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Sony Pushed Toward Early PS3 Price Cut

Tero Kuittinen

According to the latest numbers from the U.S. and Japan, sales of Sony's (SNE Quote) PlayStation3 console are even weaker than the dismal January figures implied. An unusually early price cut may be Sony's best shot at salvaging the product's performance.

In the U.S., February's sales numbers issued last week by NPD Group underlined how weak a position Sony is in now. Nintendo's Wii sales dipped from 426,000 in January to 335,000 in February, while Sony's PS3 sales slumped from 244,000 in January to 127,000 in February.

The $600 price tag of the fully equipped PS3 is weighing heavily on Sony as U.S. consumers show some signs of spending caution. The size of PS3's slump relative to the Wii's decline is revealing, especially because the Wii had no particularly interesting new games debuting in February.

Troubles Ahead of Golden Week

In Japan, things are even worse. Since the beginning of the year, Sony has launched two major franchises to PS3: The latest "Monster Hunter" game has sold almost 1 million units on the PSP (Sony's handheld device), and the latest "Gundam" title has sold 200,000 units on PS3. Despite these major hits, PS3 unit sales slid to just 32,000 during the week of March 5-11, according to Media Create.

Sony's PSP sales were solid at 56,000 units, but the portable device is now fading rapidly against its chief rival Nintendo DS. Nintendo's Wii sold 44,000 units, and the Nintendo DS sold 108,000 units.

The March 5-11 week in Japan seems to imply that the February/March hit games did not give Sony's consoles a sustained lift. Just two to three weeks after major game launches, sales of both PS3 and PSP are dropping off more steeply than expected.

Longevity of games is another spot where Nintendo is trumping Sony on its home turf. In the latest week, several-months-old "Wii Sports" placed higher in Media Create's Top 10 chart than Sony's flagship "Gundam," which dropped to No. 7 in its second week. Similarly, the latest DS surprise hit "Professor Layton and the Mysterious Village" clings to the No. 3 slot four weeks after its debut. This is unusual -- and notably, both "Wii Sports" and "Professor Layton" are brand-new franchises.

Many of Nintendo's new hits are novel concepts. Sony has been flogging the PS3 on aging series like "Virtua Fighter," and consumers are clearly growing restless.

We're getting close to the pivotal Golden Week game-selling frenzy in Japan. The week straddling the end of April and the beginning of May rivals the December-January period as the most hectic game sales season in Japan. If PS3 sales remain stuck around 100,000 in March in the U.S. and if Golden Week is a bust in Japan, Sony may be forced to cut the high-end PS3 price by $100 or more.

Crucial Summer

Sony needs strong support from Japanese developers, and they have already started ramping up their support for both Nintendo DS and Microsoft's (MSFT Quote) Xbox 360. The most wanted game among Japanese consumers recently polled by Famitsu is "Dragon Quest IX," a supposed anchor title for PS3 that was abruptly moved to Nintendo DS as developer Square Enix began hedging its bets.

Electronic Arts (ERTS Quote) is at the vanguard of Western powerhouse game developers increasing their research and development for portable devices. Sony needs to turn the tide of shifting software allegiances soon, or it will lose its status as the leading franchise platform. Upcoming blockbusters, ranging from "Final Fantasy" to "Devil May Cry," may turn the tide and make PS3 the clear global volume leader like its predecessor.

But those games won't arrive anytime soon, and Nintendo is lining up killer U.S. content like "Pokemon" and "Paper Mario" for this spring. In the meanwhile, Sony's much-vaunted "MotorStorm" has just started selling in America, and it is being badly overshadowed by "God of War 2," made for the PS2. The latter is becoming perhaps the biggest early spring blockbuster of 2007. As a PS2 title, it is diverting consumer attention from PS3 even more effectively than current games for Wii or Xbox360.

So, Sony is contending with the unfortunate timing of the "God of War 2" launch, the badly aging Japanese series like "Virtua Fighter," the slightly lackluster new properties like "MotorStorm" and the late arrivals of hotly anticipated PS3 games from "Heavenly Sword" to the next "Final Fantasy" and "Metal Gear Solid" iterations.

This spring is the moment when several small negative factors have turned into a cluster of woe for PS3. The cumulative weight is sinking the console, and I don't think Sony can afford to wait until next winter for things to turn around. The "Halo 3" juggernaut will likely arrive around September 2007 for the Xbox 360, and the new, highly innovative "Mario" game for Wii will probably launch a month or three later.

Both of these franchises are proven system-sellers; they have the rare power to increase the unit sales of their home consoles meaningfully. Sony will have to line up several hits just to neutralize their impact.

A second-quarter price cut is the most likely outcome of this dismal spring. Sony has to regain momentum before the rival consoles line up their biggest guns next winter. It will sting Sony's bottom line fiendishly as the subsidy for selling the expensive console shoots up before originally planned, and there is no guarantee of success. The early, steep price cut of the original Xbox did not do much to change the ultimate destiny of that console -- an also-ran status it shared with GameCube far behind the PS2 volume glory.

Investors are likely to interpret a price cut as an expensive gamble that may signal desperation to consumers. I am expecting more portfolio-flipping from Sony to Nintendo.