Michael Pachter, Wedbush Morgan Securities

The PSP was a phenomenal idea that was burdened by Sony's compulsion to use it as a trojan horse to sell the concept of UMD. Sony apparently believed that if it could put games on UMD, a lot of consumers would buy PSPs. Then Sony could in turn sell these same consumers movies that were UMD-based.

The problem was that the format never quite took off, and use as a movie player was not particularly popular. At the same time (2005 - 2008), the iPod went through several iterations, with increasingly large flash memory drives and a well-stocked iTunes store that had tons of movies available for download. The iPod became the device of choice for multimedia. So the PSP was relegated to being a games-only device in practice, even though movies are still offered. Being a de facto games-only device, piracy is a serious problem.

I think that consumers are generally honest, and willing to pay a fair price for content. PSP games are fairly priced at around $20 - 40, and I don't see piracy becoming a huge problem. However, the device is evolving into a download device through the use of ever-larger (and cheaper) Memory Sticks. Those will hold a bunch of games or movies; piracy can be controlled through DRM, and games or movies can be stored on a PC so that the Memory Stick isn't overloaded.

Sony's Patapon 2

It makes sense to me that a redesign would be seriously contemplated by Sony. The device could either use a Memory Stick, or Sony could opt in favor of less expensive built-in flash (a la the iPod). In either case, a PSP without a disc drive and without UMD could be made thinner, and its battery life would be extended. Both of those features would make the device more "iPod-like," and would allow it to compete better as a multimedia player.

The real problem is that Apple figured this out five years ago, and Sony is just figuring it out (maybe) now. Apple has a huge competitive advantage, and Sony will play catch-up for a while. Sony does have pretty compelling game content on its side, and this can truly be a differentiator. But unless Sony figures out DRM and makes the PSP download store a reality right away, it is going to fight an uphill battle.

A PSP without a hard drive should be cheaper to make. So if Sony can cut the price further, it has a real chance of skewing its audience younger, and competing better with the DS as well.