interesting test of the “We buy lots of software!” mentality currently existing within XBox 360 owners. We’ve seen it have positive ramifications for Crackdown, GRAW2, Lost Planet, etc…but can it extend to a JRPG?

    Also, is this JRPG genre which the PS3 could theoretically claim to hold an advantage in, actuality, that important within the American market at the moment? What exactly does Sony have left if it isn’t? Right now they’re basically banking on Heavenly Sword being the next God of War.

  4. Im a hardcore gamer, and I still hate the ps3 because one thing that sony obviously dosent realize is that its online play (playstation network) is very poor and hasent been advertised enough (if at all). The Xbox 360 in my opnion is so good not just because of its exclusives but because its online service (Xbox Live) you cannot win long term support from the advanced gamer to the hardcore gamer without having a good online service and this is where the ps3 failed where the Xbox 360 will continue to have sucess in. if you are going to build a system that is going to attract all of the hardcore gamers shouldnt you have atleast a decent online service? I think that if consumers are willing to pay 600 dollars on a system they are willing to pay for a 50 dollar yearly online service which is atleast half way decent.

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