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Analysts: PS3 Price Cut Puts Nintendo On The Ropes
by Leigh Alexander
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August 19, 2009
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After facing months of mounting price pressure, Sony at last knocked $100 off the price of its hardware platform with the unveiling of the new PlayStation 3 Slim. As the company strives to regain ground in the console war -- alongside an uncertain outlook for the industry's holiday season -- what ramifications will the move have on the hardware market?
EEDAR's Jesse Divnich says Sony is "finally" positioned much more competitively in the hardware space. "In terms of value, the PlayStation 3 is a superior hardware product in comparison to the Xbox 360," he points out.
But Divnich says that with so many other factors at play besides equipment comparisons, there won't be a sudden miracle shift in Sony's favor. "Nevertheless, the PlayStation 3 price cut will act as a positive catalyst that will close the sales gap between the PlayStation 3 and Xbox 360," he predicts.
Install Base Boost
Wedbush Morgan analyst Michael Pachter tells Gamasutra the price cut can break the PS3's depressed trend for the year, but it'll have to do more than that. "Last year, the PS3 averaged around 240,000 per month in the January – October period, while this year, it’s averaging closer to 135,000 for the last several months," Pachter points out.
"There is no question that a 25 percent price cut will drive sales way above this 135,000 level, but the acid test is whether sales rise above the 240,000 level," he says. "I think it’s likely that sales go to 240,000, which will look like a 60 percent gain, but am not as sure that sales will go higher than that until holiday."
Kaufman Bros. Todd Mitchell expects a modest boost for PS3 sales ahead of the holiday season, as Sony is likely to engage in "aggressive promotions" to flush inventory of the current model PS3. This could raise sales to around 140,000 units per month in early fall, he suggests.
How Much Will Software Benefit?
Mitchell asserts it's third-party publishers who stand to benefit most from Sony's move. This is particularly true for core titles like Madden and FIFA's current-year editions, and the major holiday release of Modern Warfare 2 "could see an even larger benefit," thanks to its Christmas timing.
EEDAR disagrees, however, and doesn't think price cuts will trigger significant software sales increases for the holiday -- certainly not enough to meaningfully impact the industry's present negative growth trend.
"Even if the price cuts from both systems increase hardware sales by over 1 million units through the next six months, that would likely add an additional $200 million to the software bucket and would only increase 2009 sales by about 2 percent over current trend; hardly a significant boost," says Divnich. "The true benefit to software sales from a hardware price cut are typically realized in the long-term, [not] over the short-term."
What Will Sony's Rivals Do Next?
Pachter says Microsoft will take a wait-and-see approach. "Last year, they sold around the same 240,000 per month, so if they see sales drop to 150,000 or below, I think that they will likely respond with a $50 cut in mid-November," he predicts. "If they continue to sell more than 200,000, they will probably wait till early next year, maybe even until E3."
On the other hand, EEDAR's Divnich expects Microsoft to announce very soon -- possibly "in the next week," that it will take the widely-rumored step of eliminating the $299 Xbox 360 Pro SKU in favor of offering the Elite SKU for the same price. This, however, is a "pseudo price drop" in Divnich's view: "It is no different from Lexus introducing their 2010 models at the 2009 prices and clearing out their 2009 inventories," he says.
A Threat To Wii?
Analysts universally agree that Nintendo is the one most at risk. Mitchell says the company is "struggling to keep the Wii relevant," and Pachter expects the pressure to increase on the company now that the two next-gen consoles, at $299, represent a better consumer value than the Wii -- which is now only $50 less.
"I think that they may see sales suffer, and certainly will see sales down year-over-year," says Pachter. "So we have to see if they cut, unbundle and cut, or rebundle (with Wii Sports Resort plus Wii Motion Plus). They’re hard to figure out."
"While the target audience for the two platforms varies greatly, some consumers will face a tough decision to purchase the Wii with outdated processing power or the PlayStation 3 with a built-in Blu-Ray player," says Divnich. "However, the market size of those actually debating between a PlayStation 3 and a Nintendo Wii is relatively small."
New Industry Standards?
Finally, EEDAR's Divnich thinks this price cut has wider-ranging implications for the way consoles will compete going forward, calling $299 the "new standard" for next-gen console pricing for at least the next year.
"Both Sony and Microsoft are acting like 12th round boxers, so exhausted (in this case, financially exhausted) over the three year battle for next-generation supremacy that neither are likely to deviate from the $299 price point for some time," he says. "It is possible that both consoles may reach a $249 price point 12 months from now, but that will likely be the lowest prices will get in the next two years."
With price parity largely achieved among the console contenders, the focus for each platform-holder will naturally become differentiating from one another and creating additional value adds through services, Divnich says.
"Both will continue to increase the size of their hard-drives and likely add additional hardware and software features to appeal to consumers," says Divnich -- for example, one possibility is for the platform-holders to include their respective next-stage motion control schemes as standard pack-ins for hardware sold beginning in 2011.
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Moreover, in terms of 'hardcore' audience, both Microsoft and Sony have started to point their efforts towards different consumers via their exclusives (and downloadable titles such as Shadow Complex/Shatter). While Microsoft tends to cater shooters, the Playstation perspective is quite interesting due to its variety and innovative new IP along with its Play.Create.Share concept. Third-party software feels just like a middle ground between the consoles.
Whatever happens for the next 16 months is going to be extremely interesting in terms of both console/software sales.
I truly agree with Pachter's prediction that the PS3 wille eventually come in second place by the end of this generation (if there is another generation). The failure rate in the Xbox (around 54%) is really hurting the 360s loyalty. A considerable amount of 360 owners, will surely see on the PS3 a more reliable console.
And if Sony plans to appeal to casual gamers with their upcoming PSWand, then it needs to priced reasonably to convince casual gamers to invest in a PS3. If it's priced up to $100, then the PS3 would pretty much be back at square one with a total price of $399. And of course, developers would need to be serious about supporting the peripheral, or else it will end up like the PS2 EyeToy.
X360 will need a price cut. The Wii, they might just do lower sales this year (around what everyone else has been doing the whole lifecycle) before dropping it next year. Best case for the consumer I see a bundle in it's future.
Companies needs to realistically price their games from day one. Recently WET went down to $49 from $59...smart.
@ Adam: The failure rates hit MS hard last year. Now they're not an issue. With the Arcade being the cheapest console on the market and Elite dropping to $299 with a bigger hard drive than PS3's $299 model, I think they'll be fine this holiday.
Nintendo will likely keep their price the same until later next year. My money's on a Wii Sports Resort/MotionPlus bundle this holiday.
Totally agreed. And I personally know many people who have comfortable income, yet are not comfortable with the $60 price tag and opt to wait for an opportunity to buy them cheaper or use Gamefly.
Personally, I've always found standardized debut prices to be BS. Just about all games for the PS3/X360 debut at $60 while just about all Wii games debut $10 cheaper. But then once upon a time that same $49.99 price tag was the standard for PS2 but you'd be hard pressed to find a high-profile release less than $10 cheaper these days. Persona 4 and Yakuza 2 come to mind which debuted at <$40. You cannot tell me those game wouldn't have been $49.99 in the PS2's prime.
I want to see more competitive pricing right out of the gate. What Microsoft did with Banjo Kazooie: Nuts and Bolt immediately comes to mind.
The new console certainly looks "sexier". No one likes a behemouth of a console in their entertainment system's housing. Something slimmer and less space taking is going to be something that will be attractive to a lot of people.
The price cut doesn't hurt either. Now that blu ray players are becoming a bit more common in the marketplace, the PS3 is no longer the only blu ray player on the block and has to compete with those other players. It'll be interesting to see if Sony delivers some sort of bundling during the holiday season, a season many retailers are extremely nervous about.
Anyway, kudos to Sony and for getting back into the game so to speak and for not being so arrogant to not do anything at all and maintain it's stagnant course. Is this the start of a Sony comeback?
In terms of perceived value I do no think that both Wolfenstein and Modern Warfare 2 are on the same league. If Wolfenstein had a starting price of $50-$45, it could sell more copies in the near feature, than by letting the price drop. Thus, resulting in better short-term renevue for the publisher.
Publishers that really take advantage on the mounting pressure for price, will surely benefit themselves. The big problem is... how much do you charge, and when do you charge that "special" price?
I feel the same as Ben about the Wii and its new peripheral being the big winner this holiday. It's still perceived as family friendly console, something the PS3 and 360 don't come across as being.
I was thinking along the same lines Sergio about Sony no longer being the only Blu-ray player option. I know of one person that uses their PS3 as a player, but including my self and my other friends, it was either the brand that matched the TV, or what was on sale at Costco.
I've never been a huge fan of xbox despite its amazing catalog. As previously mentioned, most people don't know that fact and there are still tons of excellent PS3 titles that can keep most casual AND hardcore gamers busy.
I disregard serious comparisons between the Wii and either PS3/XBOX because although we can easily put them in the same category, the audience and approach is miles apart. The same person who will buy a wii is not the same person who will opt for PS3 and XBOX. The difference in demographics is huge, so price point are not necessarily going to matter if we consider these devices as purely gaming consoles. But because PS3 has a relative physical media player, it is not surprising (and not news to you I'm sure) that some people are going to opt for the console because of its dual purpose. And they would do this even if the price was $50 or $100 apart. Most people would prefer a single high quality component than to deal with buying a console And a physical media player, the extra cables and connectivity that concerns it. But again, this segment who is torn between the Wii and the PS3 is too small to really make a difference.
So really, its up to MS to up the ante, and I don't think Natal will be the answer. So what are they thinking? I'm sure that a new console design is in the works (xbox 720) in which case the 360 will go down the chain, and much like the ps2, will have a much smaller form factor (but not necessarily a lesser failure rate). It would be worthwhile for MS to learn from PS2's lifecycle and be able to capitalize in a mass market that does not desire to have the latest hardware.
This was a fantastic move on Sony's part. I didn't expect it to be quite as drastic a slash as this. This does create an issue for the other two for a few reasons.
1) No one has even questioned that the PS3 was the powerhouse of the hardware generation. Their problem, and the only thing keeping them from dominating from out of the gate was price.
2)Both the Wii and 360 are going through a weak patch. Striking now creates a momentum going into the Christmas holiday that may push the PS3 ahead of the Xbox (they aren't going to catch the Wii this year).
3) If Nintendo has another weak Trade show season next year, that's it. Sony passes them by next Christmas and Sony's 10 year plan that I personally mocked and ridiculed suddenly looks much more likely.
Now, here's my take on this:
- Sony is gonna have a DISASTEROUS financial statement for this quarter, next quarter, and for the entire year.
- HD consoles (combined) will outsell the Wii, at least until the holidays.
- Analysts aren't the brightest people and their predictions of the PS3 skyrocketing in sales is totally wrong.
- The Wii will be the best selling console this holiday season still at $250 - the analysts and hardcore will piss, whine, moan, bitch.