Sony’s latest annual filing with the US Securities and Exchange Commission contains some pretty grim reading: since its launch in 2006, the PS3 has apparently lost the company a whopping $3.3bn. This is apparently due to ‘strategic pricing’ – a generous euphemism for flogging the console on the cheap in a desperate bid to claw back market share off rival Microsoft, which launched its Xbox 360 console a full year earlier.
What’s more, this isn’t just a bit of short-term pain for long-term gain. Sony is now saying that it’s going to have a job on its hands to earn back its investment – and in the meantime, it’s going to do some real damage to the company’s bottom line. ‘Even if the platform is ultimately successful, it may take longer than expected to recoup the investment, resulting in a negative impact on Sony's profitability,’ the group rather shamefacedly admitted.
There’s no mystery as to why this is happening: Sony started selling the product for less than it costs to make – not least because it took the decision to include the very expensive Blu-Ray DVD player rather than a cheaper alternative (which to be fair has helped it beat Toshiba’s HD-DVD format). The gamble was obviously that by winning enough market share it would able to recoup its costs by selling more games and Blu-Ray DVDs.
The problem is that while Sony and Microsoft were slugging it out, Nintendo sneaked up behind and battered both of them. The huge success of the Wii (which is still pretty hard to get hold of, a year after release) has left both of them in the shade – and now Sony has lost its dominant market position, it will find it harder to make so much money from exclusive games titles. And the Blu-Ray profits will have to be shared with its various partners.
It’s not all bad news for Sony. Hardware and software sales for the PS3 (and its PSP handheld) both enjoyed big increases last year. And as expected, production costs are falling, so it’s not selling the PS3 at a loss any more. Moreover, our gamer chums tell us that the console is finally starting to get some decent exclusive games. And at least Microsoft is losing pots of cash too (albeit it’s probably got deeper pockets – this loss is almost equivalent to Sony’s net income last year).
But it does show the dangers of strategic pricing (see our recent pricing feature here). At the moment, Nintendo is the one laughing all the way to the bank...