Sony's entry into the video game console industry

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.

Summary

The video game console industry is highly competitive. There are three firms in the industry, two of which are heavily involved in other lines of business and one of which (Nintendo) is primarily in the console business. Development in the industry is characterized by technological leaps known as generations, and the PS3 occupies the seventh generation along with the Xbox360 and the Wii.

The PS3 has been slow to gain traction in the industry. It lags its competitors in the seventh generation, and sells fewer units that its predecessors the PS2 and the PSP. Part of this can be attributed to the marketing strategy that Sony undertook. Sony priced the PS3 high in order to develop a premium position. This is matched with excellent technology, but consumer perception is that the PS3 is overpriced relative to the Xbox360. The Wii entered the market and found customers that were not hardcore gamers. The development of this market is not only giving the Wii substantial sales but is generating substantial goodwill for Nintendo.

Overall, the PS3 does still have some competitive advantages. But it has a high price and this has hampered sales. The PS3 is competing strictly in the video game console industry, as is the Xbox360. The Wii has succeeded in superceding both of those consoles by competing in the entertainment industry. The PS3 may be able to utilize its technology platform and Blu-Ray compatibility to move into a more mainstream market, but at present Sony seems determined to build the installed base slowly. Industry observers feel that the PS3 will not overtake industry leadership until at least 2011 and by then the eighth generation could once again alter the competitive landscape.

Appendix A:

SWOT Analysis

Strengths:

PS Network

Quality of console

Blu-Ray

Weaknesses:

High price

Weak sales

Games

Opportunities:

Longevity

Broader market

Threats:

Generation 8

Wii

Economy

Works Cited:

Sony UK Website: About Sony. Retrieved April 25, 2009 from http://www.sony.co.uk/article/id/1060176719725

No author. (2008). 2008: Essential Facts about the Computer and Video Game Industry. Entertainment Software Association. Retrieved April 25, 2009 from http://www.theesa.com/facts/pdfs/ESA_EF_2008.pdf

Eran, Daniel. (2006). The Next Generation Game Consoles. Roughly Drafted. Retrieved April 25, 2009 from http://www.roughlydrafted.com/RD/Q4.06/5B47C6B2-0191-4825-80C9-F6EBCA0E3B23.html

Shaw, Anne. (2008). The Gaming Console War is Still Undecided, Wii to Take Lead. eFluxMedia. Retrieved April 25, 2009 from http://www.efluxmedia.com/news_The_Gaming_Console_War_is_Still_Undecided_Wii_to_Take_Lead_14062.html

Financial information from MSN Moneycentral. Retrieved April 25, 2009 from http://moneycentral.msn.com/home.asp

Krangel, Eric. (2009). PS3 Grabs more Market Share, Still in Third Place. Business Insider. Retrieved April 25, 2009 from http://www.businessinsider.com/ps3-grabs-more-market-share-still-in-third-place-2009-3

Sales figures from Sony, retrieved April 25, 2009 from http://www.scei.co.jp/corporate/data/bizdataps3soft_sale_e.html

Ono, Denise. (2006). Game Consoles Vie for Next-Gen Supremacy. MSNBC. Retrieved April 25, 2009 from http://www.msnbc.msn.com/id/15699196/