PS3 Blues: Razor and Blade Theory Fails Sony
(very very very big read)
Via Hollywood Today
The result is the loss this week of close to 100 jobs in the U.S. following $2 billion in red ink
Sony Corp.’s disastrous launch of its next generation video player, the Playstation 3 (PS3), is a factor in the layoff this week of 80 to 100 U.S. employees of Sony Computer Entertainment, mostly at their headquarters in Foster City, California. This follows in the wake of the botched business plan for the PS3 that cost Sony about $2 billon last fiscal year and has raised questions about the long term viability of the Blu-ray hi def format.
Although SCE execs predict the unit will turn a profit this year, and Sony still strongly supports the Blu-ray format, questions have been raised about the long term viability of the Blu-ray business plan.
Sony Corp. was criticized at the end of last year for being late to market with the PS3 due to reported manufacturing problems. Even when they had a machine to sell, it was widely reported that Sony was losing as much as $200 on every sale of a $500 player. Sony called it an investment because the machine owners will then buy lots and lots of discs. It’s the classic theory of give ‘em the razor and then sell blades forever.
Unfortunately, so far it has not worked. It turns out most people who buy a PS3 actually want to play video games. Few bought it for movies alone simply because it was a cheaper way to get a Blu-ray player, which came built into each P3. Many who wanted cheaper players simply bought the competing HD DVD players at half the cost of the Sony units.
Some gamers were actually angry at Sony for sticking a Blu-ray player in the PS3 at all because it boosted the price at launch by an estimated $200. Microsoft sold the Xbox 360 for about half the price of a PS3, and then offered its high definition HD DVD player as an add on device for about $200 to those who also wanted to show hi def movies.
Going into the last holiday season there were three major video gaming systems hitting the market. Microsoft staked its claim with the Xbox 360 early. It sold well.
As the 2006 holiday approached, Nintendo launched the Wii, which quickly became the buzz toy of the season; and since has continued to deliver solid sales. The Wii comes with a technology that lets the viewer swing a tennis racket or hit a golf ball in cyberspace. It took video gaming off the screen and put it into the middle of the room. It was a sensation, and continues to show appeal with 360,000 units sold in April.
That compares to 174,000 units sold by the Xbox and only 82,000 units for the PS3, whose sales are no longer dampened by manufacturing problems that caused Sony to miss opportunities over this past Christmas when it couldn’t keep up with demand.
Sony was not just launching a new gaming system, but also a new video format that was to be a replacement for the popular and durable standard DVD, offering higher definition images to dazzle viewers, as well as lots of untapped potential to deliver interactive entertainment, and provide a link to the Internet.
The big sales pitch was that people would buy the PS3 just to get the Blu-ray capability to play movies. Those buyers were expected to then become major consumers of Blu-ray format program discs, as they sought more and more movies.
Sony spread Blu-ray out to all kind of other devices. It is already available in laptops and various wireless devices. It does offer a very high quality image. But it also came to market late last year with another problem – price. The first Blu-ray players hovered near $1,000 at a time you could get a perfectly serviceable DVD player for $40.
And for a lot of viewers, there isn’t that much difference between the two hi def formats, certainly not $960 worth, or to pay $30 for a Blu-ray disc when DVD’s are typically $15 or less, and HD DVD discs are $5 to $10 less each than Blu-ray.
When the VHS tape format gave way to DVD a decade ago, consumers could see a clear difference. VHS was tape that tore and got old. DVD was lighter, easier to use and a far superior storage medium. Within two years, the DVD became the standard. Last year most manufacturers finally phased out production of VHS tapes.
Sony was very smart in many ways preparing to launch Blu-ray. It got the majority of studios in Hollywood to support the format from the beginning, and got several – including Sony, MGM and Disney – to only offer Blu-ray as its high def format choice.
The roots of Blu-ray go back to the late 1990s when the DVD format was born. At the time, Sony had a competing format but after a bitter battle was forced to acquiesce, and accept the DVD as standard. They joined in an “open patent pool,” which is how DVD is sourced by all manufactures and suppliers, which meant Sony did not own or control the key patents. That didn’t sit well in certain parts of Tokyo at the time.
So Sony laid the groundwork this time. They had lost the battle of Beta Vs. VHS when tape desk first came to market in the 1980s; and it was said they had failed because they went out alone. This time Blu-ray was supported by a large number of manufacturers and a majority of the big software suppliers in Hollywood. Sony was determined not to re-live the past when the superior technology of Beta was beaten by the lower price and wider availability of VHS.
This time Sony’s VHS competitors were almost all onboard with Blu-ray. This time Sony and its partners would own the underlying patents, which would not be part of an “open patent pool,” but rather a very closed pool.
To meet all the various demands, and produce a machine for now and the future, Sony created an incredibly complicated device to play Blu-ray, that required an entirely new manufacturing plant to re-produce movies and TV shows. The machine manufacturing process also required a form of crystal that was difficult to make and slow to produce.
On the other hand, HD DVD was part of an “open patent pool.” It did not require a new plant, only twitches to the lines that already produce DVD’s. The HD DVD machines also came to market at about half the price of Blu-ray players, around $500, still a far cry from the cost of a standard DVD player.
There was also a powerful new competitor on the horizon – the electronic delivery of content. Its still a little ways off. The problem is still that it takes too long to download an HDTV file for a feature, but that will change in the future.
It now appears likely Blu-ray and HD DVD will remain niche products for cinephiles, HD TV owners who desire a physical library and those who just like to collect things. The consumer market is expected to convert a few years from now from physical DVD as the primary delivery device to all electronic transfers, whether delivered online, over cable, telecoms or a satellite. That could mean the market will bypass Blu-ray and HD DVD as the mass market successor.
The electronic super highway will increasingly offer ease of delivery as the image and sound quality rise and download times fall. One thing fueling this growth will be devices like the new Apple TV which allows users to move content around the house wirelessly, where ever it is convenient to watch. Microsoft began offering a similar device a year ago that links what comes to the computer with the big screen in the living room.
Sony believes that controlling the most and best exclusive, high quality content, like the Blu-ray only hi def release of Disney’s first popular “Pirates Of The Caribbean” movies, will provide the power to fuel the success of the format, even at a premium price..
HD DVD, meanwhile, offers both high quality and a price advantage. And the price is about to come down a lot more — as soon as this Christmas. Those “open patent pools” have proven irresistible to several huge Chinese manufacturers who are readying to flood the U.S. market with ever cheaper HD DVD players. You can already buy one today for about $250, half what the least expensive player cost at Christmas.
Sony in response has brought down the price of its least expensive Blu-ray player to about $500, which is half what it sold for at Christmas. However, at the same time it has discontinued the least expensive PS3, and now only wants to sell a higher end model.
A spokesman for Sony Computer Entertainment told the online trade Next that the SCE job cuts are not directly attributable to any since product. That is true. They are a result of all of these many corporate disasters, the botched Blu-ray launch and the PS3 miscalculations, Sony now finds itself cutting prices on an expensive product, and facing years more of a Vietnam-style battle over the format standard with HD DVD.
In the consumer electronic industry, conventional wisdom is that great product is nice, but the war will be won on price. The availability of low cost HD DVD players, the recent arrival of Korean made combo players (that play both formats) and combo software from Warner Bros., which services both formats with its unique double sided two format disc, will make it even harder for Sony to compete with significantly higher prices on its Blu-ray only machines and discs.
The Foster City cuts follow an announcement a few months ago from Sony Computer Entertainment Europe that it was also planning layoffs, as part of plan to “streamline.” If Sony can’t figure out how to add an element to the PS3 to compete with the Wii’s wand and tap into the cyber shift ahead, there could be a lot more layoffs and losses to come.
