The woe of the little black box

In the universe of video games, it’s amazing how quickly an empire can crumble. Less than a decade ago, Sony wowed gamers everywhere with news of their follow-up to the PlayStation console, then considered the height of cool for console gaming. The PlayStation 2 took Sony even higher in the console war, dominating longtime champion Nintendo and holding steady over Microsoft’s Xbox.

The PS2 is still dominating eight years later with the best sales record of any console ever, totaling 115 million units sold through the end of 2006.

But their success has made them cocky as the top name in console gaming, leading them to make some costly mistakes with the new PlayStation 3. The biggest problem has been its price tag, which has been set at $600 since the PS3 was launched last November.

Of course, Sony didn’t declare such high prices just to piss off gamers: the average manufacturing cost of a 60GB PS3 is $840.35, according to market researchers at iSuppli. With a suggested retail of $600, that’s over $200 in losses for each unit sold, a profit/loss margin that is hurting Sony during a critical phase of the console war.

The high manufacturing costs come for three reasons: Blu-Ray disc support, an internal hard drive with as much memory as a common PC, and the Cell Processor, the very pricey heart and soul of the PS3. Each of these features are superb, but they’re overkill for a gaming console, especially since Blu-Ray discs and the Cell Processor are cutting-edge technology that won’t get cheap for a year or two.

The plan behind such a high-priced console was that the first year would be rocky, as devout gamers with fat wallets bought the first wave of PS3s. Sony would then make up their losses on the system manufacturing costs in game and accessories sales, as the technology market accelerated and the price of the PS3 guts dropped. Then, when Sony could afford a PS3 price-tag drop, it would start selling as well as the PS2 and catapult Sony back into the console war throne.

Unfortunately, as of this month, the PS3 has only sold three million units worldwide. This is really hurting Sony Computer Entertainment, Inc. (SCEI), and some corporate restructuring has gone down. Ken Kutaragi, the aptly nicknamed “Godfather of the PlayStation” and longtime Sony executive, has stepped down and Kazuo Hirai, the chairman of SCE America, has stepped up to be new head of SCEI.

Hirai called for a stop on the 20GB system–which, at $805.85 in manufacturing costs and a $500 retail cost, was losing $100 more per unit than the 60GB–but what he hasn’t done yet is drop the PS3 price tag, the only move that will boost console sales right now. Sony will be able to regenerate interest as PS3-exclusive games like Metal Gear Solid 4 and Final Fantasy XIII are released, but these titles are two years in the making and still don’t have confirmed release dates. This strategy of exclusionary titles worked with the PS2 solely because there was a Metal Gear, a Final Fantasy and a Grand Theft Auto title available within a year of the PS2 launch.

The next thing killing Sony is the competition’s pricing strategy. Nintendo played it smart, enticing Median-Income Joe by pricing their new Wii at $250. Nintendo is the only company in the console war that isn’t overshooting on manufacturing costs, since a Wii costs about $160 to make, according to the Big N themselves. That means they’re actually turning a profit on each sale, and since they passed six million in sales during the first six months of availability, suffice it to say that the Big N is winning the console war right now.

Microsoft isn’t quite in league with Nintendo right now, though they have met expected sales for the Xbox 360, at a total of 10.4 million units shipped during all of last year. The Xbox 360 is similar in costing more to make than it sells for, but it only overshoots by about $50, according to iSuppli. Moreover, Microsoft does more in-house development of games, meaning that producers and designers have early access to the best beta technology for the Xbox 360 and can make great games for cheap.

Also, Microsoft is still the only console to support the Halo series, and the forthcoming Halo 3 began beta-testing this month to be released this fall. Microsoft released a report last year saying that Halo 2 had been played in over 500 million matches, making it the most popular shooter in network gaming history. Market research for Halo 3 predicts that it will break the 500-million match mark within the first year, especially once Microsoft drops the price of an Xbox 360 to $300, expected by the holidays.

Nintendo’s recognizability and Microsoft’s gigantic advertising campaigns are rapidly sinking the Sony ship, and there isn’t much left for Sony to do but drop the console price. No matter the losses incurred by the manufacturing costs, it’s time for Sony to pick up their sales records and devote their time to game publishing before the next wave of consoles begins.

It’s been painful to write this article, as a longtime devotee of Sony, but there’s no escaping that the former kings of console were overly confident in the PS3 from the start. Let’s hope that Sony can get back on the ball by the year’s end, or they may become another Sega story: following the horrible sales of the Dreamcast, Sega was forced to stop developing hardware and focus on gaming development for the companies that whooped their asses in the console war. One can only hope that this isn’t what awaits Sony, but without a PS3 price drop, that’s what the next few years will bring.