PS3 Introduction to Sony Corporation

PS3

Introduction to Sony

Sony Corporation was founded in 1946 as Tokyo Telecommunications Engineering Company. The firm's founders had started a small business amidst the post-war devastation repairing radios, making voltmeters and eventually a rice cooker. The founders had big dreams for their company, so changed the name to Sony as TTK (the original acronym) was already taken. The first radio was manufactured in 1955 (Sony UK, 2009), using Bell's transistor technology. By 1968 they were in the television business with the Trinitron. The company then moved into video games. Although they were a late bloomer in the field, launching the first PlayStation in 1994 (in Japan) they have grown to be a world power.

The company had originally tried to enter the game industry through a joint venture with Nintendo. At the last second, Nintendo backed out of the deal, going with Philips instead. This spurred Sony to go it alone in order to enter the video game industry, resulting in a strong rivalry between the two firms. Since then, the PlayStation concept has been adapted into numerous formats, the most relevant today being the PlayStation portable. The first PlayStation remained on the market for over a decade, long for a game console. This has prompted Sony to make that a part of its console marketing program. The PlayStation2 remains on the market, and its games still sell well. The PlayStation 3 was launched in 2006 as the company's entrant into what is known as the seventh generation of video game consoles.

The Industry Today

The main players in the game console industry today are Sony, Nintendo and Microsoft. The latter entered the market late, but has successfully captured a sizeable market share. Sony and Microsoft are both diversified firms, while Nintendo is a video game specialist whose only other major lines are playing cards and Pokemon. Sony competes in a variety of entertainment hardware and content realms; Microsoft is first and foremost a software company. In terms of size, Sony is the largest, with sales of ¥8.7 trillion, which is roughly equivalent to $89 billion. Microsoft does $60 billion in business, while Nintendo does around $1.6 billion in sales. For Nintendo, their console business is critical to their survival while Sony and Microsoft can easily survive without their console businesses.

The video game console industry is driven by consumer spending patterns. Therefore the single most important economic variable is discretionary spending. On a macro level this is typically driven by the state of the economy, consumer confidence, core inflation and taxation levels. The latter two influence the amount of discretionary spending in the economy by impacting the amount of money after essential purchase have been made. Consumer confidence will also impact discretionary spending, in particular in the key U.S. market where spending on credit is common. It times when consumer confidence is low, savings rates increase, resulting in a corresponding decrease in discretionary spending. The state of the economy overall determines the amount of people employed and how much they make, in addition to consumer confidence.

On a microeconomic level, the consumer decision making process reflects a number of different considerations. One is the availability of substitutes, which in the case of video games constitutes all aspects of the entertainment industry. Consumers make a price-reward tradeoff decision in their heads. Video game consoles are considered to be high-priced entertainment options, but they have a very long life span relative to most entertainment options. For Sony, the key microeconomic driver is the cost of inputs, which in part determines the price that they can charge for their consoles.

The video game console industry is a subset of the very broad entertainment industry. These products fulfill two needs for the consumer. One is the need for entertainment on a very general level. Sony typically does not compete on that level, but rather targets those consumers who have specifically dedicated a proportion of the entertainment dollars (or yen as the case may be) to video games. This specific market has an average age of 35, and these consumers have typically been gaming for 12 years. Indeed, 26% of gamers are over 50. The demographics are 60% male and 40% female. Within this it should be noted that women over the age of 18 represent 33% of the gaming market -- males younger than 18 are only 18% of the market. This shows that the stereotypical teenage boy video gamer is not at all an accurate reflection of the customer base for games and game consoles. In fact, the average age of the most frequent game purchaser is 40, a demographic that has substantial disposal income. Another stereotype -- that of video games being overly violent -- is also unfounded as 45% of all games sold are rated E (Entertainment Software Association, 2008).

SWOT Analysis (see also Appendix A)

The PS3 has several strengths that it has used to help it gain a foothold in the market. One is that it has a strong technological base. Sony has always traded on technological superiority and has created a strong machine. Another strength is that PS3s play Blu-Rays. When the PS3 was launched, this feature had substantial appeal because the cost of a Blu-Ray machine was prohibitively expensive. As a result, the PS3 became an affordable means to acquire a Blu-Ray machine, giving the PS3 a two-in-one appeal. Now that Blu-Ray is the industry standard, this appeal is lessened as the cost of Blu-Ray machines decreases. The Blu-Ray is just one of the cross-marketing features of the PS3. Sony has the PS Network, which enables game downloading and other attractive features. This engenders strong brand loyalty among users.

The PS3 has several weaknesses though. One is that is has a high price. Microsoft keeps the price of the Xbox 360 down, as a loss leader, in order to gain market share in the console business. They have leveraged their financial strength in order to do this. Nintendo has priced the Wii at a fairly low as well. By contrast, the PS3 is significantly more expensive than either of its major competitors. Another weakness is that the PS3 has relatively weak sales. In 2008, for example, 9.2 million units were sold. This compares with 13.9 million units of PSP and 13.7 million units of PS2 worldwide (Sony 2008 Annual Report). This is corroborated by February U.S. sales figures, which show the PS3 trailing both the Xbox 360 and the Wii (Krangel, 2009). Also of concern is that the PS3 trails other consoles in offering leading games. The best franchises in the business have trended toward Microsoft and Nintendo. Total PS3 game sales are 155.9 million (Sony, 2009), less than either Wii or Xbox360.

In terms of opportunities, the longevity of Sony's systems can be considered an opportunity. Sony systems last a decade and beyond -- the PS2 is still selling well -- which bodes well for the long-term future of the PS3. The product is still in the growth stage of its lifestyle, as evidence by the steady growth in game sales. There is significant time for Sony to build its installed base and roster of titles. Another opportunity is to find the broad market. The PS3 is generally considered to be a console aimed at hardcore gamers. While this is a substantial demographic -- 38% of American households have a game console -- the Wii has demonstrated that if a less hardcore market can be tapped, there are significant market share advantages to be won. The Wii sells double the rival systems and has many of the top-selling games as a consequence.

There are several threats to the PS3. One is the eighth generation of consoles. Both Microsoft and Nintendo are believed to be working on the next generation, with launch possible as early as 2010. The next generation would have better technology than any existing console and could become a competitive threat to all seventh generation consoles. The PS3's sales have lagged in part because it was released so soon after the PS2, before a pent-up market had developed. If the leap in technology is substantial, Sony could be forced to joint the eighth generation, which would represent a major threat to the PS3. Another threat is the Wii. This console has taken gaming back to the mass market. This means that the Wii is helping to develop considerable brand equity for Nintendo, which could erode Sony's competitive position. Another threat is the economy. As the economy slumps both in the U.S. And Japan -- Sony's key markets- sales of consoles have slipped. Until the economy begins to improve, console sales could be depressed.

Marketing Mix

The marketing mix consists of the following strategic elements: price, promotion, distribution, and product. The following section will analyze the PS3 in the context of each of these.

In terms of price, Sony decided to set the price of the PS3 higher than that of the competition. They felt that they had designed a superior console that would appeal to the hardcore gamer, and therefore could charge a premium price. This represents a risky move in this oligopolistic industry. The price of the PS3 was set at $499 for the 20 GB model and $599 for the 60 GB model. The Xbox360 is $200 less and the Wii was priced at $250 (Ono, 2006). Sony's goal with the pricing strategy was twofold -- to connote the premium nature of the product and to cover the costs. The cost structure of the Wii is less well-known, but Nintendo's business is game consoles. They are dependent on gaining market share, and their involvement in the Wii games indicates that console diffusion may be a loss leader to spur games sales. With the Xbox360, it is widely known that Microsoft is selling the product below cost. They were a late entrant into the console business and as a result have kept prices low in order to gain market share.

With respect to product, the PS3 has high-end technology to match its high end price tag. But the consumer perception of the technology is that it is not so superior as to justify the price of the console. This is one of the main reasons for the relatively slow diffusion of the PS3 into the marketplace. The other major product aspect of marketing video game consoles with respect to the games themselves. The most popular games can drive console sales. In part because of the PS3 trailed the Xbox360 in launch, the Microsoft console was able to secure better games, particularly in the early months of the seventh generation. Sony continues to lag its competitors in games -- as late as 2008 the best-selling Sony console games were all for the PS2 (Entertainment Software Association, 2008).

In terms of distribution, strategies within this industry are complicated. The firms involved are reticent to reveal the precise nature of their strategies, but the seventh generation has seen some interesting tactics. Microsoft apparently limited availability of the Xbox360, either on the production side or the distribution side, in order to feign the appearance on pent-up demand. Sony had its own distribution problems, and there were difficulties with availability during the launch period. In general, however, and certainly for all of the consoles presently on the market, availability is wide. The consoles are sold through a variety of mass market channels, including both bricks and mortar retailers and online. Most retail channels are through existing game stores, electronic entertainment outlets and major retail operators. In contrast to the Xbox360, the PS3 (along with other Sony and Nintendo products) is widely marketed in Asia and the rest of the world. Microsoft primarily markets its console in North America.

The final element of the marketing mix is promotion. The three main seventh generation consoles were each positioned differently in the marketplace, and these different positions were reflected in both the pricing and the promotion. Sony positioned the PS3 at the high end of all consoles currently on the market. They appeared to target the hardcore gamer, believing that this was the major segment within the gaming market. The Wii has since demonstrated that this was not as much the case as Sony may have believed. Nevertheless, the PS3 continues to be promoted as a high end product. Promotion today is mainly comprised of targeted ads, partnerships with different games and publishers, and with the Sony website and the PS Network.