Cut-Rate PlayStation 2 Not a Soft Sell

Sony's lower-priced game doesn't seem to be moving product or helping game-software sales.
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The video-game industry often cheers price cuts, but don't look for much rejoicing over

Sony's

(SNE) - Get Report

recent decision to drop the price of its aging PlayStation 2.

The $20 drop announced last week appears to be too little too late to help video-game software publishers such as

Electronic Arts

(ERTS)

that have struggled in recent months to combat flagging demand for games, analysts say.

And, they say, the cut does little to address game makers' underlying troubles, such as a lack of must-have titles on the market for older systems and a core gamer market that's already turned off older game systems in favor of playing or saving up for newer ones.

The ongoing struggles of the video-game publishers are just part of the normal transition period the industry goes through every five years or so as it changes technology from one generation of console hardware to the next, analysts say.

Price cuts like Sony's won't do much to ease the transition for the software vendors, they say.

"This is a cyclical industry," says Joe Spiegel, a hedge fund manager at Dalek Capital. "No matter what you try to do to eliminate the cyclicality, you can't do it. It is the nature of the beast."

Sony cut the suggested retail price on its PlayStation 2 last week to $129.99 from $149.99 The move marked the latest drop in price in the console, which Sony originally priced at $299.99 when it launched the machine back in 2000.

But it marked the first drop in price on the console in nearly two years. In May 2004, Sony last

cut the price of the PlayStation 2 by $30.

The latest cut comes at a time of struggle for the video-game software industry. Publishers saw

disappointing sales and

results during the holiday quarter, which is their most important sales period.

Additionally, the tough times have apparently continued into this year. According to data from NPD Group, retail sales of video-game software in the U.S. fell 8% to $1.2 billion in the first three months of this year compared with the same period a year earlier.

Over the next several weeks, investors will get a better sense of how bad things are as industry players release their latest financial reports. Sony, for instance, reports earnings early Thursday, while Electronic Arts and

Activision

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will report results next week.

The industry's problems have been driven largely by a fall-off in demand for older game consoles such as the PlayStation 2. At EA, for instance, sales of PlayStation 2 games fell 25% year over year in the holiday quarter.

In the first quarter this year, retail sales of games for the so-called current generation systems plunged 31% industrywide from the same period last year, according to NPD.

Given the industry's struggles, one might suppose that Sony's price cut would be a nice boost. Lower prices often boost sales of consoles. That in turn can juice sales of software, because consumers typically buy games to go with their systems when they purchase them.

Some analysts believe Sony could have helped shore up the game-software publishers last holiday season by cutting the price to $99 last fall. Consumers -- particularly those outside of the core gamer market -- are often choosing holiday gifts among a range of consumer electronics goods.

Having the PlayStation 2 at that price level would have made it more competitive with products like

Apple's

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iPod and other gadgets, says James Lin, an industry analyst for the Simba Group, a consulting firm.

What It Would Take

"It's tough to say, 'what if?' " Lin says. "But it would have

made for a much more interesting decision for consumers."

Others disagree. The problem video-game software publishers faced last year was not that consumers weren't buying enough hardware, says Spiegel. The real problem was that publishers didn't release very many compelling titles, he says.

"That, more than pricing, had the biggest effect" on industry sales, says Spiegel, whose only position in the video-game sector is a long stake in

Take-Two

(TTWO) - Get Report

.

Regardless of what happened during the holidays, analysts largely believe that Sony's move will do little to boost demand either for PlayStation 2 consoles or games going forward.

Part of the problem is the flip side of Sony's success with the device. The company already has sold more than 100 million PlayStation 2s worldwide. At least among the universe of typical game enthusiasts, who are generally the most active buyers of software titles, anyone who might want a PlayStation 2 likely already has one, analysts say.

The focus of those consumers is already on next-generation systems such as

Microsoft's

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Xbox 360 or Sony's own upcoming PlayStation 3, analysts say.

"People are saving their money and getting ready for a PlayStation 3," says Michael Goodman, an analyst who covers the video-game industry for the Yankee Group, an industry research firm. "They're not spending money on current generation games, and they're not going to."

That's not to say that Sony can't or won't sell any more PlayStation 2s. But analysts say that potential customers for the device and the games for it are now generally bargain shoppers, for whom the $20 price cut isn't likely to mean a whole lot.

In terms of consumer psychology and hitting a price point that will lure in bargain shoppers, $99.99 is the price to hit, not $129.99, they say.

"That's why I don't see this as that big a deal," says Van Baker, an analyst with researcher Gartner. "The difference between $149 vs. $129 is not that dramatic

whereas $99 sounds like a real bargain."