Sony chops PlayStation2 shipments

Sony is forced to slash initial U.S. shipments of its highly anticipated game console by half, in a move that could make the device a rare commodity during the holidays.

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Sony today slashed initial U.S. shipments of its highly anticipated PlayStation2 game console by half because of component shortages, in a move that may make the device a rare commodity at Christmas.

Sony originally said it would send 1 million units to U.S. retailers when the console goes on sale here Oct. 26. Company representatives today said that would be cut back to 500,000 units, with an additional 100,000 units per week shipped through the end of the year.

That's likely to mean shortages throughout the critical holiday shopping season.

"I don't think everybody who wants one will get one," Jack Tretton, senior vice president of Sony Computer Entertainment, said in a conference call. "I think it will be a little more difficult (to buy a console) on Oct. 26 than it might have been perceived to be. It'll get easier" after the holidays.

Analysts didn't hold back their criticism.

"Once again the gaming industry is guilty of overhyping and underdelivering," Gartner analyst P.J. McNealy said. "Bottom line, Sony wasn't able to escape the (component shortage) trap."

Numerous retailers throughout the country have already taken pre-orders for PlayStation2 consoles they expected to have in stock Oct. 26--a practice that Tretton said Sony had discouraged.

"I guess my feeling would be that if you're a gamer and you signed up for a pre-order of a PS2 and all of the sudden they tell you you can't have it?that might drive you to go to the (Sega) Dreamcast if you're really desperate to pick up a next generation system," said Schelley Olhava, senior analyst at International Data Corp. "But gamers will be willing to wait if that's the system they really, really want."

Sony senior vice president Andrew House asserts that the company can still recover from the situation. Sony expects to ramp up production quickly, he said, and should come close to targets for the rest of the product cycle. U.S. shipments are now projected to hit 1.3 million units by Dec. 31 and 3 million by March 31, 2001, the end of Sony's fiscal year.

"The component issue is being solved," he said. "The impact is about a one-month delay in production."

Shares in Sony and a number of gamemakers tumbled today on expectations of the supply problems. Sony shares dropped $9.63 to close at $99.38, after falling as low as $94.06 during the day. Among gamemakers, Electronic Arts dropped $5.69 to $45.19, THQ fell $3.38 to $21.06 and Activision fell $1.99 to $12.63.

"Wall Street overreacted to the news," Sutro & Co. analyst James Lin said. "The impact is minimal at best...This was a complete overreaction. I think the stocks come roaring back tomorrow."

Still, PlayStation sales account for 40 percent of Sony's corporate profits, IDC analyst Bryan Ma noted yesterday. Most of that comes from software licensing, not sales of hardware.

House declined to specify which components are creating the supply problems. "It's truly a combination of factors," House said. "It could vary on a week-to-week basis."

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The PlayStation2 uses flash memory, which has experienced chronic shortages this year, as well as Rambus memory. The system is powered by a microprocessor and graphics unit called the Emotion Engine designed by Sony and Toshiba. Toshiba is the main supplier of Rambus chips for the system.

Although the exact nature of the component shortage is unknown, one suspect is the Emotion Engine. The Emotion chipset is fairly large compared with chips that perform the same functions in PCs, said Nathan Brookwood, an analyst with Insight 64.

"There has been speculation about how the Emotion Engine yields," he said. "When you try to make a chip as big as that, you have two problems. The first problem is that you don't get that many chips per wafer. The second problem is that the likelihood of a defect is greater."

Toshiba representatives said Emotion Engine shipments were on track. "Toshiba does not have a supply shortage and is fully meeting Sony's requested component quantity requirement for the PlayStation2," the company said in a statement.

Rambus parts, meanwhile, are increasing in supply.

Olhava said the damage shouldn't be so bad for Sony if the company can keep up with the 100,000 units a week through the end of the year.

"I was always working on the assumption there would be about a million units in circulation for the holiday season. And if you do the math, that's about where they'll come in," she said.

Olhava said initial shortages could actually work in Sony's favor as a promotional tactic for the new console. "I actually think it's going to increase the hype a lot more."

ARS analyst Matt Sargent said Sony has a narrow window of a few weeks to increase supplies.

"There's no way a product shortage at this time of year isn't going to hurt you," he said. "But if they can make it up in November and December, I think they'll be OK.

Not everyone was convinced that Sony will still get enough systems on shelves for the holidays "It certainly sounds good, but whether they can deliver remains to be seen," McNealy said

Sony's woes could be good news for Sega's competing Dreamcast console. "This breathes a little bit more life into Sega and the Dreamcast," McNealy said. "People may turn to Sega if they can't get PS2 for little Johnnie or little Susie."

While acknowledging the production problems, Sony representatives also touted the 26 game titles that will be available at launch, with a total of 50 titles ready by the end of the year.

Analysts agreed developer support was impressive, although some questioned the ultimate value of such support.

"We were joking you'll get the software under the tree at Christmas and the system at Easter," McNealy said.

Sony also announced that it is revamping the original PlayStation, rebranding it as PlayStation1 and packing it in a trimmed-down new case.

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