PlayStation 3 delay possible

UPDATE: Due to Blu-ray plans tied to console

By George T. Chronis -- Video Business, 2/24/2006

FEB. 24 | Sony Computer Entertainment held fast last week to its previously announced plans for a spring launch for PlayStation 3 despite growing speculation that the keenly anticipated next-generation game platform is behind schedule and facing higher than expected manufacturing and component costs.

“There has been no change from what we said at [last year’s] E3 show,” a Sony spokeswoman said. “We said a spring launch, and we haven’t yet specified which territories.”

Sony was forced into damage control mode after analysts at Merrill Lynch published a research note on Feb. 17 that said Sony’s bill of materials for the PS3 could be as high as $800 per unit and speculating that manufacturing problems could cause delays.

Still, the shockwaves from the report stretched beyond the game industry and were felt as far away as the high-definition video arena, where PS3 is expected to play a key role in building the hardware base for the Sony-backed Blu-ray Disc format.

“The launch of PS3 could be delayed by between six and 12 months, with the result being an autumn launch in Japan and a late 2006 or early 2007 launch in the U.S.,” said Merrill Lynch equity analyst Joe Osha. “Sony’s design choices for the PS3 resulted in an expensive and difficult-to-manufacture product, and we think that we’re seeing the consequences of those choices play out now.”

The Merrill Lynch analysts estimated the cost of the PS3’s Blu-ray drive at $350, making it by far the most expensive single component in the game console.

Though other analysts have estimated the drive’s price to be somewhat lower, the report highlighted the cost implications of Sony’s decision to try to tie the PS3 and Blu-ray formats together into a single home entertainment platform.

Sony Computer Entertainment officials also hinted that delays in finalizing the Blu-ray technical specifications had put pressure on the PS3 timetable.

“We’re waiting for them until the last possible minute, but the launch could be pushed back if they’re not decided soon,” an SCE spokeswoman told the Reuters news agency Feb. 20.

That same day, Taiwan’s DigiTimes newspaper reported that Sony will postpone the spring PlayStation 3 launch due to “several issues with its production plans, especially concerning its inclusion of a Blu-ray Disc drive in the PS3.”

The report cited Sony’s “Taiwan-based contract manufacturers.”

By later in the week, SCE was insisting the launch would not be affected.

“This is just par for the course,” an SCE spokeswoman said. “Whenever we introduce a new platform, there’s always speculation about delays. You saw the same sort of thing with PSP, and it turned out to be unfounded.”

Ironically, any delay in the rollout of PS3 could be a significant blow to Blu-ray, which is locked in a battle for high-definition supremacy with rival format HD DVD.

Blu-ray backers, and in particular Sony, have long touted the benefits of the format’s association with the popular game platform, noting its potential to quickly drive millions of Blu-ray-equipped devices into homes.

The PS3 factor also was instrumental in persuading some studios to support the Blu-ray format.

In some cases, studios’ Blu-ray release plans are tied specifically to the timing of the PS3 rollout, and a delay in the launch could lead to a change in those plans, studio sources have told VB.

Anticipating studio concerns, Sony Computer Entertainment America president Kaz Harai traveled to Anaheim, Calif., last week where the Blu-ray Disc Assn. was holding its regularly scheduled meetings.

Although Harai did not directly participate in the meetings, he huddled with senior officials from Disney, 20th Century Fox, Warner Home Video and others to brief them on PS3 progress.

Studio sources said they were reassured by what they heard but declined to reveal what was said.

“We’re not putting much stock in the Merrill Lynch report,” one senior studio executive said.

To date, the only studio to announce specific Blu-ray release plans is Sony Pictures, which plans to issue its first slate of titles in May in conjunction with the introduction of Blu-ray players from Pioneer and Samsung.

Sony Pictures Home Entertainment officials said last week those plans remain on track but referred other questions to Sony Computer Entertainment.

Apart from any delays, Sony also is facing cost and pricing challenges in PS3’s battle with Microsoft’s Xbox 360 for supremacy in the next-generation game market, according to Merrill Lynch.

At $800, PS3 component costs would be roughly $300 per unit higher than for the Xbox 360.

The most popular configuration of the Xbox 360 is priced at $399, with a stripped down package available for $100 less. Even at the higher price point, Microsoft is estimated to be losing $130 to $150 per unit.

Game hardware makers typically lose money on initial console sales as they try to build the market for the software.

If Merrill Lynch’s estimates are correct, however, Sony could be facing a loss of as much as $400 per unit, if it priced PS3 at $399. If it priced PS3 higher, it could make the system uncompetitive with the Xbox 360.

In addition to the more expensive Blu-ray drive, the Sony platform is built around the new and innovative Cell processor. But like most new technologies, the Cell is likely to be significantly more expensive at first than the off-the-shelf processor from Intel that powers the Xbox.

The only definitive statements on PS3 pricing came from SCE president Ken Kutaragi last summer.

“Whether consumers think a product is expensive or cheap all depends on the balance between its appeal and price. Our ideal is for consumers to think to themselves, ‘OK, I’ll work more hours and buy it.’ We want people to feel that they want it, no matter what,” Kutaragi told magazine Toyo Keizai on June 28.

Kutaragi continued with the same theme at an SCE briefing in Japan on July 25.

“I’m aware that with all these technologies, the PS3 can’t be offered at a price that’s targeted towards households,” he said. “I think everyone can still buy it if they wanted to. But we’re aiming for consumers throughout the world. So we’re going to have to do our best. I’m not going to reveal its price today. I’m going to only say that it’ll be expensive.”

In conjunction with its report, Merrill Lynch last week lowered its rating on Sony’s shares to “sell,” an unusually blunt assessment, sparking a sharp sell-off on the Tokyo Stock Exchange.

The Sony spokeswoman dismissed the report as “speculation based on no data.”

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