From Gamasutra: http://www.gamasutra.com/php-bin/news_index.php?story=14527

DFC: Will The PS3 Run Last In The Console Race?

In the latest report from DFC Intelligence, the analyst group returns to an earlier report on whether the PS3 could find itself running last in the console race, answering their own question in light of the past year with "a hedging 'probably not.'"

The full text of the report, released on the analyst firm's website, follows below:

"This time last year DFC Intelligence asked the question: "Could Sony go from First to Worst?" At the time we were just raising the issue of whether both the Microsoft Xbox 360 and the Nintendo Wii could possibly beat the PlayStation 3 (PS3) in this new generation of systems. This was a period when Sony seemed to have a stranglehold grip on the console market and thus merely raising the possibility of a third place PS3 finish attracted attention.

A year later, the PS3 is in third place and now all kinds of people are questioning Sony's strategy. However, from the perspective of DFC Intelligence, we would now answer the question "could Sony go from first to worst" with a hedging "probably not."

It should be admitted that at DFC we don't have a true crystal ball into the future. We build forecasting models based on past behavior and anticipated future products. DFC doesn't develop the software, determine the pricing, run the marketing campaigns, or try and influence the latest consumer fads.

What DFC does do is try and build forecasting models that say if Company A delivers hardware system X, at price Y, with product line and marketing campaigns of Z, what is sales likely to be. How will that sales change if the price is lowered, a hit new product mix is introduced, etc? How will sales change if Company B introduces a competing product line at similar or different price points? How are sales likely to change based on various combinations of these factors? What is the likelihood of each of these factors occurring based on what we now know?

So as we said last year, when it comes to forecasting video game hardware performance the specific forecasting factors include:

1. Brand, Current Market Position and Past Consumer Behavior relative to all players in the marketplace.

2. Current Software including Software Diversity, Third Party Support, Exclusives and Big Hits.

3. Current Software for the Competition looking at all the above factors.

4. Expected Upcoming Software looking at all the above factors.

5. Expected Upcoming Software for the Competition looking at all the above factors.

6. Current Price

7. Current Price for the Competition.

8. Expected Future Price.

9. Expected Future Price for the Competition.

10. Hardware, Extra Features, the "Wow Factor," Intangibles and the Ability to Pull a Rabbit Out of a Hat.

The problem the PlayStation 3 faced at launch was a $600 price tag and very limited software library. In contrast the competition was exciting new products at half the price and a more compelling software library.

The Wii had buzz, brand, price and representation by most of the major Nintendo franchises in the first six months. Using the above forecasting model matrix the Wii was almost destined to win the first few months by default. However, the matrix is always changing.

Clearly right now Nintendo is very hot. In terms of market valuation, Nintendo is not simply competing with Sony Consumer Electronics, but the consumer electronics/media giant that is Sony Corporation. This is the Sony that has its hands in not just about every major consumer electronics product, but also owns a massive library of movies, music, television shows and other entertainment products.

However, in today's hype driven market, having the hit consumer product of the moment, be it a game system, music player, phone, is everything. In today's media and investment environment, long-term strategy becomes meaningless if a product isn't 1) selling like hotcakes right now or 2) has not yet been released so the buzz hasn't yet met with reality.

With the DS and Wii, Nintendo has two hit consumer products and in the minds of the investment community that can make the company as valuable as all of Sony Corporation.

In an interview with DFC Intelligence this week, Sony Computer Entertainment America president Jack Tretton said trying to compare Sony to Nintendo is like trying to compare Sony to Nike. In other words, these are two very different companies, with very different products and very different strategies. With the video game market, the analogy to racing and running shoes may be an enlightening comparison.

Sony's strategy has been slow and steady wins the race, much like the tortoise from the legendary fable. Sony has always talked about a decade long vision for its hardware platforms. With the first two PlayStation systems, Sony pretty much put their money where their mouth was. That track record is a very important factor in any analysis of a new Sony system like the PlayStation 3.

It is when looking at the concept of a decade long vision that we concluded our analysis in June 2006 with the statement "a $600 price point is okay for launch but it will not fly in holiday 2007." In other words, we didn't think it would flying out the door at that price point and we felt price cuts would be needed toward the end of 2007 if the PS3 was going to pick up momentum.

So far there has not been a price drop, but it is only the middle of 2007 so that doesn't tell us much. As Jack Tretton put it, it is hard to evaluate a product designed to last a decade or more based on the first 18 months. Sony has historically been slow out of the gates with their video game hardware systems, but their slow and steady pace has served them well in the long term.

The challenge Sony faces is that competition in the video game market is not sitting still and for this generation Microsoft and Nintendo have clearly turned up the heat. There is no winning by default in this market.

The Nintendo Wii took advantage of every opportunity to try and build a starting base for long-term success. However, the good news for Sony is that the same can not be said for the other major competitor, Microsoft and the Xbox 360.

In terms of long-term strategy it is worth comparing Microsoft and Sony. Microsoft has shown an even greater willingness to lose money to try and build long-term market share. The Xbox 360 was the system that could benefit most from the PS3's slow, late start. One of the biggest events (or non-event) over the past year is that the Xbox 360 did little to solidify its lead.

In terms of numbers, Microsoft met its goal of 10 million Xbox 360s shipped by the end of 2006. However, walking into a retail store in January 2007 and seeing piles of Xbox 360 inventory on the floor, it was immediately clear that many of those systems shipped did not end up in consumer hands.

Gears of War was a solid hit, but it was the type of title that appealed mainly to the existing Xbox base waiting for Halo 3. In the first half of 2007, Microsoft introduced the Xbox 360 Elite which essentially raised the price of the system into a range that makes the PS3 start to look like more of a value by comparison.

In reality the new generation of game systems is just getting started. If all hardware manufacturers make their stated shipment goals over the next year, no system will have more than 40% market share when we revisit this issue next summer. Furthermore, by that time we will only be about 20% into the new generation.

The one thing we do continue to argue is that no system is likely to have the market share dominance of the first two PlayStation systems. The video game market is simply becoming diversified in multiple respects. Consumers are increasingly willing to buy multiple systems for multiple purposes.

This means arguing who will be first or second is becoming increasingly irrelevant. Publishers and developers need to learn how to properly leverage content across multiple platforms. Unfortunately, this is something most video game companies have not historically excelled at.

Platform strategy comes down to both timing and individual products. For example, if you have a big first-person shooter (FPS) you definitely want to be on the Xbox 360, even if sales are currently lagging. The PS3 may not be flying off store shelves, but a major price cut and build up of the software library could change that a year from now.

On the other hand, for many big ticket franchises the Wii may not be appropriate. The Wii is a great system, but it has its limits and a fairly unique appeal. This could present a problem for all the slow moving third-party publishers that are now scrambling to up their Wii output. By the time third-party developers start flooding the Wii market with product, the excitement may have cooled.

It is these types of execution issues that are likely to keep executives in the video game market up at night. This is an industry that sometimes seems to get as much coverage as Paris Hilton. However, when push comes to shove, finding a profitable niche is more challenging than ever. Trying to jump on the hype bandwagon and make rash conclusions based on the latest sales numbers is always dangerous. There is still a lot to be unveiled.

With E3 pushed back two months new announcements have been delayed, so we enter the second half of the year armed with very little new information. We will follow price cuts, new software introductions and the buzz of the holiday season. It will be interesting to revisit this issue in summer 2008 and see what, if anything, we have learned."

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My take on this:

90 million consoles will be sold in the Americas, 30 million will be sold in Japan, 80 million will be sold in Europe.

Depending on whether or not you assume Dreamcast owners bought PS2, Xbox or GC, that is 10-20% growth from the 125-24-21-9 split of PS2,Xbox,GC,DC.

At the moment, 360 does fairly well in the biggest market - the Americas, and ~ 1/3 of the next biggest market - the English speaking countries of Europe/Oceania/Australia (the UK, Ireland, Australia).

Wii is doing well in Europe, great in Japan, and in between in the Americas.

PS3 is doing below average in all three markets, but is stronger in Japan and in most of Europe than the 360.

If those trends were to continue you would get numbers like this:

360 - 1/3 of Europe x 80 million x 40% marketshare ~ 10.67 million

         2/3 of Europe x 80 million x 15% marketshare ~ 8.0 million

       -  35% marketshare x 90 million Americas consoles ~ 31.5 million

       - 5% marketshare x 30 million Japanese consoles ~ 1.5 million

Worldwide Xbox 360 Sales Estimate = 51.67 million

PS3 - 80 million Europe x 35% marketshare ~ 28 million

       - 90 million Americas x 15% marketshare ~ 13.5 million

        - 30 million Japan x 20% marketshare ~ 6 million

Worldwide PS3 Sales Estimate = 47.5 million

Wii - 80 million Europe  x 41.66% ~ 33.33 million

      -  90 million Americas x 50% ~ 45 million

      - 30 million Japan x 75% ~ 22.5 million

Worldwide Wii Sales Estimate = 100.83 million

Above is what DFC seems to be hinting at (not me), in terms of suggesting 360 blew it's chance to build up a huge lead in 2006, and no console being as dominant as last gen (Wii at ~50%, when PS2 was at ~ 70% marketshare).

My primary prediction is more like this:

360 -

Americas - 40%/ 36 million

Others - 30%/24 million

Japan - 4%/ 1.2 million

61.2 million

Wii -

Americas - 35%/31.5 million

Others - 36%/28.8 million

Japan - 71%/21.3 million

81.6 million

PS3 -

Americas - 25%/22.5 million

Others - 34%/30.6 million

Japan - 25%/7.5 million

60.6 million

Doesn't take a genius to know that because of the terrible Xbox360 sales in Japan the PS3 won't come 3rd worldwide but the Xbox360 will.

And their answer of 'probably not' is hardly a firm answer.

I still can't get my head around the fact companies are paid to come up with this guesswork.

Please.

These analysts are idiots. They change their prediction whenever the masses' opinions start to shift.

The PS3 is not getting as much crap as it did before, and its future has possibilities, so now suddenly it's not going to be in third? They may be right, but anybody could predict this stuff.

It still might come in third, because of a massive shift towards the 360 as well...what with Halo 3 and perhaps a hardware revision.  It's all unknown...and these guys just base their predictions on what the market is tending to go towards at this moment today.  Hype could shift later on, who knows.

I don't know why these guys get paid so much to basically state what the public feels right now.

Interesting Analysis from both DFC and The Source. However, as with analysts, they are looking at the past and unsure about the future. That is understandable.

By most analysts, the PS3 will do well because PS brand did well in the past, while the Wii is only going to be strong for 2 years because it is different. Most give the PS3 the benefit of the doubt, but are quick to doubt the Wii's staying power. Hence, why they do not feel it appropriate to use the current trend to predict the future.

All understandable. That is what analysts do. Regardless, I will stand by The Source's predictions.

PS3 not finish 3rd no way, really how does any one see 360 beating out the PS3.

You can get a 360 at half the PS3s price in Europe yet its selling at similar levels even though PS3 is in a software drought.

Wii can dominate this gen easily if it can last the test of time.

It's not quite a given that the Wii will dominate this generation, but I'd say it's the likely case.

MS has the most to lose right now. The PS3 could turn things around considerably with a $200 or $300 price drop, which I'd consider inevitable within 3 or possibly 4 years. At that point, however, the war may have already been run away with.

The 360's reliability issues will strangle its performance. As the installed base grows in size and age, it will take front-and-center in the gaming media. The Microsoft RROD defense force will extinguish itself by the time they all have at least one failure and have to pay $140 for repairs.

The funny thing is that I want a 360 and would buy one today if there were no reliability issues. But there are and because of them, the 360 has to be considered more costly than the PS3 (which doesn't have any games I want yet).

my 2 cents: Wii will win (err...i've always wanted to find an excuse to write this ) and X360 won't come last...you guess the PS3

seriously, i don't see PS3 situation going any better:

• the user base is poor and given the titles announced will stay poor (copmpared to x360 and wii) for the rest of the year (almost all big titles are expected in 2008)
• even if blu ray is to win the "HD-war" (not yet decided though) I think that by this christmas there will be BR Player much cheaper than PS3
• too many rumors of third parties developers thinking to port "exclusive-PS3-big-hits" to other platforms
• PS3 will be for at least another 12 months much more expensive than the competition ( I mean 30% more)
  

1.) Is really a non issue ... If brand really had much of an impact the PS3 would be performing far better and the Wii would be DOA. On top of that consider that Nintendo abandoned their highly successful Gameboy brand with the Nintendo DS and it is going to be the best selling handheld system of all time. Brand is meaningless.

2-5.) Software is hugely important but this doesn't really favour Sony. Over the next 12 months it can be argued that the competition has a similar or better line-up of games and beyond that (if sales trends continue) Sony will have a very hard time keeping up with the competition.

6-9) The price will always favour the competition because Sony has priced the System way too highly; in 24 months it is likely the PS3 will be $300 to $400 but the competition will be $100 to $150 (Wii) and $200 to $300 (XBox 360).

10) The Wow factor didn't help the Gamecube, XBox, N64 or NeoGeo why would it help the PS3? 

heres my predictions:
- If uncharted sucks - PS3 will be in 3rd
- if uncharted rules - PS3 will be in 1st
- if killzone 2 doesnt match the trailer - Sony will be laughed at
- if killzone 2 matches the trailer - everyone is who doubted it will have brown marks in their pants

can I be an analyst now getting 6 figure salaries doing nothing but making things up lol.

That article was a gigantic pile of fence-sitting. As far as I could tell, DFC Intelligence said nothing other than "it's too early to call" and "let's wait and see what happens next summer." And they get paid to do this?! At least some of the other analyst groups actually make predictions, even if they are often laughable. Let me highlight the fundamental flaws in the assumptions that they've made. Here are the key lines from their report:

If all hardware manufacturers make their stated shipment goals over the next year, no system will have more than 40% market share when we revisit this issue next summer. Furthermore, by that time we will only be about 20% into the new generation.

There are two major assumptions at work here. First of all, DFC makes it clear that they are focusing on shipping numbers, not sales when talking about the upcoming year. That's a major stroke against any kind of insightful analysis, and we're left with a statement that says relatively little. I agree: no one will have more than 40% market share if we count shipped numbers and ignore actual sales. Microsoft hit their 10 million shipped goal for end of 2006, and Sony hit their shipped goal of 5.5 million at the end of March - but their sales were nowhere close to those numbers. It will be the same thing in 2008: Sony can easily meet their target of shipping 11 million PS3s this fiscal year, but they sure aren't going to sell that many.

Comparing market share of "shipped" units paints an inaccurate picture and is a waste of time.

Secondly, DFC has completely swallowed Sony's statement that this will be a 10-year console generation ("we will be only 20% into the new generation.") No offense, but I call BS on that idea. There has never been a previous console generation that lasted anywhere close to 10 years before, simply because whichever company is doing poorly in the market will try to rush out a new system heralding a new generation, forcing everyone to response or be left behind. Even if all three current console companies decided to ignore this precedent, a new company would almost certainly step in to fill the void, as the current systems became more and more outdated. If Apple could launch a system 5x more powerful than any current console and sell it (at a profit) for $250 in 2012, don't you think they would? Someone will introduce a new console before 2016; it's an inevitability considering how the gaming market works and technology becomes cheaper/simpler each year.

In short, once again the analysts have me scratching my head. I have no idea where they come up with their predictions (or non-predictions based on poor assumptions, in this case). TheSource does a much better job than these clowns.