Hardware Pricing and the PSP Go

First, a bit of keeping score. Last month we predicted that Sony was likely to announce a price cut for the PlayStation 3 hardware during E3 2009 in early June. We were wrong, and Sony has reportedly said that it felt that a consumer products show was the wrong setting in which to announce a price cut.

Some analysts currently expect the PS3 to receive a $100 price drop in time for the launch of Madden NFL 2010 in August 2009. Elsewhere Mr. Pachter of Wedbush Morgan expects a smaller cut, probably $50, and a bundle announcement, possibly at the Tokyo Game Show in late September.

We still believe that Sony will have difficulty reaching its stated PS3 sales goals for its current fiscal year without a $100 price drop.

Talk of price drops and bundling for other systems is also increasing. For example, the Wii with a different pack-in is a possibility for the holiday season, although the price might not necessarily need to drop for that strategy to be effective.

Moreover, Microsoft could be compelled to shift its pricing or bundling in response to a Sony price cut, especially since the effectiveness of its last price drop appears to be waning.

Finally, we conclude with a discussion of the PSP Go, Sony's latest update to its PlayStation Portable platform, due in October of this year.

The new system adopts slide-out controls for smaller size, eschews the UMD mechanism and replaces it with 16 gigabytes of flash memory, and retails for $250. We'll focus on possible retailer reaction and the pricing.

Sony's John Koller, director of hardware marketing, told Ben Kuchera of Ars Technica that they have “changed the model from a margin perspective from the 3000”, suggesting that retailers were possibly getting a bigger cut of the $250 retail price. However, we spoke with Mr. Pachter of Wedbush Morgan in email and he does not believe that “the higher pricing has anything to do with adding extra margin for retailers.”

We suggested, and Mr. Pachter agreed, that retailers will heavily bundle the PSP Go at the outset – adding cases, media, and other accessories – in order to increase margins on their own.

With PSP software revenue comprising only about 4% of all software revenue (that would be approximately $18 million in May 2009), most big-box retailers will accept the loss in UMD sales and stock the PSP Go prominently as an upper-end consumer electronics product.

(Anecdotally, we have observed that PSP shelf space has decreased dramatically at several retailers like Target, Wal-Mart, and Best Buy. A digital-distribution PSP Go would fit easily within those existing spaces.)

Mr. Pachter explained that the PSP Go would likely sell well to existing (hardcore, we presume) PSP owners who wish to trade up. As a result, we believe Sony has priced the system at launch to maximize its revenue from that population and that system bundles from retailers will likely drive the system price even higher as they attempt to do the same.

[As always, many thanks to the NPD Group for its monthly release of the videogame industry data. Additional credit is due to Michael Pachter, analyst for Wedbush Morgan Securities, and Doug Creutz of Cowen & Company for their industry analysis. Finally, many thanks to colleagues at Gamasutra and commenters on NeoGAF for many helpful discussions.]