Forbes: How Sony Should Respond to a Disruptive Attack (PS3 vs. Wii)

[Bodhesatva]

Sullla said:

Great article, and a nice find TheSource. I wanted to comment on a point raised by Bodhesatva (comparing Sony's business to a luxury model automobile company) and steven787 above. The problem with this comparison is that the business model for both Sony and Microsoft is predicated upon being the market leader; the PS3 and 360 are both sold at an initial loss and expect to make back that loss with software licensing. This model only works when their product becomes a runaway success, in the vein of the PS2; any other scenario just sees both companies take massive losses. Comparing these companies to Ferraris or Alienware PCs doesn't make sense, because both of those high-end businesses are specifically catered to service a niche market. That's why your Alienware PC costs $5000 - they have to turn a profit on the very small number of units being moved. Now the PS3 could be reinvented as a niche product, in theory at least, but that would require raising the price to something like $800 and accepting drastically smaller sales. Few units moved, with a small profit as the payoff. Can you honestly see that happening? Everything about the PS3 (and 360, to a lesser extent) was design upon the assumption that it would be a mass-market product. You can't suddenly reinvent your product this late in the design cycle. That's why these comparisons simply don't work.

I also found that quote from EA to be extremely interesting. Here's the line again, for repeated emphasis:

“We’ve become a niche,” Riccitiello told the Times. “Eighty, 90 percent of the resources that are put into play by us and most of our competition are in building sequels of games that super-serve teenage boys with fast thumbs.”

EA's revenues have been completely stagnant for the past four years; they've essentially seen zero revenue growth while their costs (especially R&D) have steadily been rising. Meanwhile, the company continues to churn out sequel after sequel, appealing to the same core demographic of fans. I think that EA's situation reflects that of the gaming industry in microcosm. Core gamers might be happy, but there's not much growth taking place outside of them, and innovation has been in serious decline for some time now. It reminds me in a way of the flight simulator genre that was so prevalent on the PC in the 1980s; as the games grew more and more complicated, they continued to cater to a dwindling niche audience, until the market for such games collapsed entirely. That's why the Wii (and DS) have been so good for the industry as a whole; NorthStar may hate the Wii, but there are 10 new or relapsed gamers coming back into the fold for every disgruntled gamer like him. I expect there will be many young males who seem angry that an industry that has done nothing but cater to them is realizing that they are only a small minority of the potential market.

Perhaps what's most significant is that EA (and other third parties) are well aware of these facts, and changing the direction of their companies to match them. Food for thought.

Rol made this point earlier, Sullla, and I actually have made this point as well, as I'm sure you're aware, in previous posts. I'm not suggesting that MS and Sony's current business model is appropriate, although I can see that's what I implied. Instead, what I'm suggesting is that they could continue to go more and more upscale, and make a profit off the technophile market, rather than try to be the everyman console. This would definitely require Sony to stop using a loss-leading strategy in the market. Nintendo managed to make healthy profits off a comparatively small user base for a long time, and I can imagine Sony doing the same, if they change their marketing strategy to suit.

To phrase this in a (hopefully) more clear fashion: instead attempting to copy or innovate in order to compete with Nintendo as the mass market console, Sony could accept the position of technophile niche, and carve out a smaller but still profitable space for themselves. 

Regardless, excellent post as always, Sullla.