Why Sony Won't Lower the PlayStation 3's Price
April 20, 2009 | 11:00 AM PST
by: Casey Ayers
Many people are clamoring for a price cut on the PlayStation 3, claiming it's Sony's only hope to regain some ground in this generation's platform wars. The thinking is that a lower price will mean that Sony can sell more, thereby making more money on the system overall. Generally this viewpoint would be well grounded in the fundamentals of economics. But a funny thing happened when all of the world's markets began to go haywire last year: the PS3's price did fall; you just didn't notice it.
One of the side effects of the financial crisis was a severe case of volatility in the global currency markets. People the world over flocked to the US Dollar, the currency that has unarguably been the "safe haven" in times of trouble.
In more peaceful financial times, something known as the Japanese "carry trade" was in vogue. Japan has typically had very low interest rates compared with the rest of the world, due to the fact that the country has a very savings-based culture. Clever international investors would borrow large sums of money in Yen, the Japanese currency, knowing that they would pay, for example, 2% interest. They could then trade this Yen for another currency in a country where interest rates were higher. Perhaps they found a 5% savings account rate somewhere in the US. So long as the two currencies didn't deviate too far from where they were trading when the loan was first made, this was an easy way for a shrewd investor to make the difference (roughly three percent) in interest with virtually no risk. At the end of the loan period, they could simply convert however many dollars they needed to pay off the loan back to Yen and pocket the extra interest from that US savings account as profit.
Understanding the example above is, surprisingly enough, imperative to understanding why Sony won't cut the price of the PS3. Once the world's economies began to hit the skids in the middle of last year, central banks around the world began to feverishly lower interest rates in the hopes that more people would borrow, and therefore spend, which would cause economies to once again pick up steam. But by doing this, the profit that could be made in the Japanese carry trade fell to virtually zero, because everyone else was offering interest rates that were just as low as Japan's. This caused investors to pull their money out of other countries and convert those holdings back to Yen so that they could pay off their loans. But because everyone did this at roughly the same time, this caused a high level of demand for Yen in the currency markets. In turn, the Yen was worth more against other currencies like the Dollar.
This was good news if you had a lot of Yen under your mattress and were planning a trip to America, but dreadful news if you were a Japanese company that did a significant amount of business overseas. So for every Sony product sold in the US, the company received less Yen than they normally would have when they sought to convert the money from that sale back to their own currency. This chart might help to explain what I'm getting at; generally speaking, down is bad for companies like Sony:
Chart courtesy XE.com
Let's consider the current retail price of the 80GB PlayStation 3: $400. When the system was first released in the US, on November 17, 2006, $400 would "buy" ¥47,090. At its lowest point recently against the Dollar, which was December 17, 2008, $400 would only "buy" ¥34,892. Even today, after a pretty significant stabilization, $400 is only worth ¥40,120.
Another way to think about this: based on what a customer's dollars are actually worth to Sony, they are receiving 14.8% less in real value today than they would have at launch, and at its lowest point just prior to Christmas, they were receiving an astounding 25.9% less than they would have at launch. This is why it's so important to understand how the currency markets have tied Sony's hands when it comes to product pricing outside of Japan. That 25% off figure, remember, is based on a static price of $400, and doesn't even account for the fact that Sony had to charge around $600 at launch to simply break even. So Sony is, in fact, receiving far less value in return for each PS3 sold than they did when the system was first released. Indeed, if that 25% had been kept in Dollar terms, it would have accounted for lowering the price of the PS3 to $300 just prior to Christmas. That's the problem: as far as Sony's bottom line is concerned, they did cut prices for the holiday season.
It's obvious at this point that Sony has no chance of "winning" this generation's war, at least in terms of units sold. Given that that is the case, it's prudent of them to instead focus on making as much profit as they can off of the system, regardless of how many they sell. The GameCube is a great example of this strategy. Although Nintendo came nowhere close to "winning" last generation, the GameCube still returned a significant profit for Nintendo due to its dedication to profitability and by catering to a small but lucrative audience.
Sony must adopt the same type of strategy now. There's no reason why they shouldn't promote the same kind of image for the PlayStation 3 that they do for their Bravia line of TVs or other premium products. It's okay to be the most expensive console if it's marketed as the best choice for the "discerning" customer. Because they are locked into their current pricing structure largely due to factors not under their control, the only thing to be done is to embrace it wholeheartedly. The good news is that they already have many of the pieces in place. Look at LittleBigPlanet and MGS4: games "only possible" on the PS3. Point out wondrous PSN titles like "Flower," and how that kind of quality and innovation isn't found on the 360 or Wii. It's okay to be premium, even in this economy. It's okay because they don't have a choice.
Good can come of this strategy. This is an opportunity for Sony to create that which has not existed with their previous platforms: the honest-to-goodness Sony fanboy. Fanboys are ripest for creation when they have spent a large amount of money investing in a system they believed in that has now been left by the wayside by the rest of the market. The difference between creating fanboys and simply ensuring those people never buy your products again is found in one critical element: exclusive content. It doesn't matter if these games are $15 PSN experiences or full-fledged titles. What is important is that they be unavailable to the 360 or Wii audience.
It's difficult to sell the PS3 as a premium platform using Madden. It's easier using Uncharted, LBP, MGS4, Flower, Pixeljunk and others. Sony's marketing emphasis must continue to be on these titles. Indeed, their chief goal now should be to sell software, not systems. The systems will continue to sell themselves if the content is good, but selling more games to customers that already have the system can make the most money. After all, games can sell for $60 a pop when, from a materials standpoint, they cost just a few dollars to produce. Each PS3 is selling roughly at or perhaps even below its production cost depending on where it's being sold.
Sony needs more games like Flower to help the PS3 carve out its special niche.
Sony must focus on nurturing this new "core" base of users. In doing so, they might find the largest fanboy contingent of them all willing to join their cause. Nintendo has left millions of their most trusty and hardened fans hanging out to dry, with little sign of gaming sustenance coming their way. It might not take much more to pick off some of this group, and it would be well worth Sony's time to do so. There was a time when a game like Flower would have been expected to land on a Nintendo system, but that time is no more.
Sony's new "pub fund," which guarantees that developers at least recoup their development costs on PSN projects, is an outstanding step in the right direction. It will ensure that this same type of innovative experience isn't a one-time fluke, because it provides the financial patronage necessary for developers to feel free to unleash their creativity. Sony can still find significant success with the PS3, even if it looks a little different than they might have imagined. But to do so, they must bury any remaining expectations of achieving the same sort of things they did with the PS2. They must embrace the premium product slot and embrace being a niche player. In doing so, their gaming division will emerge as a smaller but much stronger business unit. And in today's environment, that is no small feat.