OPINION: Strategy game

By Paul Sweeting -- Video Business, 7/13/2007

Sony touted its lineup of 200 new games coming for PlayStation 3 in 2008, while Microsoft showcased Halo 3 for the Xbox 360 and announced a deal to bring Disney movies to Xbox Live.

Away from the press conferences, however, their actions told of the serious strategic challenges facing both platforms.

On Monday, one day before E3 opened, Sony announced a $100 price cut on the 60GB version of PS3, from $599 to $499. It also announced the introduction of an 80GB model in the U.S. priced at $599.

The price cut announcement came 72 hours after Sony issued a statement denying press reports that a price cut was coming (although anyone reading closely would have noticed the tell-tale “at present we have no plans” squishiness).

Still, the confusion caused by the quick about-face probably cost Sony some PR bang for its hundred bucks.

By Friday, a possible reason for the confusion had emerged. Sony Computer Entertainment Europe president David Reeves revealed in an interview with GamesIndustry.biz that the price cut isn’t really a price cut at all but simply a liquidation of 60GB PS3 inventory in the U.S., after which the model will be deleted, just as the original $499 20GB model was eliminated.

“All they're doing is taking their stock in trade that they've got at the moment of the 60GB model, marking the price down, and it will all be gone by the end of July,” Reeves said of his U.S. counterparts.

After that, he said, “what the U.S. are offering from the 1st of August is a US$599 version with one game.”

In other words, still shackled with the high costs of PS3’s Blu-ray Disc drive and Cell processor, Sony is conceding all but the high-end of the market to Microsoft and Nintendo.

It’s putting all its chips on better games and positioning PS3 as an all-in-one home entertainment center.

Microsoft also tried to bury some bad news this month by putting it out over the July Fourth holiday in the U.S. and then stepping on the negative story by announcing the Disney deal and other baubles.

After months of denials, Microsoft finally admitted that its complex game console had serious design flaws that could cause the units to fail completely.

The company announced it would set aside $1.15 billion to cover repairs of the faulty machines and extended 360’s warranty from one year to three.

Corporate VP of entertainment and devices Peter Moore insisted the Xbox division would still meet its goal of turning profitable in 2007. But it’s hard to see how except on an operating or pro forma basis that ignores “one-time items” like a billion-dollar write down.

THE REAL PROBLEM facing both Microsoft and Sony, however, is that they got too far ahead of the market—and they did it for the worst possible reason.

Both PS3 and Xbox 360 were intended as “convergence devices.”

Sony, being a hardware company, tried to engineer convergence into the hardware; Microsoft, being a software company, emphasized software-enabled networking as the path to convergence.

But “convergence” is a consultant’s strategy, not a market-driven strategy. It’s great for technology providers, but consumers often have their own ideas about how things should work.

As Nintendo has clearly demonstrated with the Wii, most gamers still see gaming and other forms of home entertainment as discreet activities. Most are perfectly content with a game console that just plays games.

Both Sony and Microsoft have built sophisticated, expensive boxes and have staked out the digital living room.

They’re now waiting for gamers to come out of the second bedroom and catch up with their vision of convergence.

But the wait is getting expensive.

Paul Sweeting is editor of Content Agenda. Get more of Sweeting's analysis here.