Sony's big hopes for PlayStation 3 may fall short
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Sony Corp. has high expectations for this fall's rollout of its PlayStation 3 videogame console, a driver of the company's earnings.
But the machine's expected price tag, some downbeat buzz within the industry and improving prospects for a competitor's console could lead to disappointment for Sony, according to some analysts and videogame specialists. That is a potential problem for a stock that remains almost 24 percent higher than late last year.
In November Sony is expected to introduce PlayStation 3 (PS3) for $499 for a basic system and $599 for a console with a larger hard drive. It will include a high-definition DVD player, called Blu-ray, and a powerful new computer chip.
Rival Microsoft Corp.'s Xbox is about $200 cheaper, though it doesn't have the same new-age DVD player. And this fall Nintendo Co. will start selling its own new game system, the Wii (pronounced "we"). The Wii already is winning accolades from videogame critics, in part, because of a wandlike remote. That machine is expected to cost $250 or less.
"People in gaming and game publishing are drastically less excited about PlayStation 3 than they were a year ago, and also a few months back, and competition is looking much stronger," says David Cole, a market analyst at DFC Intelligence, a San Diego market-research firm focused on the videogame industry. "There is a lot of anticipation about PS3, but not a lot of software coming out over the next few months that would excite consumers. And the price point is staggering."
A Sony spokesman said "pricing for PlayStation 3 is entirely appropriate, given all that it has to offer, including the Cell chip and Blu-ray." The company argues that game developers are embracing the PS3.
The first run of PS3 consoles likely will sell out, as hard-core gamers scoop up the machines, analysts say. But the price could reduce broader interest, especially if U.S. economic growth slows in the fall, as many economists expect.
Sony is a sprawling company that includes Sony Pictures, the movie studio. The company is making strides in its electronics business, which has been unprofitable in recent years, with new products such as high-definition camcorders and liquid-crystal-display, or LCD, televisions.
But Sony's games business is a big part of its bottom line. Profit from this business could represent approximately 30 percent of net income in the next few years, according to analysts, as it has in past years after the release of PlayStation 2. Sony has said that it expects losses from the rollout this year. Console makers usually lose money initially on machines, though royalties of roughly 10 percent to 20 percent of the price of videogames begin to add up.
The PS3 is part of Sony's effort to boost the prospects of the Blu-ray as a standard for DVDs. The Blu-ray, with backing from Matsushita Electric Industrial Co., News Corp., Walt Disney Co. and others, is competing with a rival standard called HD-DVD, backed by Toshiba Corp., Microsoft and General Electric Co.'s NBC Universal. Perhaps most important, if Sony can generate interest in PS3 it will have a leg up on its goal of making the machine a home-media server, eventually allowing households to download games, movies and music, a top task of the company's chief executive officer, Howard Stringer.
Fumio Osanai of UBS AG says the firm will upgrade or downgrade Sony this year, based on the ability of PS3 to catch on as a home-media server. He has a "neutral" rating on Sony.
Sony fans say the inclusion of the Blu-ray DVD will lure PS3 buyers because there now are enough high-definition televisions in consumers' dens that they will want an improved DVD to view movies and programming more clearly. Sony bulls also point out the PS3 has been anticipated by videogame fans less concerned about price.
But hard-core gamers represent less than 10 percent of the market for game consoles, according to DFC Intelligence, suggesting that PS3 will have to appeal to the masses to succeed. While some consumers will be attracted to the Blu-ray and use PS3 as a home system, others may prefer to buy a DVD player separately or shy away from the cost of any changes needed to make the PS3 the center of their living rooms, some analysts caution.
Sony could elect to cut the price on the PS3 next year, but that wouldn't fit in with its strategy to sell the system as a media center. Any price cut would have to be drastic to compete with Nintendo, though prices could come down over time.
UBS estimates Sony's share of the game-machine business in the next year or so will drop to about 50 percent from more than 60 percent. Overall, global revenue from machines, games and online game playing reached $29 billion last year, and Sony claimed about $8 billion of that figure during its fiscal year ending March 2006, according to DFC.
"At $600, it will be just too expensive for the mainstream," said Mark Friedler, chief executive officer and publisher of GameDaily, a games Web site and publication. "The question is how many people will upgrade to PS3 because the software for it also will be more expensive."
About 90 percent of earnings last year and 42 percent of 2005's profit came from Sony's overlooked financial-services unit, which sports high profit margins. But investors usually aren't comfortable paying a big price for financial-services businesses, which can have slower growth. Sony's profit has been volatile recently, another reason a high price/earnings ratio may not be appropriate.
Sony's price/earnings ratio of 37, based on expected earnings for the next 12 months, is well above rivals such as Microsoft, Apple Computer Inc., Time Warner Inc. and News Corp. Investors are willing to pay that price because they expect PS3 and more cost cutting to power impressive profit in the next few years. If excitement for PS3 is muted, the stock could suffer, unless the electronics business has a big turnaround.
On a price-to-sales basis, Sony is more inexpensive than rivals, though it is close to its 10-year average. Because the bulk of its sales comes from low-margin electronics, each dollar of sales for Sony is less profitable than a dollar of sales for competitors like Apple and Microsoft.
First Published July 19, 2006 12:00 am
