LCD shortage threatens gaming handhelds

Nintendo's DS, a dual-screen handheld, and Sony's PlayStation Portable (PSP) come armed with all the bells and whistles of a modern games machine. That's good news for gamers, but it's potentially bad for the two companies.

Surging demand for mobile phones and digital cameras has created a shortage of small liquid-crystal displays (LCDs). That spells trouble for Nintendo and Sony, since the DS features a pair of 3-inch screens and the PSP promises a 4.3-inch monitor. "When we started thinking about a product with two screens, we didn't expect LCD supply to be so tight. In that respect, this isn't going according to plan," Nintendo President Satoru Iwata said last week at E3, the games industry's annual trade show.

Sharp, Nintendo's main LCD supplier for the Game Boy Advance, has said it plans to boost output of small and midsized panels--defined as screens that measure less than 10 inches. However, that capacity is not expected to come online until sometime in the next business year, starting April 1.

"Supply is fairly tight at the moment," said Damian Thong, a technology analyst at Dresdner Kleinwort Wasserstein in Tokyo. "It's due to the sheer proliferation of products that are using these small-sized, high-resolution LCDs today."

Cell phone makers are shifting to color screens in droves. Sharp forecasts that global shipments of mobile phones with color screens will increase by 140 million units in the current business year, ending March 31.

Compounding the problem are commodity prices that are near two-decade highs, lifting the cost of metals used in electronics, such as tantalum for capacitors and copper for wiring. High oil prices are also boosting production and distribution costs.

Sony said it planned to manufacture the PSP in-house, while Nintendo expects to outsource DS assembly to Japanese companies with factories in China.

No money?
Kaz Hirai, the head of Sony's U.S. game unit, said Sony would not make money on the PSP at the outset, but that the new handheld would ultimately generate a profit.

"If you just add up the components, day one, there's probably not too much margin on the hardware," Hirai said of the PSP, which also comes equipped with Wi-Fi wireless networking. "But when all is said and done, we are in the business to make money on the hardware, and we have proven that with the PlayStation and the PS2."

Manufacturers often see a rebound from initial losses as a result of sales of in-house software titles as well as of improvements in manufacturing efficiency. Sony has always insisted that it makes money from just the hardware and that strong software sales are an added bonus.

But analysts say Sony and Nintendo must strike a balance between the loss level they can live with for every handheld sold and a price tag its target audience would be willing to pay.

Nintendo did not say how much the DS--which features dual processors and wireless networking--would cost, but it has promised it would be "affordable" when the device goes on sale in the United States and Japan later this year.

Industry watchers speculate that the DS will sell for under $199, while the PSP--due out in Japan by year-end and the United States and Europe by March 31--could cost between $50 and $100 more.

Sony has promised to ship three million PSPs in the business year to March 31. But with supplies so tight, analysts said hitting that target might be difficult.

"There's a high likelihood that Sony won't be able to do it," Hiroshi Kamide at KBC Securities in Tokyo said.

Even if it wanted to scale back the DS launch and wait for component prices to cool, Nintendo's Iwata said the Kyoto-based games maker would not do it, because it is important to get a games machine off to a good start.

"In the entertainment products business, it is very difficult to recover from a failed launch," Iwata said. "Once people think your product is bad, the situation becomes very painful."

Story Copyright  © 2004 Reuters Limited.  All rights reserved.

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