PS3 and the Wii

You have to appreciate great journalism — and few newspapers dish out consistent quality like the New York Times (the Washington Post is probably the closest, and don’t even think about mentioning the WSJ. That paper and NYT don’t belong in the same sentence). The NYT provided a piece on the State of Videogames the other day, and it’s a nice read — much to the delight of Wii fans, Sony continues to absorb a barrage of negative publicity, and the situations made worse by idiotic comments from Sony Reps that either make no sense or are SO deliberately PR spin that they’d make Tony Snow proud. GameSpot kindly posted these comments from the NYT — without the rest of the article, they are akin to when Atari Reps insisted floundering Jaguar sales were not a reflection of apathy but of consumers wanting to hold out for 2-3 more killer apps. And some of us who use it as a paperweight are still waiting on those killer apps.

To gamers, the fact that Wii outsold the PS3 during the holidays is not news — after all, Sony barely got enough machines out the door after several production delays. Nintendo, on the other hand, didn’t run into that problem — and I think that’s primarily because the Wii’s infrastructure is indeed GameCube’s on steroids. I don’t mean that as a dent to the Wii (so fanboys stay at bay!); come on, it’s a technological fact based on the specs and many 3rd party developers have expressed the same sentiment.

So should Sony be running scared about now? The answer? “Not yet.” Sony is right to say this is a marathon, not a sprint. However, a little anxiety is healthy, and may help take Sony’s hubris down a few notches. While economists always try to predict markets, the fact is markets are unpredictable, and that alone is why Sony should be a little worried about recent trends. While the past suggest console penetration ranks can be altered, that window has gotten smaller and smaller each generation. Sony’s troubled leap from the gate might have done enough damage to keep PS3 down for a long time, and given most consumers don’t spend $600 on consoles until the Holidays, that means Sony will have an even harder time moving hardware while 360 and Wii continue to sell and grow their libraries. Sometimes, being an “impulse buy,” as Sony describes the Wii, isn’t such a bad thing.

This scenario might be improved if demand for PS3 was still high, but that craze has clearly come and gone. PS3s are now sitting on most store shelves for weeks before they are claimed. In fact, stores in my area have them in ample supply — and no one is buying them. Of course, a system is only as good as its games, so Sony is hoping exclusives will show PS3’s muscle in the coming months. Unfortunately, there is cause to worry in this department, too.

How “good” (and I mean visually for now) games will be and for which system they release for depend in large part on penetration. All these rumors about MGS4 going 360 and Ubi Soft dropping Assassin’s exclusivity are happening because PS3’s penetration numbers are falling well short. It doesn’t help that PS3’s development costs a whole bunch more than 360’s, and that the software backing the system is notoriously complicated. You know it’s pretty bad when Hideo Kojima goes on record to say the PS3 architecture is outright confusing.

Exclusive titles drive console purchases — it’s what has kept Nintendo in the game and the reason why Microsoft wines and dines Japanese developers on a weekly basis. Without killer exclusives, differentiation in the console market is hard. Perhaps in this sense, Sony is right — its real competitor is the 360, not the Wii (Though I’d argue that either way, it loses ground). As more publishers/developers decide to include 360 versions, what will happen is graphics downscaling; PS2’s huge penetration meant Xbox ports looked decidedly less stellar (since the games were being made first for PS2 and then for the Xbox). Poetic justice may exist because the 360 looks like it’ll be returning the favor this generation. If Microsoft keeps a penetration lead, there won’t be enough to make consumers fork over the extra $200-$300. Most gamers will settle for a 360 and see the few games they don’t get as a wash since Microsoft has its own killer exclusives. Sony’s decision to ignore the Wii might prove fatal in this scenario. Like what Ross Perot did to Bush, Sr. and what Nadir did to Gore, Wii might swing in to steal Japan’s market, which will compel developers there to hop on board Nintendo’s development train. That’ll mean PS3’s edge in the Japanese market (the one place 360 can’t break into) could be gone or at least diminished. With fewer games coming out of Japan, more pressure would be applied to Sony’s 1st party teams. That wouldn’t be ideal. Sony would be draining more funds to make more games — and that’ll be a losing proposition. Look back at PSX and PS2 — all of Sony’s best games came from 3rd party exclusives. While Sony has made some headway with its own titles, the fact is SCEA, SCEJ, and 989 can’t compete alongside HAL, Bungie, or Lionhead.

What this would mean is the end of Sony’s grand strategy …

The purpose of the PS3 is essentially twofold: (1) populate CELL and (2) win a format licensing war — let’s be frank about this. Sure, there will be DMC4, Heavenly Sword, and FF13 — but that’s not Stinger’s ultimate point now, is it? The reason Ps3 is so expensive is because the Co. spent billions in R&D to build those two elements. The PS3 is the frontline in making sure Sony not only recoups the investments, but profits many times over. Without enough PS3s in households, the CELL will remain expensive to produce, and the same will hold true for Blu-Ray discs and players. If Sony has to cut prices deeper to move PS3s then it might win the format war, but the time it’ll take to get back in black will be seriously lengthened, not to mention the jaunting reality that disc-based delivery might very well be gone next-gen, which would render Blu-Rays defunct right when Sony breaks even. Now you know why Stinger’s supporters are walking around like they have ants in their pants.

The irony in all this is that Sony’s consumer electronics and movie divisions are now as rosy as ever. What once were seen as the laggers dragging down the whole Sony empire are now what save Sony’s earnings report. The PlayStation division, on the other hand, is now looking more and more like the reason why Sony’s profit margins will be squeezed for years to come.