GamesIndustry.biz: Price Conscious

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With apologies to the eminently quotable Winston Churchill - fast becoming a regular contributor to this column - this is not the end. It is not even the beginning of the end - but it is, perhaps, the end of the beginning.

The launch of PlayStation 3 across Europe marks the last of the next-gen consoles to launch in the last of the major global territories. The awkward, difficult, confused and downright bloody painful pre-launch period will be over; judgement, finally, will rest in the hands of the world's consumers.

The launch of the console, however, is really only the beginning of the console war. It's already posing more questions than it answers, frankly; for a start, there is a question mark over the success of this launch. PS3 looks unlikely to sell out in its first week at retail in Europe, and there's really no consensus over what that actually means.

On one hand, every other console launch in recent times has been a sell-out - the most recent, the Wii, is still suffering massive stock shortages more than four months down the line. Sony's naysayers claim the lack of a sell-out launch for PS3 as proof that the system is suffering grievously in the public eye. It's a popular viewpoint among hardcore gamers, bolstered by the fact that Sony, right now, is an unpopular company.

On the other hand, though, there's no doubt that this launch boasts the largest supplies of hardware ever seen in Europe for a console roll-out. Sony could sell the Xbox 360 or the Wii's day one allocation twice or three times over, and still have units left on retail shelves.

Lacking hard figures for what the demand actually was for its rivals (we only know how many people actually got units on day one, not how many people wanted them), it's impossible to make a useful comparison. Of course, there's always the chance that Sony's sell-through figures next week will turn out to be lower than Nintendo's or Microsoft's, despite the larger stock allocation. In that case, well; Tokyo, we have a problem.

Maybe it's the possibility of that kind of frosty reception which is driving Sony to backpedal a bit on the early promise of its curvaceous new system. How else should we read comments from Sir Howard Stringer, speaking on US TV recently, where he claimed that if the PS3 fails, it will be down to the console's positioning as "the Mercedes of the videogame field"?

For a CEO to be talking about failure as a product rolls out in a major market is surprising enough - but for him to so openly admit that Sony's decision to price the machine so uncompetitively could lead to failure is astonishing. The comparison with Mercedes works on a number of levels, after all; and I have to wonder if he's actually aware of how insightful his comment really was.

Certainly, Mercedes cars are built to an exacting standard, packed with features and generally considered to be a high quality product - and even Sony's most vehement naysayers cannot deny the quality of the PS3's hardware. Equally, Mercedes cars are renowned for being expensive. They are an aspirational item not only because of their quality, but because their price keeps them out of range for the average consumer.

Ring any bells? Stringer's argument is that PS3 is an aspirational item, like a Mercedes, and he may be right to a very large extent. Even with the patchy software support so decried by hardcore gamers, the console will be regarded as a system to aspire to by a large number of consumers - thanks to the build quality, the design, the brand identity and the price tag. That price tag, however, will keep the PS3 aspirational... Perhaps to a degree Sony won't like much.

The other part of the Mercedes comparison worth dwelling on is that Mercedes cars don't exactly dominate the road. In fact, Mercedes-Benz's owner, Daimler-Chrysler, is fifth in the world ranking of car manufacturers - ahead of it are the likes of Ford, Toyota and General Motors, all of whom also own luxury brands but whose names have been made by successful workhorse vehicles aimed at mid-range consumers.

Howard Stringer is no fool, and nor are many of Sony's top executives. Surely, if they make a comparison between their own feature-laden, expensive product, and feature-laden, expensive products in other markets, they must see that such products never, ever dominate the landscape. They are successful niche products, at best, not market leaders. Mercedes occupies a niche in the car industry, nothing more.

Manufacturers like Alienware and Apple, offering expensive but highly specified or beautifully designed products, cannot rival box-shifters like Dell in the PC market. Apple's iPod range dominates the handheld music player market, despite being vastly under-specified compared to many of its rivals.

Sony has ruled supreme over the games industry for a decade; the company will not, surely, happily slide into a high-end niche and watch its competitors capture the mass-market without a fight. Yet right now, that's exactly what they are doing.

PS3 is completely priced out of the videogames mass-market which was the backbone of the success of PSone and PS2. What's more, Sony clearly knows that the system isn't priced for the mass market; otherwise, why compare it to the Mercedes brand?

Which raises the obvious question - what kind of game is Sony actually playing?

We all know that Sony has been walking a tightrope for a few years, desperately trying to balance the introduction of the PS3 with a careful nurturing of the goose that continues to lay the golden eggs, the PS2.

Too much emphasis on PS3, and the PS2's vastly profitable late life would be terminated prematurely. This would not only damage Sony's revenues - it would threaten to throw the whole industry back into the financial chaos that accompanied the last console transition period.

I would suggest that far from having come off that tightrope, Sony now finds itself faced with an even trickier balancing act than ever before. The PS2 is going strong, especially in Europe - games like Final Fantasy XII, Rogue Galaxy and God of War II are seeing to that, and a vast installed base remains of the venerable system. Even as the PS3 launches, Sony must bear in mind that for the next 18 to 24 months, its bread is buttered on the side marked PS2.

In other words, Sony's rather bizarre behaviour over the PS3's price point and its positioning as an aspirational product can be explained by one simple twist of logic. If the senior management at Sony believe that the biggest threat in the next year or two is not that Xbox 360 will gain a massive head-start, or that Nintendo will win hearts and minds, but rather that the PS2 market might shudder to an unseemly and costly halt before its time...

Well, in that case, the only thing for it to do would be to introduce PS3 in such a manner as to make users' future upgrade path to this new, aspirational system clear, but without actually positioning it at a level where they're likely to abandon PS2 en masse - flooding the market with second hand PS2 consoles and software and essentially wiping out the long tail business.

This is, obviously, an extremely dangerous game to play, and for Sony's sake I rather hope they've got some aces up their sleeves for when the going gets rough. One such ace might be pricing, because it strikes me that the PS3's high price might actually be rather more transient than Sony would currently have us believe.

Despite their claims that the console will continue to cost a small fortune for a long time to come, it's worth remembering that the price of the PS3 is constantly justified by the inclusion of a Blu-ray drive in the machine - and Blu-ray won't cost a fortune forever.

In fact, already the cost of Blu-ray hardware is plummeting. Sony itself is preparing to launch a standalone player which costs roughly half what the current players on the market do, and with the format seemingly putting more open water between itself and HD-DVD every week, the price of Blu-ray drives looks set to continue to fall dramatically. In that case, the PS3's price suddenly starts to look volatile.

After all, if the PS3's manufacturing costs are high because of Blu-ray, and its price tag is justified by the inclusion of a Blu-ray drive, then both of those factors evaporate when those drives become significantly cheaper. Within as little as 12 months, the reasoning used by Sony to keep the PS3's price so high could have disappeared entirely. What happens then?

Here's one theory; what happens then is that the PS3 gets a series of price cuts, in a relatively short space of time, which bring the console down to mass-market prices without losing much face for Sony. By this stage, the PS2's long tail will have declined to the point where it will mostly be kids' games and classic titles being sold, and it will be safe to market PS3 as a mainstream prospect without seriously impacting on a healthy market.

Depending on how much blood HD-DVD can draw from Blu-ray before the format war is settled, the PS3 could have a hundred pounds or more lopped off its price within a year or less.

It is, of course, just a theory - although it's quite compelling, since Sony must know that the cost of its console will not be sustainable once Blu-ray player hardware drops to a more reasonable price point. It's a topic worth theorising over, too. When Howard Stringer talks about the PS3 as the Mercedes of videogames, it's what he doesn't say that is most interesting; because he must, surely, have a roadmap which shows how he's going to turn an expensive niche product like a Mercedes into a mass-market success like previous PlayStation platforms.

At least, he better have - because if not, this console war may be over before it's even properly underway.

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