Hype War Goes to Xbox, but PSP Should Thrive

Sony's ( SNE) PlayStation Portable, which looked destined for greatness when it arrived nine months ago, finds itself lost in the hype surrounding Microsoft's ( MSFT) Xbox 360.

But Sony shouldn't hit the panic button just yet, analysts say.

"The PSP is not dead by any means," says James Lin, an analyst for the Simba Group, an industry research firm. "It's just been slow out of the gate."

Sony launched the PSP in the U.S. to great acclaim earlier this year and sold more than half a million units in the first two days. The device marked the first effort by Sony, the leader in the console game industry for the last 10 years with its PlayStation and PlayStation 2 systems, to enter the portable game market, which has been dominated by Nintendo. Some analysts even believed that the PSP, which can play music and movies and surf the Web through a built-in wireless transmitter, could be a wider threat, potentially eating into sales of Apple's popular iPod digital music devices and other portable multimedia devices.

Right now, the PSP's threat to Nintendo -- much less to Apple -- remains hypothetical. Sales of the PSP are disappointing thus far, particularly this holiday season. Through the end of October, Sony had sold just 1.6 million of the devices after the first days' sales flurry.

Last week, in an earnings-related conference call, GameStop ( GME) CEO Richard Fontaine said that PSP sales this holiday season have been "somewhat slower than anticipated."

"The truth is we would have expected it to have more momentum than it has," Fontaine said.

When Amazon.com ( AMZN) published its list of top-selling items in November, the PSP was conspicuously absent. Only recently did a PSP package crack Amazon's list of top 10 best-selling video game products; it has yet to show up as a leader in the broader electronics category.

A more complete gauge on PSP sales should come out later this week when the NPD Group, an industry research firm, releases its November video game sales data.

Analysts say sales of the PSP in recent months have been hindered in part by the attention paid to the Xbox 360, which made its debut last month. The launch drew attention because the Xbox 360 is the first of a new generation of consoles that are expected to be on the market within the next year. With its high-definition graphics, sophisticated online gaming system and multimedia capabilities, the Xbox 360 is expected to steal share from Sony's market-leading PlayStation consoles in the new product cycle.

The PSP "is not where the focus of the gaming market is right now," says Van Baker, an analyst with Gartner, an industry research firm.

But even if Sony were able to push through all the Xbox 360 noise, it faces another problem in pushing sales of the PSP: price. The base PSP package costs $250. Add in a couple games and a decent-sized memory card on which to store game data or some songs, and the price jumps to well over $300.

The PSP's price is "prohibitive," says the Simba Group's Lin. "That's a huge purchase."

The other big problem facing the device is the lack of compelling software titles. To date, there have been no "killer aps," say analysts. Instead, most of the games developed for the system are simply reworked versions of games developed for the PlayStation 2 and other consoles, they say.

"Right now, there is very little on the PSP that is compelling," says Joe Spiegel, who follows the video game sector as a hedge fund at Dalek Capital. Spiegel has no position in Sony but is long shares of Nintendo.

Despite the apparent problems, Sony doesn't appear worried. Company representatives did not return calls seeking comment on PSP sales, but at an investor conference last month, Jack Tretton, co-chief operating officer and vice president of sales and marketing at Sony Computer Entertainment America, argued that the PSP has been a success so far. The company expects to ship 14 million of them worldwide by the end of Sony's fiscal year in March, he noted.

The PSP is a "disruptor in the portable space," Tretton said.

While few analysts would agree the PSP has already achieved that status, fewer still believe the device is a failure. In fact, many think it will do quite well in coming years, and possibly this holiday season.

The PSP should benefit from the fact that the Xbox 360 appears to be in short supply this holiday season, analysts say. Unable to find one of the new consoles, many parents will probably pick up a PSP as a consolation prize, they say.

"It's likely people will make some tradeoffs ... and fall back to the PSP," says Gartner's Baker.

Just because GameStop is seeing soft sales doesn't mean overall sales of the device are weak, notes Michael Pachter, an analyst with Wedbush Morgan Securities, which has not done recent investment banking for Sony or GameStop. GameStop's customers are those who typically have to have a new game or game machine the day it goes on sale, he says. Those customers likely already own a PSP; in contrast, the consumers who are likely buying a PSP this holiday season are shopping at Target ( TGT) or Wal-Mart ( WMT), he says.

A Target representative declined to comment on sales of the PSP, but sales of the PSP on Wal-Mart's online store have been "very strong," said a company representative.

"The thing's going to be huge," says Pachter.

Sales of the device should pick up after the holiday season once Sony cuts the price, analysts say. And better games should come for the device as the number of owners increases, they say.

"You can put great software on the PSP, but at the current price you're only going to attract a limited audience," says Lin.

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