Friday, May 18, 2007

Console Post of the Week: Going Down, Down, Down

Here are some quick data points before the discussion.

Sony earnings announcement:

--in the fourth (financial) quarter alone, the games division lost $914 million.

--full-year financial year losses for the games division were almost $2 billion

--Sony said they shipped 5.5 million units for the fiscal year (340,000 less than Nintendo's Wii) and sold 3.6 million of them.

--they project losses of $415 million in the games division for the next fiscal year (which ends March 31, 2008).

Those were the high-level points that people focused on. What they missed, though, was something much more interesting. Sony said they were going to ship 11 million consoles in the upcoming fiscal year.

That sounds like a ton, until you do the math.

Remember, they shipped 5.5 million units from the mid-November U.S. launch (one week earlier in Japan) to the end of March. That's roughly four and a half months, or about 1.2 million units a month.

Shipping 11 million systems in the upcoming fiscal year represents just over 900,000 units a month.

Even if you factor in stockpiling the 300,000 launch units, Sony is still going to ship fewer units per month than they did in the just-concluded fiscal year.

Sony isn't accelerating their PS3 shipments. They're reducing them.

Of course, part of the reason for doing that is that at least two million of the units they've shipped haven't sold, which is a huge inventory overhang.

So Sony's going to be shipping, on average, 900,000 units month. Meanwhile, they're selling 20,000 a week in the U.S. and 12,000 a week in Japan (actually, only 8,839 last week in Japan). Even if you give them an incredibly generous 20,000 units a week in Europe, that's still less than 250,000 units a month worldwide.

The retail channels are already stuffed.

Even with a manufacturing schedule heavily weighted toward the holiday season, that adds up to a disaster.

So again, I think this all adds up to a significant price cut, and soon. At this point, they don't have a choice.

Here's the interesting question, though: what happens if they drop the price to $499? They're selling less than 100,000 units a month in the U.S., and they need to be selling at least double that.

Would a $100 price drop double sales? No. Not even for two months, let alone long-term.

Here's what gaming analysts and gaming executives don't want to admit: gaming consoles are a $299 market. And do you know who's conclusively proven that?


The 360 is an extremely powerful system with a wide range of excellent games. Xbox Live is an outstanding service. With the exception of reliability issues, Microsoft has handled itself extremely well. In spite of all that, though, they have no momentum. And they have no momentum because they're $100 over what the mass market will bear.

If Microsoft reduced the price on the Premium unit to $299, and reduced game prices across the board to $49.99, they'd be golden.

If Sony reduces their price by the same $100, though, it will attract more buyers, but they will still be hopelessly above the mass market price. And for Sony to succeed financially with the PS3, it has to be a mass market product.

This is what happens when you over-engineer a product to the degree that the BOM costs $800+ in a $299 market: you're screwed. You have to reduce the price, but that reduction will result in hundreds of millions of dollars in additional losses. But if you don't reduce the price, you're not going to be able to ship enough units to move further along the production curve and reduce the price of the BOM, which means the consoles that do sell are going to generate hundreds of millions of in losses.

Scenario 1: hundreds of millions of dollars in losses.
Scenario 2: hundreds of millions of dollars in losses.

Actually, it's not even hundreds of millions of dollars. The gaming division will lose over a billion dollars, at a minimum, in the upcoming fiscal year. There is no scenario where that will not happen.

If you're going to lose hundreds of millions of dollars (or more) in every scenario, I say pick the scenario that gets you the most market share. At least it keeps you in the game.

Here's the other option: stay the course.

Let's take a quick look at that. At the current rate, it looks like it will take eight months for the PS3 to reach sales of 1 million units in Japan.

The Wii took six weeks. The PS2 took three.

Sony had a nice gaming day this week where they showed all kinds of interesting games, and even some interesting promotions (there's going to be a deluxe edition of Stranglehold that will include an HD-version of Hard Boiled). That's a terrific idea.

But Sony can talk about the upcoming games all they want, as loudly as they can, and the price of the unit is still the elephant in the room.

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