Action &#39sStation

Firstly, can you give us an update on the progress made by the Sony games business this year?
Two years ago we lost $2bn dollars globally on the SCE business – we thought at the time it was a lot of money, but in perspective with things like Citibank it’s not that much. And last year we lost $1bn dollars.

Our target this year is to break even, not on a cumulative basis, but on an operating business. Our point of view from the 100 markets we work in, we have PS2 which we’re making a profit on, PSP where we also make a profit, and PS3 where, if we just look at it in Euro terms, we are in a profit on software even though we still make a loss on hardware. It’s likely we will get into profit in Europe this year. So SCEE is a solid, safe pair of hands for SCE.

Does that mean once you’ve broken even you will reduce the price of the hardware to stimulate more sales?
No, we are not going to go down in price on PS3 – neither are we going to go down in price on PS3 in spring time either. Absolutely not, whatever you might have heard to the contrary. Our strategy is very much value added.

That doesn’t mean we are going to add pieces of software – we might add original ideas to the machine. What we want is to make the machine value for money.

The long-term objective of the company is the growth of the industry. During the 12 to 13 years we have been in the market, the handheld and static console market has grown by over 350 per cent, which is hugely dramatic. Software has gone up even more, and our objective is to grow the industry to bring it into credibility.

Aren’t video games already credible in the UK?
In a sense, but often you get the impression that for the likes of The Daily Mail and Keith Vaz we’re the whipping boy. There’s always something that characterises games as bad – and in Germany it’s worse, in Holland it’s even worse and in Scandinavia it’s worse than all of those. We still haven’t reached a point where it is accepted like music or films, but you can use market growth to change that.

What specific market growth strategies are you thinking about?
We’ve moved into Russia, the Middle East and beyond – SCEA recently launched the PS2 in South America.

We also are looking to new demographics. We used to just market to males, but I’d like to think that in SingStar, EyeToy and Buzz – and Nintendo with Wii Fit, Nintendogs and Brain Training – we’ve grown demographically.

We also try to do that via a high tie ratio – the ratio on the PSone was about six games to each machine. On PS2 it is 10 to 11 – some markets are even higher, in the UK it’s 12. If you increase the tie ratio you grow the business.

The other way to grow it is through online – incrementally and not taking from retail. On PS3 we have used that to attract PC gamers, and even girls and boys aged 14 or so who are used to already downloading content through iTunes and so on.

We also grow the market through new products – some work, some don’t, that’s just the Sony way. And on that point, another thing we have committed to for supporting market growth is putting out quality hardware – you don’t grow the market by putting out shoddy machines. So we try to make sure that PS3s have a failure rate of just two to three per cent, which is very low by industry standards.

In this generation there has been a lot of focus on the competition between the three format holders – growing the market has been something Sony, Nintendo and Microsoft have all talked about.
In our view, competition grows the market. That’s the exact market force which has led, for an example from another industry, from someone like Dunlop being the only mail trainer company in the 1970s to you having Nike Stores and so many sneaker companies today.

Competition is good – it brings in more consumers, it generates more attention and even attracts more advertising money. I would never bad mouth our competition and I genuinely believe they have all contributed to the industry in terms of growing it and helping bring credibility in. That’s what we’d like to have as a legacy.

I think that same competition is what has encouraged many to expect another PS3 price cut soon – as people expect a drop in price given that’s the pattern PlayStation hardware has followed in the past.

When we came into the industry we started at zero. And we had to have a model that was price elasticity – and as soon as we got the manufacturing price down on PSOne we lowered the price. Same with PS2. But we’re not doing that on PS3 – that’s not the model, but people are expecting it.

We’re relying on the fact that the industry will keep growing and while we might have a smaller share of the market we will have an overall increase in sales. So the value added strategy is to continue for some years to come.

On the competition, I will say Nintendo have only done good things. They have expanded geographically and dramatically extended demographically. They have never been afraid to try new products, be that hardware, or software or peripherals. In a way, they have strength in silence as they don’t have to say too much. That’s really good, and it works for them.

For Microsoft, again, I can understand that, again, they have put money into the market and have initiated growth. In some ways what they have done is brought forward consumers from next year into this year.

By bringing the price down they are trying to establish themselves quickly, as they did with the first Xbox. But they have built online in a meaningful way and the competition they have brought to the market place is great.

And what about other, newer competitors, like the iPod/iPhone?
We anticipate other people will come in, like Apple, and mobile phone companies. Yes Apple is competition and they will get stronger – it will make everyone look up and we will have to get stronger too.
So we are in a solid position, but are not lackadaisical. Next year we are probably going to be a little bit more aggressive when we reach the break even point.

What can you tell us about sales figures and numbers for the Sony hardware?
The PS2 is doing very well in those new territories, such as Saudi Arabia – it still has a lot of life in it yet.

I know MCV recently said it was ‘dead’, but PS2 will live on for at least two years. And it’s still ticking over in the UK. It is a different model to Nintendo and Microsoft – they tend to drop their older hardware straight away – but we like to keep them around as third-party publishers do great business on them.

THQ and Ubisoft will do very well this year from PS2, and PES 2009 and FIFA 09 are also big sellers for
those formats.

And PSP?
The PSP is as successful in numbers as PS2 – it tracks its numbers in a cumulative basis. It’s weakness, however, is its software. And that’s because developers, when it comes to placing bets, have to chose PS3 and 360, then Wii, then DS, maybe even PS2 before PSP. It’s the same at our internal studios, where the focus has been on PS3. They’ve also focused a lot on PS2 as well because we have to get the SingStars out for that format.

And before you ask – no, there are currently no plans for a PSP2. I go to Tokyo quite a lot and no one has referred to it – I think they have their hands full at the moment. And we just launched the PSP-3000 so we are still focused on this generation of the platform.

What about the PS3?
As I said, we have a very low failure rate. The format is accepted as multimedia. And we’ve had a great balance of first party software. In fact I think that its the software sales which will help us get to that break even point on PS3.

But what we’re doing now is focusing a lot on our own IP – we’ve found companies like Media Molecule, Insomniac and Naughty Dog who have provided key games for us. I’m not saying we’re completely abandoning exclusives, but we don’t have the $50m dollars to spend on securing exclusive content – and we’d much rather put that money not into securing an exclusive but developing another innovative game like LittleBigPlanet.

In terms of sales, we are tracking very closely to where PS2 was at this point in its lifecycle. We’re on the PS2 pace – some countries are ahead, some are a little behind.

I will comment on the sales figures for PS3. In recent weeks we have outsold 360 in countries like Germany and France, and we’re outselling Xbox and Nintendo about eight to one in Russia. So, overall, while we have sold a lot less than Nintendo – who have done outstandingly well of course – I am confident that in PAL territories our installed base is 300,000 units ahead of Xbox 360. Sales for PS3 are on track and where we want to be for the financial year.