GM Paper 2 2011-12 Sony Case Study

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Case 10

PS3: Sony on the Run1

Gun s ho ts and s ir e n s f ill t h e air around hi m . S p ee ding t hrough c i t y st r ee ts , S ony CEO S ir

Howard S t ring e r i s on t h e run . S ir S t ring e r hoo k s a l e ft ; t h e c op s kee p up t h e f ran t i c pa ce and

ar e on hi s t ai l . “Can’ t s e para t e f ro m t h e s e #@*%ing!!! bobbi e s ,” S ir S t ring e r grun t e d . In t h e

h e a t o f t h e m o m e n t , S ir S t ring e r ’ s m ind wand e r s on t o t h e r ece n t t ur m oil a t S ony . Hi s st ra t e gy o f

c o st - c u tt ing and s e lling o f non- c or e a ss e ts ha s brough t s hor t - t e r m gain s t o t h e in c o m e st a t e m e n t .

How e v e r , t hi s ha s produ ce d li tt l e c on f id e n ce t o a divid e d boardroo m . As t h e s i t ua t ion b ec o m e s

m or e dra st i c s o do e s S ir S t ring e r ’ s a c t ion s . Th e c ha s e e s c ala t e s wi t h S ir S pring e r w e aving

dang e rou s ly in and ou t o f t ra ff i c . As S ir S t ring e r ’ s doo m e d f a t e b e gin s t o m a t e rializ e , h e r e f l ec ts

ov e r t h e r ece n t c on t e n t iou s S ony boardroo m m ee t ing t ha t f ini s h e d m o m e n ts b e f or e t h e c ha s e

b e gan .

Sony in the Early Years

It all began on May 7, 1946, in Tokyo right after the war. Tokyo Tsushin Kogyo (Totsuko), co-

founded by Ibuka and Morita, was officially established. In Ibuka’s prospectus for the new

company he wrote, that the purpose of incorporation was “to establish of an ideal factory that

stresses a spirit of freedom and open-mindedness, and where engineers with sincere motivation

1 This case was prepared by Deanna Chan, Gavin Simon, and Kenji Yonemoto of the University of

Hawaii at Manoa under the supervision of Professor Masaaki Kotabe for class discussion rather than to

illustrate either effective or ineffective management of a situation described (2008).



can exercise their technological skills to the highest level,” and “to reconstruct Japan and to

elevate the nation's culture through dynamic technological and manufacturing activities.” From

the very beginning the company that was to become Sony Corporation set out to change

everyday life.

Totsuko first went to work fixing radios after the war. People yearned for news around

the world and demand grew. Ibuka also wanted to produce products for everyday life. Products

that would help rebuild Japan after the war. The company with little more than the creativity,

energy, and ambition of its employees set out to create new markets. The company in the early

days was made up of young, passionate employees that worked hard and late into the night, often

getting locked in the department store in which the company workshop was located.

Totsuko next developed an electric rice cooker that unfortunately made mostly

undercooked or overcooked rice. It was the first of many failures for the company. Totsuko’s

next popular product was an electrically heated cushion. The cushion sold well during the time

after the war where conveniences were scarce despite the fact it had no thermostat or fire

retardant. Even though a cushion Ibuka gave as a gift burnt his friend’s pants and caught blankets

on fire, the cushions earned much needed revenue for the young company. With these early

failures, the core ideology of Sony was established. The founders of Sony believed they were

creating revolutionary products. Failures may happen along the way, but innovation was key to

advancement. Not all products would be a success, but it was more important to push and

challenge standards.

When at the forefront of creation, not everything is a success. The founders of Sony

understood this and were willing to take the gamble. Central to Sony’s success throughout its

history is its ability to innovate and push the bar of acceptance toward a new standard.



Sometimes this led to non-acceptance such as the Betamax system in the early 1980s, but more

often this led to world dominance such as the compact cassette in the late 1960s, the Walkman in

1979, 3.5 inch floppy disk in 1983, and the launch of the first PlayStation in 1994. This was the

foundation of Sony, however, in recent times Sony’s core has dramatically shifted.

Modern Sony

The founders of Sony had a vision that the company would one day manufacture both hardware

and software (content for products) and realize synergies on both sides. Sony believed that high

quality content would greatly help and promote Sony’s diverse electronics. In 1968 Sony came

closer to this vision when it formed a joint venture with CBS, CBS/Sony Records Inc. By the end

of the 1980s, rich from its electronics that enjoyed huge popularity and success, Sony acquired

CBS records and Columbia Pictures Entertainment ($3.4 billion purchase). Through the 1990s

Sony’s huge investments in film and music began to have an impact on the company. Columbia

TriStar’s instability is evidenced by high top-executive turnover. However, these acquisitions led

to the next big step for Sony, gaming. Competencies combined when Sony Computer

Entertainment Inc. was established to develop, market, and license video game consoles and

game titles. The PlayStation combined hardware knowledge of Sony Corporation and the

software knowledge of Sony Music Entertainment.

Although Sony began setting up overseas manufacturing subsidiaries in the 1970s, during

the 1990s the company began to be increasingly reliant on outsourcing. This was in large part

due to cost pressures from manufacturers of low-priced products in South Korea, China and

Taiwan. Not only was Sony forced to increase outsourcing, but also began spreading R&D

outside of Japan at a time when consumers began to put an increasing emphasis on quality due to



the higher price relative to competitors. Sony found itself facing a string of problems unlike any

the company had faced before. In 2006, 9.6 million faulty batteries were recalled costing Sony

$436 million. With the advent of the iPod, Sony also lost its leadership role in portable music

players. Sony was caught in a lose-lose situation: it needed to increase outsourcing to stay cost-

competitive, but more outsourcing led to less quality control and innovation.

By 2002, 62% of Sony’s profits came from PlayStation 2 console and game software

sales alone. As Sony’s other divisions floundered, the PlayStation line kept the company alive.

As the PlayStation 2 became the centerpiece of the company and the image of Sony success, a

true and weaker image of Sony Corporation was hidden in the background. Sony had huge

investments tied up in unprofitable film and music projects, was heavily reliant on outsourcing,

lost much of its innovative capabilities, and clung to the PlayStation 2 as its only life preserver in

the rough and competitive industry environment. With the upcoming launch of PlayStation 3,

hopes for its dominance were high. Indeed it seemed to Sony as an imperative.

PlayStation 1 and 2

In 1988, Sony formed a partnership with Nintendo to create a Super Disk. The Super Disk would

be a CD-ROM attachment for Nintendo’s Super NES gaming platform. The Super Disk format

combined compressed audio, visual, and computer data that had been created in partnership with

Philips. Sony and Nintendo’s agreement gave Sony sole licensing power. Sony also retained the

rights to the audio chip, which was a crucial component of the Super NES system. The

PlayStation was officially announced at the 1991 Consumer Electronics Show. The name came

from developer Ken Kutaragi’s reasoning that if computers used for work were called “work

stations” then similar technology used for play should be a “play station”. The PlayStation would



have a CD-ROM drive to play Sony disks as well as a port to play Super NES cartridges. A day

after this announcement Nintendo announced it would work on the CD-ROM drive with Philips

instead. Nintendo was concerned that Sony might eventually use its R&D department, licensing

power, and audio chip to take over Nintendo’s business. Sony’s management was furious at

Nintendo.

Rather than abandoning the PlayStation, it was redesigned to be a freestanding platform

which played games on compact disks. The 32 bit compact disk format had the advantages of

being cheaper to make and store more information. Adding additional disks allowed game

designers and programmers the freedom to build more complex worlds. Sony’s goal was to beat

Nintendo at its own game. The revamped PlayStation was released in 1994. The PlayStation

broadened the gaming market from children and teenagers to include young adults. PlayStation

has sold over 50 million units since its release.

The PlayStation 2 (PS2), released in 2,000, quickly became the fastest selling console in

history. The PS2 played DVDs which, like the PS1, enabled better graphics and allowed owners

to view movies on DVD. The success of the PS1 and PS2 gave Sony a dominant market share

position in the video game market and helped carry Sony Corporation through its recent past.

In a m u ff l e d br e a t h , “Bloody wan ke r s , wha t a m I no t g e tt ing?”H e s ha ke s t ha t t hough t away . H e

r e f o c u s e s , “ i t ’ s all riding on t h e P S 3 .” I t i s hi s and S ony’ s only hop e f or a do m inan t f u t ur e . At

on e t i m e t h e P S 2 brough t in m or e t han hal f o f S ony’ s pro f i t and c arri e d t h e c o m pany t hrough

s o m e o f i ts hard e st t i m e s . Th e c o m bina t ion o f t h e Blu-ray t ec hnology wi t h t h e P S 3 l e av e s S ony

wi t h all o f t h e ir e gg s in on e ba s ke t . “ Da m n , our bli m y P S 3 m ar ke t ing st ra t e gy ,” S ir S t ring e r

la m e n ts in hi s h e ad . Hi s in t e rnal ran t c on t inu e s , “ m i s m anag e m e n t o f ou ts our c ing , lo ss o f pri ce

c on t rol , and la ck o f ini m i t abili t y hav e %%@@ up our po s i t ioning .”



PlayStation 3

The PlayStation 3 (PS3) is a graphical powerhouse utilizing a Nvidia graphics chip and cutting-

edge cell processor. The PS3 can also play high definition Blu-ray movies. The PS3 was

envisioned as an “entertainment hub” for the whole family. Multiple added features made the

PS3 more expensive than the Xbox 360. A 60GB PS3 currently sells for $200 more than a

premium Xbox 360. The PS3 was also released much later than the Xbox360 because of a delay

that stemmed from outsourcing coordination. Furthermore, the online media and commerce are

not as developed as the Xbox 360. For these reasons, PS3’s marketability has been seriously

injured and is not Sony’s panacea as expected.

The Video Game Industry

The video game industry was once for hobbyists, children, and computer nerds. It is now a 27.5

billion dollar industry. Once a niche market, the industry has grown rapidly. The video game

industry now reaches a broader market than ever before. In 2001, sales from video games

surpassed the movie industry’s annual box office earnings by $1 billion. This highly profitable

industry is also highly concentrated. Microsoft, Sony, Nintendo, and Electronic Arts make up

65% of new product sales. Furthermore, the top 10 vendors make up 80% of new product sales.

These key players continue to invest large amounts of capital in R&D to develop a next

generation console. Because each new generation redefines the industry, the industry is highly

cyclical with no entrenched leaders. Nintendo’s console dominated until the PlayStation was

released. Sony’s PlayStation was the clear industry leader until Nintendo’s Wii was released. If a

next generation console is revolutionary enough, it can leap ahead of its competitors.



Nintendo Wii

After losing to the PlayStation, Nintendo appeared to be out of the race. However, in 2006,

Nintendo released the Wii. In contrast to the Xbox360 and the PS3, the Wii has attracted a whole

new market of gamers. The Wii is the cheapest, least powerful contender in the console wars.

While the lack of gaming depth has deterred some serious gamers, with the Wii’s simplicity and

innovation it has attracted both young children and grandparents alike. This has made the Wii the

clearly dominant seller among the current generation consoles selling 27.42 million units

worldwide.

The Wii has been able to seize the holy-grail of the gaming industry, a broad target

market. While the typical console adoption cycle initiates with harder-core gamers and spreads to

more mainstream gamers, with the latest generation of consoles this trend has changed. The

market has been split recently with the Wii attracting mainstream gamers and a broader market

from the outset and the PS3 and Xbox360 in fierce competition over the hard-core gamers. As

the Wii finds itself alone dominating a large and open market, the PS3 and Xbox360 are really

battling in a separate segment. Case Exhibit 10-1 shows the comparison among the PS3, the

Xbox360, and the Wii.

Case Exhibit 10-1: Game Console Comparison

PS3 Xbox360 Wii

Price $500-$600 $300 $250

Units Sold to Date 13.26 Million 19.13 Million 27.42 Million



(June 2008)

Units Sold to 2007 3.25 Million 9.15 Million 7.38 Million

Customer Market Hard-Core Gamer Hard-Core Gamer Mainstream Gamer

CPU3.2-GHz Xenon

Broadway

PowerPC3.2-GHz Cell

Memory 20-60 Gb Optional-20 Gb 512 Mb

DVD media format Dual-layer DVD Blu-

rayDVD

Case Exhibit 10-2 plots total units sales for each console starting from each console’s launch.

Note that because of PS3’s delayed launching, the plot for PS3 does not extend out as far as the

Xbox360. Case Exhibit 10-1 clearly illustrates the similar trend in sales that the PS3 and

Xbox360 experience by the similar trajectory of the plots. The Wii, however, has sold

dramatically better and experiences a completely different sales pattern, further reinforcing that

the Wii sells in a separate, wide open market.

Case Exhibit 10-2



Source: VG Chartz 2008.

Sony PS3 Vs. Microsoft Xbox360

While Microsoft’s Xbox struggled, losing $4 billion in four years, the launch of the Xbox360,

turned the table. The Xbox 360 was announced several days before Sony announced the PS3.

The Xbox360 released in November 2005, one year before the PS3. Because of the direct

competition of the two consoles, this gave the Xbox360 a clear advantage. The lower price of the

Xbox360 has also helped its sales. The Xbox360 sold 19 million units worldwide, 10 million of

those units in the United States. However, while the earlier introduction and lower price of the

Xbox360 helped its sales initially, the PS3 and the Xbox360 are very similar as is shown in Case

Exhibit 10-1. Both consoles are highly powerful processing machines similar to personal

computers, which can serve as multi-media machines, playing both video, and music.

The PS3 and the Xbox360 are both heavily reliant on third party support. Looking at a

recent week’s sales, most of the top video games sold for each console are offered on the



competitor’s console. During the first week of June 2008, Dragon Ball Z, Burst Limit and Lego

Indiana Jones, and The Original Adventures were top sellers and available on both the PS3 and

the Xbox360. This lack of software differentiation between the two consoles increases the

already extremely intense competition. Again this fierce competition is illustrated in Case

Exhibit 10-2 with the close sales figures of the PS3 and the Xbox360. It is clear from the graph

that as yet there is no clear winner between the two and there is a constant struggle to gain or

maintain the lead.

S ir S t ring e r ’ s a tt e n t ion jol ts ba ck t o t h e pur s ui t . H e pull s ou t a qui ck U- t urn and f ir e s hi s m a c -10

wildly in t o t h e f l ee t o f poli ce in ho t pur s ui t . Thi s do e s li tt l e t o st op t h e m bu t par t ly ou t o f ang e r

and par t ly ou t o f f e ar S t ring e r pull s t h e s a m e m ov e again . Ano t h e r qui ck U- t urn , only t hi s t i m e

h e a cc id e n t ally ha s lin e d hi m s e l f up f or a h e ad-on c olli s ion wi t h a s p ee ding c op c ar . H e r e t urn s

t o hi s in t e rnal m onologu e , “Wha t c ould I hav e don e di ff e r e n t ly t o avoid t hi s t rav e st y?”

PS3 Marketing Strategy

Prior to its release, the Sony’s PS3 was the predicted favorite of the next generation of video

game consoles. This was due to the aforementioned dominance of the PS2 and the superior

technological capabilities of the PS3. However, Sony’s befuddled marketing strategy of the PS3

has caused a slow jump out of the gates. Issues with outsourcing, loss of pricing control, lack of

differentiation, and misguided advertising have manifested themselves into poor positioning of

the PS3. In order for the PS3 and Sony to succeed in the future a major adjustment of their

marketing strategy is vital.



Outsourcing

The PS3’s excessive outsourcing strategy has been a major hindrance to its marketing strategy

via price and availability. Due to the mismanagement of the PS3 supply chain, Sony abandoned

its ability of price control and capability to meet delivery targets at the PS3 release dates.

Sony is not a typical Japanese firm. Throughout the majority of its history the company has

heavily used outsourcing as tool to combat high fixed costs, high risks, and distribution issues

with in-house production. However, Sony’s outsourcing benefits have also come with a steep

cost. Its outsourcing strategy resulted in a lack of product innovation in the early 2000s that

nearly caused the company to go out of business. As discussed earlier, in 2006 Sony had a major

recall of laptop batteries that was extremely costly and largely a result of loss of quality control

due to outsourcing. The PS3 is no stranger to the short-comings of outsourcing. The first mover

strategy brought the PS2 great success in achieving its dominant market share. Initially Sony

intended on using the same strategy for the PS3. However, issues in its outsourcing part of the

supply-chain inhibited this strategy and even led to delays of the PS3 behind all other next

generation consoles. The PS2 was released nearly a year ahead of the XBOX. The PS3 lagged its

release date by only by a few months, but more importantly it lost the first mover advantage.

Excessive outsourcing contributed to creating another hindrance for Sony and the PS3. Due to

delays in the production of blue laser diodes, the PS3’s release was delayed 6 months, with only

100,000 available for release in Japan, and 400,000 units for the American release. Sony’s

limited release is impeding its attempt to achieve the dominant 70% market share it once held

with the PS and PS2. “If I we're asked whether Sony's quality of manufacturing has declined, I

would have to say 'yes,'" Mr. Kutaragi, the creator of PlayStation series including PS3, told

reporters.



Pricing

At $500-600 in the U.S. and ¥50,000-60,000 (or $425-510) in Japan, the PS3’s pricing has

targeted the dedicated hard-core gamer. The PS3 high pricing has resulted in incorrect

positioning of the product. This error in elevated pricing was caused by several factors. First,

Sony completely misjudged the market’s price range. The company believed the average

consumer would be willing to pay top dollar for a complete entertainment hub. Also, the

inclusion of the Blu-ray technology greatly increased Sony’s production cost. And last but not

least, heavy outsourcing allowed Sony to lose price controls of its supply chain. Outsourcing was

a major factor in Sony to lose its ability to control costing. The combination of the loss of price

control and the inclusion of Blu-ray technology priced the PS3 at release beyond its intended

target market.

Promotion

Sony originally planned to market the PS3 as a home entertainment centre. Sony hoped the

combination of its gaming capabilities, large hard drive, Blu-ray technology and broadband

access would appeal to a broader target market. “Our goal is to definitely widen our target base

and not be so niche,” said Kim Nguyen, PlayStation 3 manager. Contrasting to its publicly stated

strategy, the PS3 marketing strategy has positioned itself toward the hard-core gamer.

The disturbing crying infant advertisement (see Case Exhibit 10-3) was targeted to the

hard-core gamer if anyone at all. Sometimes the PS3 is marketed as a subsidized Blu-ray player,

other times it is a home super computer, or more recently it is a video game console. Consumers



have yet to be a given a consistent marketing campaign explaining the products main appeal and

value.

Case Exhibit 10-3

The PS3 advertisement at release is described and pictured below:

An animated baby doll sits in a white room looking at a small black box. It

coos with delight. It laughs with an adult’s demented cackle. Tears flow

down its cheeks—and back up again. And just for an instant, an image

from the PS3 game Resistance: Fall of Man flashes in its eyes.

Sony’s jumbled promotional strategy has only compounded the issue of a lack of

differentiation between the PS3 and their direct competitor Microsoft’s XBOX 360. The major

difference between the two competitors is a lower price for the XBOX 360 and more powerful

hardware and Blu-ray capabilities for the PS3. Consumers, unaware of any differentiation, will

more likely purchase the less expensive product.

Positioning



The PS3 may have the most sophisticated technology and the broadest entertainment capabilities,

however Sony’s positioning of its key strategic product leaves something to be desired. The

PS3’s positioning is described effectively by Yoichi Wada, President of Square Enix, a

prominent video game developer, "Sony first unveiled the PS3 as a mighty home electronics

product. Then, after some badgering from game companies, it shifted the position of the console

closer to a game machine," he commented. "(The future of the PS3) would be tough if its

marketing strategy is not straightened up."

Unabl e t o dodg e t h e on c o m ing poli ce c ar , S ir S t ring e r drop s t h e p e dal t o t h e m e t al . Viol e n t ly

a cce l e ra t ing in t o t h e f a st approa c hing s quad c ar , t h e i m pa c t t hru sts hi s body t hrough t h e

wind s hi e ld on t o t h e hood o f t h e c op c ar , wh e r e S ir S t ring e r i s pro m p t ly bu st e d by poli ce wi t h

gun s drawn . Furiou s , S ir S t ring e r h e av e s hi s P S 3 c on t roll e r s ha tt e ring t h e S ony Bravia f la t

s c r ee n in hi s o ff i ce . U s ually a st r e ss r e li e v e r , Grand Th e ft Au t o 4 (GTA4) ha s l e ft t h e S ony CEO

e v e n m or e livid t han b e f or e h e b e gan t h e ga m e .

GM Paper 2 2011-12 Sony Case Study

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