Tuesday, May 19, 2009

Console Post Of The Week (#2): Sony

Here's the problem:

The graph shows, in millions of units, each fiscal year from launch for all three generations of the Playstation platform. The yellow addition to the PS3 line is what Sony is projection for FY2009.

[As always, this note: Sony changed accounting methods beginning in FY2007, from "production shipments" to "recorded sales." As best I can determine, "recorded sales" means "shipments to retailers," not actual consumer purchases.]

In many ways, the first two fiscal years of all three Playstation generations are similar, and the second year striking so: 9.2M, 9.2M, and 9.12M, respectively.

Then, however, it gets ugly. If you look at the next two years (including Sony's projected 13M for the PS3 in FY2009, you get this:

So no matter how many times Sony tries to imply it, the PS3 is not the PS2, or the PS1. It's far too expensive, it's always going to be chasing on price, and it's never going to get the same market penetration as its predecessors. Just last week, in Sony Tokyo's earning briefing, CFO Nobuyuki Oneda confirmed that the cost to Sony of a PS3 is still 10% above the retail price, and that's with a retail price that is still far too high! It could take the PS3 three years from launch (or more) to even MATCH the launch price of the PS2. That's incredible.

Sony has acknowledged how badly the PS3 project has been managed, although not in words, necessarily. They've replaced so many members of senior management that hardly anyone is left, seemingly, and appointing an "outsider" (Howard Stringer) to run the company was certainly a watershed moment for a Japanese company that has traditionally been deeply insular. No, that wasn't entirely due to the PS3, but it was certainly a factor.

Howard Stringer recently gave an interview to Nikkei Electronics Asia, and although this interview hasn't been widely cited, he made some relatively astonishing (for Sony) statements. Here are a few excerpts:
We developed brand new, absolutely incredible technology for the PlayStation 3 (PS3), but the cost was high. We've adopted a slightly different approach now, and are evolving the PS3 into a platform for Web services...

A lot of people thought Sony's content download service was doomed, but it's in a pretty good place right now in the form of the PlayStation Network, available to PS3 users for network gaming, video, etc. The DRM is based on Marlin, an open scheme developed by consumer electronics companies and other companies.

What does all this mean? Very simply, it means that Sony has begun the transition from a closed system to an open one. Next we will be expanding the PlayStation Network to hardware other than the PS3, because the number of PS3 units sold puts a limit on the scale of the network possible.

That seems significant, for several reasons. First, he's clearly waving the white flag for the traditional Playstation business model, and even waving the white flag for what seemed to be the original business model for the PS3. "Evolving" the PS3 into a platform for web services and "expanding" the Playstation Network to other hardware translates into this: the PS3 cost too much, they couldn't sell enough of them, they're not going to sell enough of them, and they got tired of taking an ass-kicking in their earnings reports.

In other words, the closed system arrogance appears to be at an end. Sony simply can't afford to be that way anymore. Stringer makes some definite comments to that effect, and here are more excerpts:
We can no longer say that we're right and our customers are wrong. We can't build only what we want to build.

There was a time when it made sense to divide the market with closed technology, and monopolize a divided market, but that's just not an effective strategy any more.

Understanding customers and open technologies are not the only important things. Prices should also be reasonable and reflect what customers are willing to pay.

Then Stringer lays down the law, and seemingly, he's speaking directly to Sony employees:
The relationship between Sony and its customers is changing, even if some people at Sony may not like it. We really didn't have anything you could call a relationship back in the analog era. It was pretty simple, with the manufacturer providing products and the customer either buying them if they liked the goods, or not. The Internet and information technology have changed all that. And if we don't adapt accordingly, we will lose our customers to the competition.

It seems fairly clear from this interview that Howard Stringer gets it. He understands what's gone wrong with Sony, why it won't work anymore, and how they have to be different. Whether he can accomplish this in a company that, to some degree, seems firmly against him, remains to be seen. One thing that will probably be necessary, though, is bringing in people from outside Sony's culture. Last week, Stringer named former IBM senior executive George Bailey
[obligatory: "You're thinkin' of this place all wrong, as if I had your money back in safe! The money's not here--your money's in Joe's house, that's right next to yours, and the Kennedy house and Mrs. Mapeland's house, and a hundred others. You're lending them the money to build, and then they're gonna pay you back best they can."]

as "Chief Transformation Officer." Of note, however, is that Stringer has hired only one other "outsider" of note (Apple's Tim Schaaff) during his tenure.

This is running long, so I'm going to (finally) pull the plug, but it's going to be a grindingly painful transition for Sony. It's entirely necessary, though, if they expect to both survive and remain relevant.

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