PS3 Price Cuts: Why Sony Can’t Afford Not To

Three months ago, a funny “buzzing” noise began in the darkest corners of the internet.

Two weeks ago, it grew to a “murmur,” then a low rumble, and eventually the worn and weathered machinery of the rumor mill settled into a familiar dull roar: Sony was to make an announcement on Tuesday, March 31, and they wouldn’t say what it was about.

“Surely,” mused the masses on blogs and boards, “they must be talking of a PS3 price cut. Their market share dwindles and their software grows stale on the shelves.” But, like a slap to the astonished expression on every speculators face, Sony announced it was the PS2’s price that would get the ax – not the PS3.

There are three reasons why this was a mistake; the first and most obvious of which being the thinning third-party support.

In an article posted on Gamespot.com, as well as elsewhere, a Janco Partners analyst by the name of Mike Hickey explained that “unless Sony can substantively increase the PS3’s installed base, publishers will likely enact ‘a capital reallocation’ of resources to Nintendo’s market-leading Wii.”

Third party folks want more numbers, especially considering the world’s current financial situation. They can only sell PS3 games to people who have PS3 systems, and they want more people to sell to, which leads conveniently into the second reason Sony needs to cut the price on the PS3: they need a greater install base, which they won’t get with the current pricing.

Earlier in March, Eric Brown, EA’s CFO, spoke about the current generation of consoles having yet to reach their potential. In the article, he mentioned some pre and post price-cut figures for the PS2, noting only 21% of the PS2’s lifetime sales came in at the initial $299 price point compared to 45% at the $149 price. In terms of putting more PS3’s in the hands of more consumers, the logic is fairly simple: cut the price in half, sell twice the systems.

But what about the loss on each system sold? The most recent article Google would spit out suggests that Sony loses about $48 for every 80Gb PS3 sold, which equates to about a 12% loss. So if they’re still selling at a loss, how can they justify cutting the price at retail any more?

Consider this: there was an experiment that Valve conducted on their Steam distribution software with the game Left 4 Dead just over a month ago. For one weekend, Valve cut the price of the game by 50%, and they turned around a 3000% increase in sales. Factor in the 50% cut, and Valve still came out 1500% ahead. Valve gave their customers an incentive to buy, and buy they did. The end result was that Valve made more money and their customers were happy to save a little cash, a very literal “win/win.”

So Sony’s currently shipping the PS3 at a 12% loss, and if they cut the price by $50, their per-unit loss would be closer to 25%. On the other hand, with a wider install base, Sony would gain more third-party support, which would generate revenue in licensing, and they’d have a better opportunity to conduct the kind of software distribution pricing experiments that garnered (at least for one company) a 1500% return. Granted, not every game would yield a return that high, but one has to admit that 1500% sure seems a lot higher than the 12% per unit Sony’s losing now.

Finally, the third and most important reason skipping a PS3 price cut was a mistake: even the people who work for Sony want a price cut.

On March 20, 2009, Sony Computer Entertainment America’s Senior VP of Marketing, Peter Dille, was quoted saying, “I think it’s already well publicized that we have a very clear objective from our parent, Sony Corp., that we’re to focus on a profit objective, and with those marching orders it limits the playbook when it comes to pricing and promotion.”

This quote is important for two reasons. First, it’s a Sony VP admitting that their objective is not on increasing market share, but on turning a profit on the systems. The most incredible part of that statement lies in the realization that Sony still thinks they can turn a profit at a 12% loss per unit.

Dille himself, however, may have inadvertently given gamers a glimpse into the belly of the beast that employs him.

“…we have a very clear objective from our parent, Sony Corp., … with those marching orders, it limits the playbook …”

As Kotaku pointed out when they reported on this quote, it sounds an awful lot like Dille wants to have more options for his “playbook,” but the top brass at Sony won’t budge.

The reality is that Sony is, by all accounts, failing. As their gaming division continues to lose dollar after dollar, their stiff upper lip and determined resolve seem to slowly dissipate into the stubborn tantrum of a child holding his breath until he gets what he wants.

Please, Sony, listen to that old rumor mill. It’s millions of contributors aren’t whispering about what they “think” will happen, they’re speculating what they “want” to happen, and what they want – what “we” want – is a cheaper PS3.

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