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After more than a decade at the top of the video game heap, during which it sold more than 200 million consoles, Sony ( SNE) is set to be knocked off its firm position as King of the Hill because of its flawed PlayStation 3 strategy. This is only one of many reasons to avoid shares of the consumer-electronics conglomerate, but it's certainly the most important.
Zapped by Blu-Ray
Among the most glaring errors Sony has made with the PS3 has been the inclusion of a next-generation Blu-ray DVD drive in the console. Having seen Blu-ray in action up close, I can say it certainly is impressive. But it has also had the effect of driving up the cost of the two versions of the PS3 to $500 (20 GB hard drive) and $600 (60 GB hard drive) respectively, much more expensive than the competing Microsoft ( MSFT) Xbox 360 and Nintendo Wii, with no discernible improvement in game quality. Shortages of certain Blu-ray components have resulted in extremely short supplies of the PS3, giving Microsoft and Nintendo some running room to build market share. In addition, the competition between the two next-generation DVD technologies, Blu-ray and HD-DVD, is causing an enormous amount of confusion among consumers and hindering adoption of both. This is a critical issue; slow consumer adoption of Blu-ray will make it more difficult to build economies of scale, which normally result in lower manufacturing costs. Look at the relatively unsuccessful audio formats DVD-Audio and Super Audio CD for a historical parallel. And in a world where digital distribution of media is becoming more prevalent by the day, it makes little sense for Sony to have made such a bold bet on a physical format. Sure, we're years away from high-definition video downloads being both quick and economical, but download services such as Apple's ( AAPL) iTunes as well as numerous file-sharing programs clearly are shrinking the size of the market for physical media such as DVDs and CDs. Of course, the HD-DVD camp will suffer along with Blu-ray. But Sony is disproportionately tied to Blu-ray, given its strong dependence on its video-game division for profit.