46420918-PS3 - Sony: Maintaining Dominance with PlayStation...

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Sony: Maintaining Dominance with PlayStation 3 Jie Cheng, Mark Freeman-Aloiau, Xin Guo, Anthony Pullen BEM 106, California Institute of Technology, March 6 th , 2007
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2 Executive summary In face of the competitive advantages of Nintendo’s Wii and Microsoft’s Xbox 360, how does Sony maintain its leading role in the video game industry with its PlayStation 3 (PS3)? Rather than reduce the retail price, Sony should seek to maximize the value of the PS3 and to aggressively market it as not only a powerful video game console but also an affordable home entertainment hub. Specifically, the strategy should include the following major components: Sony should effectively market the PS3 as the world’s most powerful video game console and an affordable home entertainment hub. Sony should imitate Wii’s motion sensing controller and offer it as an optional add-on for both the PS2 and the PS3. Sony should use the PS2 and the PS3 to fill different customer niches and encourage PS2 owners to gradually upgrade to the PS3. Sony should leverage its core competencies and exploit synergies between the PS3 and other Sony products.
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3 Part I. Introduction Sony launched the long awaited PS3 in the United States on November 17 th 2006, two days before the debut of the Wii from Nintendo. Both events have witnessed hardcore gamers and eBay entrepreneurs living in tents for days in front of Best Buy and Circuit City stores waiting to buy the next generation consoles. These consoles were soon after sold on eBay for up to five times the retail price. The frenzy lasted for weeks and finally escalated into riot, robbery and gunshots. Moreover, the recent unleashing of the PS3, the Wii, and Microsoft’s Xbox 360 has started a new generation game console war between the three giants in the oligopolistic industry. Due to the non-interoperability of these proprietary consoles and the network effects present in the video game industry [1] , all three firms are pushing for the greatest installed base possible. A large installed base induces entry of video game publishers and provides the sources from which royalties will be drawn. The royalties, typically 16% of the revenue [2] , are the major source of profit. Microsoft’s Xbox 360 has a one-year lead in the market and has been enjoying a first-mover advantage. It has built a large customer base and over a hundred game titles. Nintendo’s Wii has successfully distinguished itself from rivals by an innovative motion-sensing controller (Wiimote). Both gamers and game critics enthusiastically embrace this controller. Despite the fact that the PS3 has arguably the best raw computing power and the Blu-Ray feature, it is falling behind in the race for market share, presumably due to its high price. NPD group research showed that January PS3 sales in the U.S. were lower than both the Wii and the Xbox 360, and that the PS3 was also outsold by its predecessor, the PlayStation 2 (PS2) (See Exhibit 1) . Analysts have raised their outlook on Wii’s success in the market and significantly lowered the
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46420918-PS3 - Sony: Maintaining Dominance with PlayStation...

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