Sony's other units depend on the PS3's success
The electronics maker hopes to use the game consoles to give its Blu-ray DVD standard an edge over HD DVD.

TOKYO, May 7 (Reuters) - With the launch of its PlayStation 3 video game console six months away, Sony Corp. is gearing up for an all-out battle to put the electronics and entertainment conglomerate back on a growth path.

At stake is not just pole position in the $25 billion video game industry, but dominance in the next generation of DVDs, the commercial viability of Sony's Cell microchips and possibly control over living-room electronics around the world.

Sony (Research) needs a hit. Over the past four years, its revenues were virtually flat as its operating profit rose 3 percent.

By comparison, rival consumer electronics company Matsushita Electric Industrial Co. (Research), the maker of Panasonic brand products, boosted its sales by 20 percent and saw its operating profit soar more than threefold.

Sony's new console, equipped with a Blu-ray next-generation disc drive and powered by the Cell microchip, is slated for early November release, setting the stage for a three-way showdown with Microsoft Corp.'s (Research) already-released Xbox 360 and Nintendo Co. Ltd.'s upcoming Wii.

Sony controls about two-thirds of the current-generation global game console market. Although the game unit accounted for less than 5 percent of the corporation's operating profit in the year ended March 31, the division's performance has sweeping effects on the Sony group.

"We will supply microchips and other key devices in large quantity for PlayStation 3. So, the impact will be felt in Sony's all core businesses," Sony Senior Vice President Takao Yuhara told reporters last week.

"Our movie division is also holding high hopes on Blu-ray. PS3's success is a concern for the Sony group as a whole."

Blu-Ray versus HD DVD

Sony is a leading proponent of Blu-ray optical disc technology, which competes with the HD DVD standard promoted by Toshiba Corp. and supported by Microsoft.

Since Sony holds more patents in Blu-ray technology than in the current generation of DVD format, a victory over HD DVD would boost Sony's bottom line substantially.

Toshiba launched the world's first next-generation optical disc players in March, but Sony hopes PlayStation 3 sales will turn the tide in Blu-ray's favor. Sony expects to sell 6 million units of PlayStation 3 by March 2007.

"Brisk sales of PS3 means lower cost of Blu-ray drives for (stand-alone) optical disc players and recorders," Daiwa Institute of Research analyst Kazuharu Miura said.

"Toshiba is selling the lower-priced version of its HD DVD players at about $500 in the United States. If Sony gives a similar price to PlayStation 3, that would make the machine attractive not only as a game console but as a Blu-ray player," Miura said.

Key information on PlayStation 3 such as selling prices and software availability may be unveiled at the Electronic Entertainment Expo, or E3, in Los Angles, an annual trade show the week of May 8.

Sony also counts on robust sales of PlayStation 3 to boost output and reduce production cost of Cell microchips, co-developed with Toshiba and IBM Corp. (Research) to drive advanced digital electronics.

"Achieving volume production of Cell chips for the game console and then putting them in its digital electronic products is Sony's strategy," Mizuho Investors Securities analyst Mitsuhiro Osawa said. "If Sony fails to sell PlayStation 3 in volume, this business model crumbles."

Point of no return

Sales versus Microsoft's latest console will be watched particularly closely since any success of Xbox 360 is expected to allow Microsoft, which already dominates the PC sector with its Windows operating system, to gain a secure foothold in living room electronics -- a Sony stronghold.

"In the PC market, growth is still brisk in volume terms, but not so much in value, prompting Microsoft to go after the living room," Daiwa Institute of Research's Miura said.

Sony's company-wide effort to drive PS3 sales and defend its home turf comes with a hefty price.

The company says operating profits will tumble 48 percent in the fiscal year ending March 2007 as heavy start-up costs for PlayStation 3 push its game division deep into the red.

"Sony has been the winner in the game industry and I have no problem with that. But it appears that it is going to cost Sony an arm and a leg to defend that position," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

"I wonder just how much return they can get from that," Akino said.

Despite such market concerns, Sony has no choice but to keep pressing towards the November launch after pouring in billions of dollars for PS3 development, Osawa said: "The point of no return is behind it."

Sneak peek: PS3 and maybe "Halo 3"

Nintendo goes 'Wii' Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.