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Air Raid 02-10-2006 01:08 AM

Could the Playstation 3 Kill Sony?
Could the Playstation 3 Kill Sony?
February 09, 2006

By David Walker

As we quickly approach E3 in May, many people are eagerly anticipating
more details on the Sony PS3. Since Sony burst onto the gaming scene
with the original Playstation, they have been the company to beat in
the console wars. As a matter of fact, while the rest of Sony has
struggled, the Playstation division has been a cash cow that the rest
of the company has relied on. With Microsoft having already launched
the Xbox 360 to overwhelming demand, many are wondering what the
counter from Sony will truly look like, hype set aside. It wouldn't be
exaggerating to say that Sony is betting a large hand on the
Playstation 3. It's not just the Playstation division that's making the
bet, either. With the next-gen Hi-Def format war still raging, Sony is
betting a substantial portion of it's future on Blu-Ray. While most
analysts agree that HD-DVD will not likely win, some analysts are
openly wondering whether Blu-Ray will as well. If it doesn't, Sony
could be in serious trouble.

Isn't This Thing Supposed to Play Games First?
In order for Sony's Trojan Horse strategy with Blu-Ray to work, the
Playstation 3 has to succeed as a gaming console. As a game console,
the Playstation 3 has to deliver on several fronts. In pure horsepower
and graphical ability, there's little doubt that the console will
impress. There are serious reservations as to Sony's online strategy
(compared to Xbox Live) and we'll cover that in a bit. However, one
aspect of gaming that is often ignored, but can become a major issue is
load times. Ask any Sony PSP owner what annoys them most about the
portable console and you are sure to hear about it's dreadful load
times. Gamers are an impatient breed and if Sony frustrates hardcore
gamers - and developers, for that matter - it could greatly damage it's
reputation with the group that will comprise PS3 early adopters.

Until now, it's been widely assumed that the Blu-ray drive that will
make it's way into the PS3 will be single-speed. If true, this choice
could be disasterous. Blu-ray single speed transfers data at a constant
rate of 36Mbps (Megabits per second) or 4.5 MBps (Megabytes per
second). Sound impressive? Think again. DVD single speed is rated at a
little over 1.32MBps max. A 12X DVD, such as the one in the Xbox 360,
transfers data at rates between 8.2 and 16.5 MBps for an average of
around 13MBps. This article from Gamespot provides all the details on
transfer speeds, but simple math should show that there are some
serious concerns looming with a single speed Blu-Ray drive. So, all
things being equal, a 20 second load-time on the Xbox 360 would equate
to just under 60 seconds on the PS3!

In order for Sony to bring load times into the same range as the Xbox
360, it would have to use at least a 2X drive (which would transfer a
little faster than a 12X DVD's minimum speed) or a 3X drive (which
would closely resemble a 12X DVD's average transfer rate). Since
Blu-ray is a new technology, it's a certainty that the faster speeds
will increase the base cost of the PS3, which leads into the next

Money Doesn't Grow on Trees
The Playstation 3 will lose money for at least a few years. How much
and for how long is key, and recent projections from Merrill Lynch
Japan suggest that the PS3 could lose a tremendous amount of money for
Sony in the first few years. Merrill Lynch is projecting losses of 1.18
billion in year 1, 730 million in year 2 and 457 million in year 3. By
comparison, Sony's profits in the past three years has been about 1.86
billion. If the PS3 doesn't start turning a serious profit in year 4,
Sony's bank accounts could start drying up. There's no indication if
these losses also anticipate the costs involved with setting up the
massive infrastructure for an Xbox Live competitor, which most people
think Sony will provide. If not, Sony's losses could skyrocket even
more as it looks to create a brand-new online presense.

Sony could try to offset these losses by launching the PS3 with a
higher price point, but anything above $500 is considered too high for
wide adoption. Will consumers agree with Ken Kutaragi's assessment that
you will want to work an extra job to have one? Kutaragi has even
lamented that "...the PS3 can't be offered at a price that's targeted
towards households."

Additionally, Sony is stil having to compete with HD-DVD, which is
getting significant backing from Microsoft (and their 37 billion in
cash). Whereas Microsoft has little to lose if HD-DVD fails, Sony has
everything to lose. Additionally, recent announcements at CES in
January indicate that the least expensive Blu-Ray drives will start at
$1000 while HD-DVD is hitting the market with players starting at $500.
Many analysts saw these changes as giving HD-DVD a second-wind that
could ultimately hurt Sony more than it helps HD-DVD, which leads to
another point.

Tell Me Why I Need Blu-Ray More Than DVD?
Unless you have an HDTV set, you'll never see the difference between
Blu-Ray and DVD. And considering that Hi-Def adoption is currently at
24% and more than half of consumers are waiting for price drops, the
target market for Blu-Ray is not as lucrative as one might believe.
When DVDs hit the market, there were several reasons to purchase them.
For one, the quality far surpassed VHS. Additionally, menus and extra
features made DVD content easier to access and gave it more value.
Also, DVDs don't degrade in quality over time, making them a better
long-term investment. The jump from DVD to Blu-Ray (or HD-DVD) is not
as significant, unless you're an HDTV owner. Even then, the question
remains: Is Blu-Ray content going to be compelling enough to make me
say "I have to have it?"

Recent announcements also suggest that Blu-Ray disc prices will come at
a significant premium over existing DVD prices. With broadband adoption
growing rapidly, one also has to ask if a physical format has a long
life ahead of it. Bill Gates has publicly stated that he thinks the
format war is the last we'll see, because hi-def content will be soon
be delivered over the Internet instead. HD-DVD may not win the war, but
it doesn't mean that Blu-ray will.

Games, Games, Games
The Playstation 3 has wide support right now. However, rumblings have
been surfacing that the PS3 is hard to develop for, due to the
complexity of a brand new processor with multiple cores. Similar
criticisms arose with the PS2, and while Sony was able to overcome the
same hurdles then, there is one major difference now that may keep
history from repeating itself: the Xbox 360.

Since the original Xbox came into the game a good bit later than the
PS2, developers had to stick with Sony because it was the clear market
leader. This afforded Sony liberties that it may not have had
otherwise. Now, Microsoft has the head start. Additionally, the
Microsoft unit has already been praised by the likes of John Carmack
(creator of Doom, Quake, etc...) for it's great development
environment, while Hideo Kojima of Metal Gear Solid fame has expressed
some concerns that development for the PS3 could be more difficult than
for the Xbox 360. Sony must have strong 3rd party support so that
licensing fees will help recoup the costs of putting the PS3 into the
market. Just being Sony may not be enough anymore.

While I don't think we'll see Sony close it's doors for good, I have
some concerns about the affect the PS3 could have on Sony's financials
over the next few years and into the future. Microsoft has created an
impressive console with the Xbox 360 and while Sony has a strong
history in the Playstation line, there are key components for concern.
Blu-Ray, an online service like Xbox Live and a hard development
environment create additional areas for financial loss that may not be
recouped. For the sake of competition and a strong market, let's hope
Sony can address these concerns adequately and while there is still

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