When competition turns bad

The benefits of a competitive marketplace are numerous: innovatory technologies, better end user pricing, heaps of ‘added’ value… the list goes on and on. However in the case of the game console market, competition may have gone full circle and become a bad thing. Windows' WinLabs editor, Jason Saundalkar, explores how the long-awaited launch of Sony’s PS3 console could leave the firm fighting for its life…

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By  Matthew Wade Published  April 10, 2006

|~||~||~|Competition is accepted by most to be a positive thing. I first came to this realisation back at school when we had friendly games of football and basketball. I was never any good at these, but harmless rivalries with friends (and foes) pushed me to try and better myself in the hopes of stealing a win and embarrassing the hell out of the opposing person or team. In the same way that this competition made me strive to do better, competition in the consumer electronics and PC industries forces companies to innovate and offer great value in order to try and sway consumers over to their side of the fence. Those of you that work in the industry - and those that monitor it with interest – will be well aware that ours is one of the most cut-throat on the planet, but it’s because of this fierce competition that we have many of the new technologies on the market today. At present though, I find myself in the rather odd position of wondering whether too much competition is actually – sometimes – a bad thing; for the industry and for consumers. In particular, I’m thinking of the game console business. As most of you will probably know, Microsoft entered the console business very late and thus had to play catch-up against the likes of Sony’s mighty (at the time) Playstation2 console. With the recent launch of its cracking Xbox 360 however, Microsoft has delivered its next-generation machine way ahead of the Japanese electronics giant and I’m sure that, had there not been the thought of Sony’s Playstation3 lingering in Microsoft’s mind, the 360 would have been nowhere near as good as it is today. Unfortunately it now seems that the console business (and in deed the consumer electronics industry) is in quite real danger of losing one of its key players. Though the Japanese giant Sony is an old player in the business and has a wide product portfolio, it’s fallen on hard times of late. In fact, save for 2005 when the firm made a profit of $580 million, it had posted net losses for the previous three years. Regardless of this, Sony has ploughed ahead at full steam with the development of its Playstation3 console. This long-delayed wonder device is expected to go on sale by the end of the year, or early next year at the latest. However, if you’re thinking that its launch will surely help the giant get back to its winning ways, you could well be wrong (I’ve just got my fingers crossed you aren’t). A quick search of the internet will reveal that the estimated cost of Sony building each PS3 console is in the region of between US $800 and $950. Now unless you’re filthy rich, that price tag (even if it didn’t have a profit margin added) will surely put you off, which means – as is traditional in the console business – Sony will have to sell each console at a loss. But just how much of a loss? Considering the Premium Xbox 360 version retails for $399, Sony can’t really afford to price its PS3 at double or triple that figure, despite the fact that the PS3 will ship with a Blu-ray DVD drive (again late to market as its competitor technology, ‘HD DVD’, has already been launched). So if Sony tacks on a price tag of, say, $600 for each PS3, and assuming each costs $800 to make, the company will still make a loss of $200 per console (in comparison, Microsoft loses $126 on its Premium Xbox 360). Down to brass tacks, and what this means is that – get this – if Sony sells only 10,000 consoles on launch day, that’s a loss of $2,000,000. If it flogs 100,000, that’s a loss of $20,000,000! Had the firm been in a better financial position I wouldn’t be worried, but considering the state it seems to be in these days, it’s not ridiculous to suggest that the launch of the PS3 could well be the final nail in Sony’s coffin. And should that happen, Microsoft would only have to deal with Nintendo (which isn’t exactly in the best of spirits either) before it has the market all to itself. And that isn’t a thought that washes well with me… ||**||

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