Sony's PS3 losses may pay off
Sony has admitted that it's losing money on each PlayStation 3 unit it's selling. But at this point, it needs to take those losses if it wants to capture more market share.
With Sony's PlayStation 3 trailing so far behind Microsoft's Xbox 360 and Nintendo Wii, it was only a matter of time before the company that had offered the most expensive console on the market would reduce the price of its hardware.
But by doing so, Sony has ensured that going forward, it will take a loss on every console it sells. That was confirmed by Sony Computer Entertainment chief Kaz Hirai in a recent interview with the Times Online.
"If you're just talking about the hardware alone, the quick answer is yes," Hirai said in response to a question asking if Sony is losing money on each console sold. "That makes good headlines, but I don't actually know that that's the true nature of the business that we're all in, whether it's PlayStation, Xbox, or the Wii."
There's little debate that Sony's decision to cut the price of the PlayStation 3 to $299 and offer the PS3 Slim at the same price is surprising. The price cut will undoubtedly hurt profit margins. But it was a smart move.
The store shelf battle
Having a higher console price than the competition hurt Sony at retail. When consumers went to the store with enough cash to buy just one console, they needed to choose among the $250 Wii, the $300 Xbox 360 Pro, or the $400 PlayStation 3. They chose the cheaper alternatives.
Sony's console is no longer the most expensive console on the market; Microsoft's Xbox 360 Elite now holds that crown, with a $400 price tag, though even that could be slipping, with very nearly confirmed price cuts coming next week that could drop the price of the Elite to $299 and the Pro to $249.
Regardless, Sony should enjoy better sales, now that it's in that same pricing sweet spot. That will be especially true when consumers consider features the Xbox 360 doesn't have, like a Blu-ray player, free online multiplayer gaming, and built-in Wi-Fi.
And yet the PlayStation 3 is a victim of its feature set. All those extras add to the cost of its console. It's why at $400, the company couldn't profit off a single console. It's also why it's still facing losses with each sale of its cheaper hardware.
Microsoft and Nintendo force gamers to invest in accessories to achieve the same level of usability. Xbox 360 owners need to buy a $50-per-year subscription to Xbox Live just to play games online. Wii owners might be able to play online for free, but thanks to the uniqueness of its games, Nintendo has been able to sell a slew of add-ons, including a steering wheel for Mario Kart Wii, gun attachments for first-person shooters, and more. Neither console boasts a Blu-ray player.
The consumer wins, when we consider the PlayStation 3's value proposition. Sony loses, from a per-unit profit perspective. But in the long run, the price reduction might help Sony.
As ideal as it might have been to turn a profit on every sold console, Sony's decision to reduce the price of the PlayStation 3 and offer a new console version was smart. It makes the company's consoles more affordable. It ensures that it provides the best value proposition in the space. And as more consumers opt for the PlayStation 3 over its competitors, it could put Sony in a position to capture a larger share of the market, considering what it makes on royalties and licensing fees from third-party developers and hardware makers.
As bad as the losses may be, capturing more market share is Sony's goal for the foreseeable future. That wouldn't have been possible if the PS3 wasn't so affordable.
Check out Don's Facebook profile, Twitter stream, and FriendFeed.