Sony's PS3: High-Scorer No More

Former Title Titan

Plus, Sony is losing exclusivity on many PS3 video-game titles. Software publishers such as Koei, publisher of the Dynasty Warriors series, are moving titles over to the Xbox 360 in increasing number. There are even rumors that Konami(KNM Quote) will put out a Metal Gear title on the Xbox 360, which would be a huge blow to Sony, given how popular that series is.

Then there's Take-Two Interactive's(TTWO Quote) blockbuster Grand Theft Auto series; a next-generation version of the game will appear simultaneously for Xbox 360 and PS3 consoles late in 2007. Sony previously had an exclusive deal with Take-Two for GTA games during the PS2 cycle, though those titles later appeared on the original Xbox. In addition, 2007 will see Xbox 360 players enjoying both monster PS2 hit Guitar Hero 2 and Sega's Virtual Fighter 5, formerly a PS3 exclusive.

This bet-hedging by all these software companies is making the lower-priced Xbox 360 much more attractive to consumers by drastically improving the breadth of software available for it. I also expect Microsoft to cut prices on the Xbox 360 in the near future. The console has sold about 10 million units to date, though I have recently noticed retailers getting a bit aggressive in giving away freebies with the console. That implies that near-term demand may be a bit sluggish.

While brand loyalty is an issue with console gamers, the lower-priced Xbox 360 has captured plenty of ground in attracting former Sony exclusives. That's likely to cut into Sony's fan base.

Wah-Wah Wii

As for the Nintendo Wii, the most important thing to note is that its low manufacturing cost and relative technological simplicity are giving Nintendo a huge boost in the important Japan market. The Wii is making its way into gamers' hands a lot faster than the PS3, giving Nintendo a chance to gain a foothold with consumers ahead of mass production of the PS3.

Sony's video-game business is easily its crown jewel. At its best, it has provided more than 60% of Sony's operating profit despite hovering around 10% of overall Sony revenue. Given that Sony is almost certainly going to lose market share, the company's profitability will be dragged down dramatically.

This state of affairs means Sony's historically lucrative video-game unit is very likely to lose its luster over the next few years as Microsoft and Nintendo gain market share in this segment. Plus, one must consider the generally tough state of the consumer electronics business, given how competitive businesses such as high-definition televisions have become. With that in mind, it is nearly impossible for me to come up with a bullish case for Sony.