Article: Sony's Slow-Motion PS3 Price Cuts (SNE)

[Dodece]

Sales are about a number of things stock liquidation, customer loyalty, increased traffic, and offsetting sales. Good prices on some products induce consumers to shop at your site, to continue shopping, and to return at a later time. Sales are good for business, but do not necessarily point to anything more relevant then a retailer looking to increase their profits.

That said these prices may also point to something else entirely. Sony may once again have issues with surplus supply. Which is actually to be expected. They were increasing production before the economic downturn, and their sales did not increase in the holiday months, or even maintain the previous years levels. Which means they have more units then there is a demand for from retailers.

Perhaps these retailers are able to make these bargains, because Sony was forced to give them better deals in order to maintain production levels. Sony may very well have lost capital in these deals, but if they did not acquiesce the stockpile would once again quickly lock up liquidity. Remember one million unsold units at retail price could lock up as much as half a billion in liquidity.

This I am finding highly interesting, because Sony has yet to announce a decrease in production of the console. While it is true this could force a price reduction it is equally true its a true disaster in the making. I am finding it hard to gauge how much Sony is willing to lose on the PS3 in this economy. The author is probably wrong it isn't stupid it is probably the only choice Sony has available.

Sony sells at a loss to retailers. Even if they do not sell the consoles that is no sweat off their corporate back. They avoid a general price cut, and they regain liquidity which will allow them to maintain production. In the end making the hardware more cost effective. The only downside is that this unbalanced pricing may in the end result in ever decreasing sales for retailers that are not getting the better pricing, and in the end they may retaliate by decreasing their support for the platform.

Short term this could be a good strategy. Long term however it can be a disaster in the making. Basically it gives Sony time to put their house in order. Logically they would need to decrease production to clear out the channel. Right now channel management is critical for Sony. Weak demand must see weak supply. Without that Sony could be forced into a corner again as they were in the first year, and investors are not going to forgive two billion dollars more in losses.