Thinking Deep Thoughts About Sony's Strategy

Sony's strategy has perplexed me for some time. Long-time hardware and engineering excellence, progressively (IMHO) getting farther and farther away from the customer. Net result: problems creating products that enough people actually want given the costs of producing them. Further, I've been tremendously cynical about the whole "window into the living room" strategy as an explanation for a high price point, where a gaming console is being positioned as a multimedia player. Do gamers really want to pay for multimedia? I'm not so sure.

Anyway, a few things have prompted me to re-assess my thinking. Firstly, it looks like Sony might be willing to scale down and focus, as illustrated by its considering the sale of a part of its animation studio and digital effects company. Companies like Sony usually collect properties like these as trophies, regardless of whether or not they make sense from an ROI perspective. Because vertical integration has always been favored, as well as having a broad, horizontal set of product offerings. So Sony's willingness to reduce its commitment to these ancillary businesses is both very unexpected and extremely encouraging from an investor perspective, at least to me.

Another point I'd like to raise was tabled by my friend Tristan. We have both been watching the console wars unfold for some time, and our thinking has evolved along somewhat different paths. His angle is that Sony's PS3 strategy is all about the Blu-ray player, and that its economic model will ultimately be built around licensing revenue from the studios, not gaming revenue or console sales, as Blu-ray wins the format war against HD-DVD. My perspective is more that if someone wants to buy a Blu-ray player they'll buy a Blu-ray player, and if Sony wants that Blu-ray player to be the PS3 then they need to seriously revamp their messaging. The pitch I get is that PS3 is a powerful, leading-edge gaming console with killer graphics, and, oh, by the way, it is also a Blu-ray player. This just isn't going to move the metal, as currently weak PS3 sales attest. Now I'm not disputing the fact that PS3 may well be a cost-effective Blu-ray player right now, but just how many people want this player today? And if, in fact, Blu-ray does turn out to be the dominant nextgen digital video format, is PS3 going to be well-positioned to garner these sales? I'm not that confident.

Though I'm not a marketing guru, the mixed messages Sony is sending towards the PS3 can't be good. It's confusing. And further, if Blu-ray is the winner, won't lower-cost Blu-ray players come to the fore simply because they won't incorporate the components necessary for a high-end gaming console? I'm just not buying this angle. Maybe I'm just too wedded to my bearish view on PS3 as a platform, but I don't think so. Gaming consoles are sold to gamers. Video players are sold to those who want to watch videos. And until Sony (and Microsoft, for that matter) figure this out, there is going to be a lot of shattered dreams and unrealized expectations. And it's just not fair. Especially to those working in the gaming business and doing great stuff.
 

Comments

[Tristan Louis]

@Warmwaterpenguin

I agree with you that people won't buy bluray because of a marginal improvement on pixel count and that's against this background that I think that Sony needs to do something radical to push the tech.

The media business seems, to some extent, to exist based on the fact that format change force people to buy the next version of the same catalog again and again (ie. vinyl -> 8 track -> tape -> cd -> mp3 or vhs -> dvd -> ???)

so think about it, the winner in the bluray hddvd war is the one that convinces the studios to put more content on their side. The studios won't take strong positions until there's a market. The problem, as you say, is that demand isn't there... So Sony is creating artificial demand by taking an ancillary market (video gaming) and presenting it as growth in the blu-ray camp. It's a nice magic trick :)

That said, I think you may have hit on something in terms of how you get people to move to a different format. The question then becomes whether the added functionality is worth the extra cost.

You might want to check my post here: http://www.tnl.net/blog/2005/01/21/drm-is-not-binary/

for my views on this balance of convenience vs. value.

[drewfus]

Blu-Ray is ancillary to the success or failure of the PS3. Once journalists and the general public realize what the machine is capable of it will generate sales and success for Blu-Ray, rather than vice versa.

[Warmwaterpenguin]

@Tristan

My question is this: what is driving the consumer to make the switch to either format?

The leap to DVD was not made because of its improved image quality. It was made because it preserves movies better, has improved search functionality over VHS, and takes up less physical space. The majority of consumers are happy with the collection of movies they already own, and when they do migrate to HDTVs, an upscaler will be perfectly adequate for most.

Look at CDs. A number of other, superior audio formats have come around since then with better sound quality and storage. Why then have we not left CDs behind? The improvements are too abstract. Going from cassettes to CDs was a no brainer. Going from CDs to what are essentially better CDs is not.

People look for a material improvement. They look for convenience in their consumer goods. How do you stand up to an incumbent format? Usability. MP3s are taking a bite out of CDs because they are more convenient, not because they are capable of better sound.

If either HD format wants to win the day, the answer is not using the space to improve image quality. The answer is using the capacity to put more content on a single disc.

Will Joe consumer rebuy his Munsters DVD collection to improve the pixel count? No. Will he rebuy it to get the entire show on a single disc? Quite possibly.

[Tristan Louis]

What you appear to be missing is that even if cheaper blu-ray players hit the market, Sony would win out because it owns the technology for blu-ray so the war, in terms of formats, is really between HD-DVD (Toshiba) and Blu-Ray. If there are more Blu-Ray players on the market Sony Wins.

Why?

Well, in order to understand it, you need to dig a little deeper. Generally speaking, video technologies are more of a grab-bag of different technology grouped together. So it's a fight between two different baskets of goods and Blu-Ray is heavily weighted with technology that has to be licensed from Sony. For example AACS (a standard for content distribution and DRM) sits at the core of Blu-Ray but is not part of HD-DVD.

Assuming Blu-Ray wins, Sony would actually generate revenue from every part of the chain as companies would have to pay Sony some licensing revenue for every disk and every player that includes the technology.

It's a risky gamble and it's basically a bet the company one. If PS3 fails, blu-ray (and possible Sony) could die with it. If it succeeds, Sony will deal Toshiba a pretty big blow as it will direct some licensing revenue associated with DVDs away from DVDs and into Blu-Ray.

[Michael]

I met Howard Stringer in Vegas while he was pumping the Sony Pro HD format... ...in 1999.

It's still too expensive.

This is the Sony culture. Exclusive and super expensive.