Sony Risks Losing Game Developers

Sony didn’t see this coming 4 years ago when they first announced the PS3. At that time the competitor was Microsoft and price points were footnotes on slides detailing world domination of the digital home, today the company has faltered so badly on the PS3 that not only are they are risk of continuing losses well into the future but 3rd party game developers may abandon the platform as R&D budgets inevitably tighten, which would put the PS3 platform into a death spiral that would be exceptionally difficult to overcome without a reset, a do-over, that takes them back to square one.   

Three years into the latest generation of game consoles, Sony is stuck in third place, data from the manufacturers show. The Tokyo-based company, once the dominant player, has half the worldwide users of Wii, even though the PS3 has earned praise for its processing power, graphics and Blu-ray movie player. U.S. sales of the PS3 have declined for three straight months.

“If they can’t meaningfully increase their install base, then you will likely see a capital reallocation,” Hickey said.

[From Sony Faces Heat From Game Publishers to Cut PS3 Price (Update1) – Bloomberg.com]

What killed the PS3? Two factors, the first being over confidence as a result of dominating the market with the PS2 for so long, which resulted in ambitious tangental strategies around home entertainment and technology adoption that were not linked to the gaming experience. The second being Blu-ray which pushed the bill of materials cost up beyond what the market would support and was responsible for critical delays in 2006 as Sony dithered around with DRM details unrelated to gaming which had the effect of giving Microsoft a full year head start in the market. More critically, the Blu-ray delay caused Sony to launch the PS3 during the Wii launch, literally a few days apart just before Christmas 2006, drawing contrast to the significant price delta between the two consoles.

While you can’t ever count Sony out of the game, the fact remains that the PS3 development and launch has been so badly executed that it could set the company’s game division back 5 years as they try to recover lost ground. The gaming market has long operated as a duopoly, if you are not in first place you are last, and right now the market dynamics are around Nintendo and Microsoft. As developers make hard choices about where to focus their limited budgets, it’s unlikely that Sony will retain the library of popular titles available on the PS3, much less grow it.

Sony has two choices and neither are good, they can subsidize the PS3 with a retail price that essentially gives it away and recover the losses from game royalties, or put the PS3 on life support and focus their resources on developing a PS4 platform that serves as the base from which to expand. The former is a defensive strategy and you don’t win by defending, while the latter is fraught with risk as it relies on completely unpredictable factors and a lot of luck.