NEW YORK (CNN/Money) -
The clue phone's ringing, Sony. It's for you.
Your earnings this morning were pretty disturbing -- with a sharp drop in profits and a slashed full-year operating profit target. Part of that is your movie division's fault (and with "Gigli" in this quarter's crop, you had to have seen that coming). But what was particularly shocking was how badly your gaming division performed.
Operating income fell more than 91 percent. Sales were down almost 36 percent. And while the July-September quarter typically isn't a hot one in the gaming industry, you can't blame industry trends for today's numbers. This one's your fault. You could have prevented it all with a simple price cut.
Flash back to the Electronic Entertainment Expo in May: Everyone was hoping you'd drop the price of the PlayStation 2 to $149, something that would kick-start the industry and ensure strong sales through the holiday season. Instead, you decided $179 would do the trick.
The general public yawned and asked "Is that it?" So did software publishers, though they were a bit more animated (and upset) in their questioning. But everyone assumed you were just holding off until the holidays were closer.
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| Consumers weren't impressed with the PS2's minimal price cut earlier this year. |
Recently, you've been whispering that no more price cuts are coming this year -- and the grumblings are starting again. Electronic Arts (ERTS: Research, Estimates), one of your strongest partners, reduced its estimate of the number of PS2s you would ship by 1 million to 8-9 million units. It also said that because you hadn't cut prices to the expected $149, industry-wide sales of PS2 software would likely only grow 15 to 20 percent. That's 10 percent less than what it was expecting a few months ago.
Of course, you already knew that. Today you cut the gaming division's operating profit outlook to ¥100 billion -- a ¥30 billion reduction. That would be down 46 percent from last year.
Look, I realize there are a few factors that are beyond your control here. You were hoping the cost of manufacturing PS2s would go down a little more than it has. And R&D costs are up significantly as you work on the PlayStation 3 and upcoming PSP handheld device.
It's understandable that you're hesitant to cut prices. After all, you only started making a very slight profit on PS2 sales in the last year. $149 might make it a loss leader once again. It also looks like you won't get the PS3 out by 2005, as you'd hoped. By delaying the price cut, you're hoping to keep a somewhat steady flow of hardware sales going until that machine hits the streets.
But hardware sales aren't what make the industry profitable. Software sales do. The license fee you collect on each copy of "Madden 2004" or "Grand Theft Auto" more than fills the gap on any loss on the hardware side. And you make even more from games created in-house.
Software sales for the PS2 were fairly flat last quarter -- with only two million additional games being sold. Meanwhile, it looks like folks are about ready to quit buying games for the original PlayStation, which has been a nice secondary income for you.
Cut prices, Sony (SNE: Research, Estimates), and you'll see both hardware and software sales explode. You'll help not only your bottom line, but also that of your partners, the publishers.
Nintendo's price cut last month brought the expected surge in both hardware and software sales. Something surprising has happened, though: That surge seems to have grown some legs. Sales of both the GameCube and its titles are showing no signs of slowing down.
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Microsoft (MSFT: Research, Estimates), meanwhile, has said in the past that it will look to you to lead the price war, which always seemed a pretty odd statement. Given today's numbers, it's not inconceivable that Bill Gates and Co. might try to step up and launch one of their own. And after leading the industry for so long, do you really want to be seen as having to match the move of a competitor? Heck, 17 months ago you stole their thunder, slashing prices before they had a chance to do so.
Obviously, Nintendo and Microsoft are in no position to threaten your market leadership. But both are poised to see their market position increase over the next few months. And both are seeing their buzz factor increase, something that can hugely influence buying decisions down the road.
You didn't step up to the price cut challenge in May, Sony. Now you've got a second chance. Don't blow it.
Morris is Director of Content Development for CNN/Money. Click here to send him an e-mail.
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