Opinion: On Sony’s PS3 Past, Present, Future – The Possibilities

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Great article on Playstation 3 from Gamasutra

In the first part of this opinion piece, I looked at the success of the PlayStation 1 and PlayStation 2, and tried to pinpoint the business issues around the PlayStation 3’s current issues.

So what can Sony do to turn around the outlook for the PlayStation 3? Firstly, let’s look at some things Sony has traditionally done, or has maintained at current levels, that appear to have failed or need to be reduced.

What Sony Has Done

Throughout PS3’s development, and after launch, Sony made it clear that they wouldn’t have the cash to create a PS4 for many years yet, even if the PS3 were successful, so that appears to be out of the question.

First failure? High revenue per hardware unit. One of the big reasons for Nintendo’s Wii being so successful was simply price (even if you ignore the different market-targeting, the price differential was so large that it was a major attraction across markets).
Yes, I’m well aware that the average content/price ratio for Wii games is much lower than for PS3 games, but mainstream consumer purchasing decisions tend to be made much more on “what I can see/touch/taste now” rather than “long term value proposition”.

On high revenue per first party title at retail, there are two schools of thought. The first school says that “everyone’s doing it, so it’s OK – the consumer has no choice” – the cost for a new title to the consumer is very high on *all* “traditional” console platforms, and on “traditional” PC games.

The second school of thought is that the consumers have already voted with their wallets and shown the retail prices are too high, as shown simply by the huge second-hand games market.

The reason consumers spend hundreds of millions of dollars a year on second-hand games is that the retail “new” price of games is far too high for the average consumer. Maybe the hardcore consumers who used to be the bulk of the market were less price-sensitive than the new, more mainstream, consumers introduced by PS1 et al – but retail is driven by the many, rather than the few.

Personally, I think you can “get away with” the high prices for a bit longer, but to ignore that the market has already shown it’s non-acceptance of this is a strategy with very little future.

Now, let’s look at high tax per title sold at retail. This is a holdover from the “old days” of consoles. The world doesn’t work like that any more – nowadays, publishers need to have much greater control over pricing.

Just look at the MMO market, and how both revenues and profits have soared as they’ve moved from fixed-price subscriptions to dynamic F2P (free to play) models where each user pays a different price. Fixed-price taxing of unit sales actively prevents any innovation in consumer pricing – which, ultimately, reduces everyone’s revenues.

What Sony Can Do

Increase the revenue-per-title of PSN titles. Given that PSN unit sales, in my opinion, appear to be relatively slow, increasing cost-per-title would seem a poor choice. Until the unit sales get up to where they “ought” to be based on comparative markets and the superior consumer benefits of digital-distribution, you mustn’t do anything to scare the consumer off. Price hikes are probably a very bad idea right now.

Incidentally… anything that the user notices in terms of a high price here is a bad idea. That means two things: initial purchase price, and total-cost-of-ownership.

What If? Some Recommendations

There are three broad recommendations I’d make, based on all the above. I’m going for a compromise between Effectiveness, Practicality, Risk, and Reward. You could try a lot more things, but if you’re running a multi-billion-dollar company, you probably need to keep your strategies simple enough that you can communicate them to thousands of staff and have any hope of ensuring they get enacted properly. Here’s my top three:

• Hardware: increase the installed base, and get out of “2nd place”
• Portfolio: make the PS3 the world’s richest games console (in terms of games)
• Retail: capture the second-hand games market on Sony’s platforms

Hardware: increase the installed base, and get out of “2nd place”
Going back to my list of ways Sony could increase profit, this section mostly covers:
• Increase PS3 installed base
• Reduce hardware production costs (increases profit per unit PS3 sold)

The number one problem here is PS3’s small install base.

Small installed base makes it very unattractive to developers — witness the fact that Rockstar was very happy to break out of their GTA exclusivity. The more the PS3 falls behind, the fewer third-party exclusives Sony can hang on to.

Developers and publishers focus their energy (and their best titles) on the biggest-selling consoles, and each extra console they sell on provides diminishing additional returns but linearly increasing technology costs.

Sony hasn’t won the marketing war against the Xbox 360; Sony hasn’t won the zeitgeist war against the Wii. They have a good product, that sells OK, but they need to go for something much, much simpler if they’re going to pull ahead. I’d go for the simplest one of all: price.

The PS3 needs to come down in price at retail, by at least 30%, preferably 50% (in my personal, entirely biased, opinion). As of this writing, it’s retailing for $350. The Xbox 360 is $250, and the Wii is £160. That price cut would make the PS3 directly competitive on price with the other consoles, and would bring into sharper focus the differential in product quality and portfolios.

If Sony is already making a 10 percent loss per unit, as reported recently, then this could bring the per-unit loss up to $100-$120. Sony is 10 million units away from second place, and 30 million units away from first place.

At the current rate-of-sales of the market-leader (Wii), and assuming Sony’s annual sales rate would triple with the price reduction, getting into first place could easily require 45 million more unit sales. Assuming no reduction in production costs, this would cost Sony corporation around $4.5 billion.

Sounds like a lot; then again, let’s bear in mind that they’re planning to lose a third of that this year already. It may sound insane – and after the vast losses incurred to date, they may not be able to raise enough cash and goodwill to fund it.

Corporations of Sony’s size have done bigger strategic losses in the past and come out the other side smelling of roses.

My favorite example is IBM, which in the early 1990’s incurred an annual loss measured in the tens of billions of dollars, entirely as a deliberate act to improve profitability 5 years later. It worked, and the loss was handsomely paid off a decade later.

Personally, I’m not sure Sony really has a choice here: do they still want to be in business in 5 years time, or not? The PlayStation family has been essential to the survival and profitability of Sony over the past decade and a half as legions of their competitors (other consumer electronics companies) have given up the ghost. Sony needs PS3 to succeed; quite possibly “at any cost”.

Why Does It Have To Cost So Much?

But let’s take a step back here: does it really need to cost Sony so much cash? Why is the PS3 so expensive to produce anyway? Why hasn’t the production cost plummeted already?

In simple terms, the different components of a console scale down in price at different rates. Some items come down in manufacturing cost and power requirements at a ferocious rate. It’s been a very long time since I worked in an electronics giant, but off the top of my head, and simplifying a lot, the big wins are (biggest first):

• Any off-the-shelf electronics that other companies in other industries are already paying to miniaturise/improve
• Proprietary stuff that is technically simple and easy to integrate into new microchips
• common, standalone, consumer electronics systems
• Proprietary stuff that’s already in microchips and just needs improved chip fabrication plants to improve it

In practice, that means (biggest savings first):
• RAM
• Flash / SSD
• 3rd party major electronic subsystems (graphics cards)
• 3rd party minor subsystems (bits of BIOS, bits of standard tech like USB)
• 3rd party physical subsystems (hard-drives, CD/DVD/etc)

With the PS1, the CD-ROM drive plummeted in cost very quickly, and kept on falling. Funnily enough, that flies in the face of my list above.

And that, many suspect, is what tricked Sony into putting the vastly expensive BluRay drive into the PS3: their internal version of the above list had the bottom item at the top.

Why? Because CD’s swept the world in a way that nothing else has before or since. The timing almost couldn’t have been better. The PS2 achieved a similar trick with the DVD – although less pronounced.

The Blu-Ray drive? And Microsoft’s HD-DVD? Much less so than DVD, and a pale shadow of the CD. They just haven’t taken off as consumer electronics devices (and, possibly, the very lack of Sony’s old competitors has contributed to the slower reduction in manufacturing costs – maybe consumer electronics has relatively less investment these days).

There’s a couple of problem-devices hiding in there too. The worst one is probably the hard-drive. Hard drive capacity increases at a ferocious rate each year, but – in the wider consumer market – the older drives simply stop being manufactured, they don’t get cheaper. Compare this to CD/DVD/etc, where the “new” drives provide exactly the same functionality as the “old” ones, just cheaper to produce; with hard-drives, the cost savings are ploughed 100% into increased capacity and speed, keeping retail price effectively constant.

Here’s something interesting, though: the world demand for SSD (which is like RAM, only it saves the state permanently) is so huge, and so varied, that *all* capacities are constantly coming down in price *as well as* the cost/megabyte decreasing constantly.

When the 1Gb SSD that was enough for your high-end camera is replaced by 10Gb SSD because the cameras have gone higher-megapixel and need more capacity, the 1Gb SSD becomes viable for the compact cameras. When it’s too small even for them, it’s useful in the mid-range cell phones. And so on, down the line.

To put this into perspective, the latest iPhone is on sale with almost as much SSD storage as the PS3 has hard-disk space.

Hardware: Actions / Summary

1. Remove the Blu-Ray drive; go “online only”
2. Remove the hard-drive; go “online only”
3. Where necessary, replace the hard-drive with SSD

The most important thing to recognize here is that – in the PC / MMO world – we already *regularly* get all our home users to download 10Gb game clients, and to re-download them every few months in the form of patches. Darkfall Online, one of this year’s MMO releases, came as a 9Gb download. That’s almost half the size of a BluRay / HD-DVD disk.

In other words, 100 percent of console game purchases *could* be delivered via the internet.

I don’t want to remove local storage entirely; the idea of waiting overnight each time I want to play a game – wait for it to re-download – *every* time I play is far from appealing.

But as a budget offering, there’s an awful lot of wiggle-room for Sony to put in the largest SSD they can afford cheaply, and expect/force home-users to regularly re-download titles. It’s not pretty. But we already knew there’d be no “easy” ways forwards for the PS3.

And that SSD? We *know* it’ll come down in manufacturing / purchase / integration cost. As a bonus, it’s more reliable, and a lot smaller and lighter than a hard drive. That all adds up to additional savings in physical costs (transportation, warehousing, etc). Funnily enough, the raw hardware performance is also a lot better than that of hard-drives, and massively better than that of BluRay drives et al.

What About The PlayStation Network?

Microsoft was very innovative and clever with XBLA; they tried things no one had ever done before (e.g. they invented the whole system of badges/awards that is now endemic in games on all platforms). In my opinion, Sony has done relatively little to promote PSN, and if anything has tried to kill it off through a combination of “damning with faint praise” (providing tacky, half-cocked clones of XBLA’s awards system) and “self-obsolescence” (creating – and marketing – the self-competing Home).

Further, being purely download-based, the PSN could easily take a whole chapter out of Kongregate’s book, and be turned into an interface between professional game-developers and the people who play their games.

This is a novel (and scary) concept for console developers: actually having direct interaction with your own consumers – but it’s how the online game studios have lived and died for the last decade.

And having lived through it, I believe that it’s a good thing, and that studios quickly come to embrace it (and benefit from it). Kongregate started with the opinion that players wanted to talk to the people who made the products they loved, and that developers wanted to learn at the start of the process what their players liked and disliked (rather than only after release). Console developers generally don’t get any of that feedback until the game launches, and the games are harder to make well without it.

So… the PSN could be turned over into a gallery of in-progress game development. It’s terrifying to take this approach to your platform “let a thousand flowers bloom”, and it’s totally buzzword-compliant, sadly – but it would revitalize the PSN platform.

What If PSN Was A Java Environment?

I’d settle for a scripting language, actually. But java is available, and looks like a more powerful option right now. The key point here is to make it very cheap to develop new games, both by increasing the pool of available “qualified” staff, and by reducing the development complexity – and by opening up PSN as a place where studios can throw up their experimental side projects.

The secondary boost is that PSN could be turned from a boring, dull, holding-ground for tacky, cheap rip-off games that even the developers themselves clearly didn’t love – and the publishers certainly weren’t taking seriously – into a vibrant, exciting, community.

That’s a scathing, extremist view of the PSN – but it’s one that I believe is becoming more endemic in the PS3-owning community, as the platform continues each year to fall short of their hopes and expectations.

The Second Hand Market

PS2 is a lucrative market for Sony today – the hardware is profitable, sells like hotcakes, and the software market is still selling new games. Simulating the PS2 on the PS3 was always hard – Sony’s not great at software, and the PS2 was a complex beast; in practice, it required including extra hardware on the PS3 that contained some of the components from the PS2. No wonder they removed the backwards compatibility from the PS3.

Only … the second-hand market on PS2 is massive, and Sony makes nothing from sales of 2nd hand games. And the PS2 sales are now paling in comparison behind the next-gen consoles – even falling behind PS3 sometimes. The honeymoon is over; it’s time to accept it and move on.

I would bring back 99% PS2 backwards compatibility, preferably through pure software emulation (the PS3 is a powerful beast, and with enough cash injected into a good software team it’s likely that a software-only solution could be provided).

But I’d add a caveat: it only works for digitally-downloaded PS2 games.

As of today, that means precisely “none of them”, because the PS2 wasn’t networked (bar a very small number of near-experimental units of networking hardware that briefly shipped and were soon aborted).

A little bit of DRM magic (much as I hate DRM in general), and the PS3 could be downloading PS2 games on-demand.

Here’s the exciting part, though, both as a consumer and for Sony:
• if the downloads are digitally retailed (DRM’d), then Sony knows who “owns” what
• if Sony knows who owns it, Sony can mediate consumer-to-consumer sales

If you could buy PS2 games direct from Sony, and then re-sell them to other consumers once bored – with Sony skimming a percent each time – then Sony could sell them at a much lower price than retail, and yet still make a higher profit per-unit (as would the publishers / IP owners).

I’m sure there are plenty of startup companies that even now are grateful Sony hasn’t (yet) pulled this stunt. Microsoft could try it – but with backwards compatibility already guaranteed on the Xbox 360, and a much much smaller portfolio of titles, it would be much harder for them to pull off. Although if Sony did it, I’m pretty sure it would put a sizeable dent in their strategies.

Threats

I’ve only made glancing mention of the fact that Xbox 360, PS3, and Wii are all “traditional” consoles. If you’ve been playing games long enough to remember them, you’ll no doubt look back at Nintendo’s NES and Sega’s Master System and see that – in most ways – the three “current gen consoles” aren’t really any different at all. Even down to the widespread use of funky plastic peripherals (Duck Hunt, anyone?).

But what of the non-traditional consoles?

The iPhone has sold well over 45 million units to date. It’s selling faster than the Wii and the DS, and considerably faster than the PS2 – yet, since it is (pretends to be) a mobile phone, it has a target market measured in the hundreds of millions rather than the tens of millions. This horse has some serious legs…

The king of consoles is still the PS2, with its current 150 million odd installed base. All in all, it would be a sad day for any of Microsoft, Sony, and even Nintendo, if they finally managed to dethrone the PS2 only to look round and see that the iPhone had just hit 500 million.

And that 60 percent of those iPhones were being used as gaming consoles, with one-click-billing, subscriptions, micro-payments, “always-online”, motion-detection, GPS, facial-recognition, and live video capture all “built-in” to *every* game…

Article can be seen at

http://www.gamasutra.com/php-bin/news_index.php?story=24305

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Through out my years, Sony has been a passion of mine.

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