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In consoles, the game isn’t going Sony’s way

Times Staff Writers

Joel Downs is the type of video game buff that Sony Corp. expected to fall for the PlayStation 3. The 32-year-old Culver City entrepreneur is tech savvy, loves his PlayStation 2 and has the money to afford an upgrade.

But Downs is holding out.

For the record:
12:00 AM, Jun. 01, 2007 For The Record
Los Angeles Times Friday June 01, 2007 Home Edition Main News Part A Page 2 National Desk 1 inches; 45 words Type of Material: Correction
Video games: A May 14 article in Business named “Gran Turismo 4" and “Final Fantasy XII” as games that would be exclusive to Sony’s PlayStation 3 console. Those titles are currently available; “Gran Turismo 5" and “Final Fantasy XIII” will be exclusive to PlayStation 3.

“There’s no compelling reason for me to buy it,” he said. “There aren’t enough good games for it. And it’s too expensive.”

The PS2 has been a runaway hit and profit machine for Sony since its introduction in 2000. But its highly touted successor, the PS3, is off to a slow start, leading some game-industry insiders to question whether the consumer electronics giant will dominate this generation of consoles as it did the last.

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Analysts caution that the complaints echo those made early this decade about the PS2, which also lost hundreds of millions of dollars at first. This time, however, the stakes are much higher, making the PS3’s success all the more crucial. Sony spent more than $1 billion developing the console and invested a sizable chunk of its future in it -- not just games but also its broader entertainment and consumer electronics businesses.

“PS3 is Sony’s flagship product for this decade,” said Richard Doherty, principal analyst for Envisioneering Group, a consulting firm in Seaford, N.Y. “There have been a lot of expectations put onto that device.”

Sony executives stress that the game is just starting. They say the PS3’s technology is so advanced that it won’t be considered obsolete for another decade, giving them plenty of time to catch up in sales.

“We didn’t get into PS3 for the first six months of 2007 -- we’re into this for the next 10 years and beyond,” said Jack Tretton, president of Sony’s U.S. PlayStation unit. “A million units one way or another at this point isn’t going to worry us.”

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But so far, Sony is in last place.

Sony sold 1.2 million PS3s at $599 from November, when they hit the market, through March. Nintendo Co. launched its $250 Wii at the same time as the PS3 but sold 2.1 million. Microsoft Corp. jumped in early, 18 months ago, and consumers have snapped up 5.3 million Xbox 360s, which cost $299 to $479, depending on the features.

“It’s clear Sony is struggling with PS3 sales,” said Geoff Keighley, editor of GameSlice, an online industry publication. “The key question is: How is Sony going to persuade those 100 million PS2 owners to buy the PS3?”

Some liken the Japanese company to the New York Yankees. Both have high-paid talent and great offenses but are straining to win this year.

Neither are being counted out. Sony might just be a late bloomer. “The PS3 is ahead of the market, while the Xbox 360 and the Wii were designed for immediate market impact,” said Billy Pidgeon, an analyst with International Data Corp. He projects that PS3 sales will take off in 2008.

Part of what’s slowing down PS3, analysts say, are the bells and whistles Sony built into the box in an effort to make it the entertainment hub of the future. For instance, the PS3 sports a Blu-ray high-definition DVD player. It’s also designed to let consumers connect to the Internet and download digital movies, music and games.

In effect, the PS3 is a physical representation of Sony Chief Executive Howard Stringer’s vision of “Sony United,” an effort to foster cooperation among Sony’s various businesses.

Part of that vision revolves around the movie player. Sony receives a royalty for every Blu-ray disc sold, and the company’s movie studio hopes consumers will buy high-definition versions of its older films.

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Sony saw a 700% spike in sales of Blu-ray movies in the two months after the PS3’s release, said David Bishop, worldwide president of Sony Pictures Home Entertainment.

But that effort came at a price. Each Blu-ray player built into the PS3 costs Sony about $125, according to consulting firm ISuppli Corp. And Sony’s ability to produce enough consoles for the last holiday season was hampered by a shortage of blue laser diodes for the player.

Overall, ISuppli says Sony has lost more than $240 on every PS3 sold. Sony won’t confirm that number. But after five consecutive years of profit, its game unit posted a $455-million loss in the Christmas holiday quarter. Sony reports its full fiscal year earnings Tuesday.

Sony executives say the PS3 is simply following the razors-and-blades nature of the video game business: Lose money or break even selling consoles but make loads of cash selling games.

That’s what happened with the PS2. When it debuted in 2000, Sony posted a steep loss. But by 2003, when the costs of the console’s components had come down and millions of games were being sold, the PlayStation business unit made up 10% of Sony’s revenue and 68% of its profit.

To do the same with PS3, analysts say, Sony must slash its price to lure buyers and offer some must-have games that can be played only on that console.

Sony declined to say when it planned to lower the PS3’s price. But an earlier cut would mean an even bigger loss on each box.

For now, Sony is still milking the PS2, with each sale producing $129 in profit. It outsold all other consoles in March, according to NPD. And blockbuster games such as “God of War II,” “Guitar Hero II” and “Spider-Man 3" are still being released for the PS2, giving Sony a robust revenue stream to lean on while PS3 ramps up.

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But in some ways, the success of PS2 makes the PS3 a harder sell, analysts say. “They need to give gamers a reason to put the PS2 in the closet and buy the PS3,” said IDC’s Pidgeon.

That means putting out games that can only be played on a PS3, including the upcoming “Gran Turismo 4,” “Metal Gear Solid 4" and “Final Fantasy XII.”

Sony will have tough competition from Nintendo, which plans a slate of its own exclusive titles for its hot-selling Wii console, including “Super Mario Galaxy” and “Metroid Prime 3.” Microsoft, meanwhile, has lured the popular “Grand Theft Auto” franchise to its Xbox 360 console. That game series was key to PS2’s success. The software king also is poised to release the third installment of its blockbuster “Halo” series this holiday season.

Sony’s lineup will be crucial when holiday shopping gets going. So far, the rap on PS3 is that its games have been “somewhat short of awe-inspiring,” said Michael Pachter, an analyst at Wedbush Morgan Securities.

Kyoshi Shin of the International Game Developers Assn. in Japan said many creators there were shifting their focus to the Wii.

“When people talk about the PS3 on chat forums,” he said, “they say it’s like going to a very expensive restaurant and not getting anything to eat.”

alex.pham@latimes.com

bruce.wallace@latimes.com

Pham reported from La Jolla, Calif., Wallace from Tokyo.

*

(BEGIN TEXT OF INFOBOX)

Who’s got game: Console sales in U.S.

*--* Units sold* U.S. launch Console (in mllions) Manufacturer date Price Xbox 360** 5.3 Microsoft Nov. 2005 $299/$399/ $479 Wii 2.1 Nintendo Nov. 2006 250 PlayStation 3 1.2 Sony Nov. 2006 599 PlayStation 2 37.7 Sony Oct. 2000 129 Xbox*** 14.3 Microsoft Nov. 2001 N/A GameCube 11.5 Nintendo Nov. 2001 N/A

*--*


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