Tuesday, June 22, 2010

PlayStation 4 is a myth

Saucy headline, right? Snazzy graphic to go with it, too. It's an attention-grabber, I know.

Anyway. I had mentioned in my last post Confirmed: The Bomb has been Dropped how I believe that there will be no PlayStation 4, and that Sony will very likely bow out of the video game market after the PS3 has run it's course. This statement was challenged by the commenter Eddie on that post. I made a quick comment back, but as I started thinking more and more about it, I thought that I should create a more fleshed out post with some actual facts and sources to help provide some insight into this belief for anyone out there who actually might read this blog.

Reader Eddie's reasoning doesn't seem off-base at face value. Here is the quote:
"What makes you say that? PS3 will sell around 75 -100 million easily. Gamecube sold 21 million. But Nintendo didn't exit the hardware market at all!"

Now, while I certainly don't believe that the PS3 will ever make 100 million sales "easily", I will entertain that it is possible (however remotely) that they'll make 100 million sales on the PS3. Compared to GameCube's total sales of about 22 million, that is pretty amazing. Unfortunately for Sony, "total number of consoles sold" does not even begin to tell the whole story.

The ghosts of Christmases past
The video game sector of the entertainment industry is ruthless and extremely difficult in which to sustain profit-- Especially making hardware. Don't believe me? Try asking some of your favorite console-makers of the last 30 short years: Atari, Coleco, Commodore, Amiga, Hudson, WonderSwan, NeoGeo, Hudson, Philips, Apple, Panasonic, and even Sega. You may note that I've only listed the consoles that I considered "major" here-- Many more companies have created game consoles and failed in addition to these. How many of these consoles were destroyed by Nintendo and/or Sony? Every one of them... but let's be real: Most of them were destroyed singlehandedly by Nintendo.

Money Talks
Back to the subject at hand: What did all these console companies have in common? The inability to make money in the video game market. Yes, it's really that simple: Turns out, making money is kind of important to running a successful business... and not just any wise-crackin' monkey can run a successful business of course. Companies this huge need capital, investors, shareholders, and sometimes even a board of directors. Sony is a gigantic international conglomerate which depends on the many "arms" of the corporation to create large amounts of revenue so that they can afford to expand the business into new markets, and they depend heavily on the approval of their shareholders, investors, and board of directors to do so. To put it simply, these people are the "wheels" that provide the means for the "drivers" like Howard Stringer (the Sony CEO), and the other executives to do their jobs and make Sony successful.

Sony is very much controlled by these entities and individuals. After the runaway success of the PS2 however, Sony seemed to be nearly infallible, and the executives (including the infamous Ken Kutaragi) were given a lot of freedom to develop their next console. Sony invested around 2 billion dollars into the R&D of Playstation 3. At the time, however, this was seen as the logical next step for the entertainment giant: The PS2 was a clear winner. Invest heavily in PS3, and it's sure to follow in PS2's footsteps, right?

Marty! We have to go BACK!
Let's turn back the clock again for just a moment. The Nintendo GameCube, while considered a "failure" by analysts and even Nintendo themselves still made a profit from the day it was launched. Nintendo has never follwed the "razor-and-blades" business model, (which is to sell your "razor" at a loss, and make up for that loss by selling many "blades" at a profit), and so Nintendo's 22 million units sold (along with the very successful Game Boy Advance), still provided them the cashflow they needed to invest in another console themselves. In the PS3 era, however, as Microsoft began to gain a foothold in the market, Sony believed they were forced to go the "razor-and-blades" route in order to compete with Microsoft at all. Microsoft is very much a "razor-and-blades" company, and they proved it by boasting amazing computational power and a deep and connected online platform for their upcoming console at the time. Sony's board, investors and shareholders (their "wheels") were not happy at all with the prospect of Microsoft "stealing" the video game market away from them-- It had been immensely profitable during the PS2 era, and they were not ready to let that go without a fight... But also, this was an "entertainment gateway" into the public's living rooms. A set-top box of this nature was surely the way to dominate in Sony's other entertainment divisions: Movies and music.

As Sony and Microsoft geared up to be "loss leaders" with their new consoles, many wondered what route Nintendo would go: How could "little Nintendo" compete with these international conglomerates-- powerhouses-- in the electronics and entertainment industries? Nintendo again released a console that did not fit the "razor-and-blades" model (as they never do) and came out with Wii.

Sony (and Microsoft) did not see Wii as a threat whatsoever. Even many pundits and analysts believed that the Wii was an inevitable failure, and that it would likely be Nintendo's last console (hahaha... but that's not what this article is about :P) and so they forged ahead. Laughing at, mocking, downplaying, and even insulting Nintendos "gimmicky" motion controls, Sony and their "wheels" felt very confident with the direction they were taking.

Fast-forward to a year after launch: PS3 is incurring severe losses, and Wii has skyrocketed in popularity. Still, Sony (along with many many others) believed that Wii was a fad and would soon disappear. Putting all its faith in Blu-Ray, Sony's "wheels" were concerned only with getting more "razors" (the PS3 itself) into consumers hands, so that more "blades" (software/games, Blu-ray movies, accessories, etc) could be sold. They decided to release new PS3 bundles with altered hardware configurations, and even cut the price on their original model already-- They needed to improve the "perceived value" of the PS3 (while cutting the cost to manufacture it) so that more consumers would buy it as soon as possible. Blu-ray must be successful. All the while, of course, Sony is taking heavy losses on each PS3 sold.

Fast-forward another year, and Sony has not only confusingly reconfigured hardware a few more times, but has also removed functionality in an attempt to cut costs on the console to reduce losses. Why would they intentionally remove PS2 functionality, for example, if not because they were pressured by their "wheels" to cut cut cut (and to keep people buying the still-profitable PS2)? It certainly wasn't because their customers wanted this functionality removed :) By this time, it is important to recall as well that Wii's popularity was still absolutely insane. It was flying off shelves, and was still sold out at every retailer that carried them consistently. You couldn't even find one on eBay for less than the cost of a brand new PS3.

Pressure on Howard Stringer to "fix" this situation was starting to build. Sony needed to beat the Wii at its own game, before it was too late, and get a piece of that massive pie. After years or mocking and insults toward motion controls, Sony now has just "up and decided" to present their own at next year's E3. It is also important to remember that Sony's PSP (and its other new digital movie format, UMD) at this point is getting absolutely spanked by the Nintendo DS, and was not at all the success that Sony, market analysts, and even many consumers believed it would be.

Sony looks in to the possibilities of "direct download games" (also called Downloadable Content, or DLC), and realizes that there are a lot of reasons for them to go this direction, from a business standpoint. The content is very easily controlled, retailers are no longer needed (saving on overhead costs), and the customer can never expect to re-sell their games or even get a refund! The PSP Go was born, and showed at the following E3 along with Sony's "new motion controller".

The PSP Go launched at a higher price than the original PSP, and much to Sony's chagrin, was viewed by consumers as having "less value" for a number of reasons. The PSP Go was an absolute failure in terms of ROI (Return on Investment) as well as Total Units Sold.

Here today, gone tomorrow
All of this build-up brings us back to the present. Sony is readying their motion controllers which, believe it or not, is really just a desperate attempt to recoup. They have lost more money on PS3 than they ever earned during the PS2s entire lifespan, bringing the total losses of the PS3 to about $5 billion dollars, and they had been incurring losses on every PS3 sold up until April 2010, when the PS3 finally began to sell for more money than it costs to produce.

The PS3 has been on the market for about 4 years now, and the graphics technology and processing power (two of the PS3s primary selling points throughout its young life) are already dated. Many personal computers (not just enthusiast gamers' PCs) are already capable of much more than the PS3 is in these departments, and that gap can only widen as more time goes by. This is the time in a console's life-cycle (at the absolute latest) where your "wheels" would normally green-light the beginning of R&D for your next console. 

You make the call
Tell me: If you were the "wheels", and you watched your "drivers" take all the massive success of the PS2 and flush it down the toilet along with another couple billion to boot in just a short 4 year period, how enthusiastic would you be to give them the go-ahead to invest another $2+billion into R&D for their next console?

It doesn't even stop there, though, really. Sony's "wheels" watch the market very closely. There is no doubt in my mind that they were being silenced by Sony's "drivers" with promises of a "3d revolution", and that Sony's new 3d push for gaming would be the PS3's savior. The "wheels" may have even believed it to a degree: despite the ridiculous cost of entry and the fledgling and flawed technology, there is a very strong amount of consumer interest in home 3d entertainment technology. Of course, the inevitable has happened, and Nintendo is making an attempt to nip this in the bud and deliver the "death-blow" to Sony's 3d push before it is even out of the gate by producing cheaper, more accessible, and more desirable 3d effects on their next handheld, the 3DS. Sony's "wheels" just got a lot more nervous.

The skills to pay the bills
Creating a new console doesn't just take money either. It takes insight, creativity, and the ability to foresee and predict upcoming market trends. Sony has clearly demonstrated over the past 15 years that, if they ever had the ability to do these things, they absolutely do not now. The world sees Sony's motion control direction for exactly what it is: A direct result of Nintendo's success with expanded audience gamers-- and a scramble to copy their success. Sony has a long, long, history of copying Nintendo's innovations after all.

The Biggest Loser
Conglomerates and other gigantic multi-national corporations survive and stay profitable by focusing on areas where they are strong, investing in new markets, and "trimming the fat" so-to-speak when a division or branch of the company is underperforming. 

Ask IBM-- In the early '00s, IBM's "wheels" were wondering what the hell they were doing in markets where they didn't belong, and put into place one of the biggest and most influential company restructuring plans of all time, and you know what? It's been pretty successful so far (but don't tell that to the thousands that lost their jobs over it).

I think that Sony's video game division can be very easily and accurately defined as an underperforming division, to put it lightly.

The 10-year plan
I believe that Sony's "wheels" have already made the decision to stop creating video game hardware, and are going to make the "drivers" do whatever they can to squeeze any positive cashflow out of the PS3, no matter how long it takes.

Myth Busted
As the company's share value continues to struggle, it is time for Sony to remove itself from markets where it is underperforming. Investing billions more into creating another video game console is just bad business.

1 comment :

  1. What do I find funny about all of this?

    At least Sega had a character to milk for a few years after their console died out.

    What does Sony have? Of course, I guess the idea is that they were never really a developer either. Nintendo and Sega (and even Microsoft on their acquisitions) have memorable characters. So far, it's served one of these companies well.

    But even that is finite. Make me a god damn Zelda game already.