In the six months between November 17th 2006 and May 2007 Sony will know whether they have a future in their current form. The loss making electronics Company is banking on the success of the PS3 and the Bravia “Ball bouncing” LCD TV’s and in both markets they are under pressure.

On one hand they are relying totally on Samsung for LCD TV panels in their flagship Bravia LCD TV range along with a glad bag of third party manufacturers from China, Taiwan and Korea for the rest of their range. 18 months ago Sony got out of manufacturing their own LCD panels, instead they formed a joint venture Company with Samsung with the Korean Manufacturer owning 51% of the venture and the management rights.

Also set to impact Sony is the launch of SED TV’s by fellow Japanese Companies Canon and Toshiba. When one talks to these two Companies they both constantly refer to Sony as being one of their key opponents.

On the games front, an area where Sony has made money in the past the Company is under real pressure and when they launch the PS3 on November 17th the pressure gauge will start to rise.   

With E3 come and gone, Sony has now played their biggest cards in the PS3-hand. Price point, launch date, and playable games all made their debut lat the E3 games show in Las Vegas earlier this month, and it’ll be a pretty big surprise if we get another info dump of this magnitude before the Tokyo Game Show in late September and the actual system launch on November 17th. With most of the critical information now available, a far clearer picture of Sony and their plans for the PS3 becomes apparent.

To say that Sony is betting heavily on the success of the PS3 is an understatement. Over the past four years, the conglomerate’s revenues have remained essentially flat, while operating profits have increased by only 3 percent. Though the total amount of money (revenue) that flowed into Sony last year was an impressive $67.94 billion dollars, their profit margins were a slim 1.65%, figures that reveal a giant corporation barely squeezing profits out of its many disparate holdings in consumer electronics, movies, music, and videogames. For a company that has long cited it’s technology and consumer electronics divisions as bedrocks of stability, these numbers look weak compared to arch-rival Matsushita Electric Industrial (Panasonic), which has seen it’s operating profits more than triple in the same years Sony has managed only 3% growth.
 

In the heyday of the PlayStation and PlayStation 2, the videogame market was a cash cow for Sony and a much needed source of actual profits, rivaled only by the major successes of the Spiderman movies for contribution to profits. Sony’s troubled music arm, razor thin margins in personal computers and general consumer electronics, and the need to play catch-up in LCD and plasma HDTV technology have all necessitated greater and greater reliance upon the PlayStation to keep the company rolling.

The coming year will be critical for Sony. The PlayStation 3 will be facing the heaviest challenge yet for dominance of the $25 billion videogame industry from Microsoft’s Xbox 360 and Nintendo’s Wii. Microsoft is already proclaiming a solid head-start with six-million consoles shipped, and the double threat of the low-cost but innovative Wii may succeed in bringing Nintendo’s “disruption” strategy to success. On top of it all, Sony has embroiled itself in the next-generation DVD format war, challenging its many HD-DVD supporting consumer electronics competitors with the Blu-ray format.

The costs of fighting these battles will be high. In addition to the billions already spent in developing the Cell processor and the PS3’s general architecture, Sony has announced that investors should expect the company’s operating profits to fall by 48 percent in the fiscal year to March 2007 as the PS3’s production and start-up costs force the videogame division to report massive losses.
 

Despite the challenges, if all goes Sony’s way the PlayStation 3 will look like an excellent business decision. Senior Vice President Takao Yuhara spoke with reporters a few weeks ago and told them “The [PS3’s] impact will be felt in all Sony’s core businesses. Our movie division is also holding high hopes on Blu-ray. PS3’s success is a concern for the Sony group as a whole.” Indeed, the PS3’s success may be the key to Blu-ray’s victory over HD-DVD. The low-cost version of the PS3 will retail in America at $499, the same price as Toshiba’s low-cost stand-alone HD-A1 HD-DVD player. Faced with a choice between competing formats, consumers may well decide that the PS3, and thus Blu-ray, is an excellent deal thanks to both its high-end gaming capabilities and high-def DVD support, as opposed to a similarly priced box that does nothing but play movies.

The most recent sales figures show that Toshiba has only sold a worldwide total of 7,500 HD-A1 units (1,500 in Japan, 6,000 in the US) and has plans to ship an additional 4,000 units “soon.” While these were sell-out figures, the numbers pale in comparison to the 2 million PS3’s Sony will ship on November 17, the additional 2 million that will ship by the end of the calendar year, and the extra 2 million units Sony promises to have produced by the end of the fiscal year in March 2007. Despite the fact that HD-DVD is available now, whereas the first stand-alone Blu-ray drives will not ship until late June, unless the HD-DVD supporting manufactures intend to pour money into manufacturing and perhaps begin selling at a loss, if the PS3 succeeds in selling out through the first six months of the console’s availability, Sony stands a chance of steam-rolling the format war on the back of its videogame division.
 

The long-term benefits of a PS3 win would do a lot to put Sony back on top of the overall consumer electronics heap. Efficiencies of scale due to PS3 success would dramatically lower Sony’s production costs of both Blu-ray drives and Cell Processor chips. Sony has long insisted the Cell Processor will be a cornerstone of its general consumer electronics and will eventually be found in many products other than the PS3. The chip is undoubtedly more powerful than what competitors like Matsushita or Samsung will have available in-house, and if there are practical uses for such power, Sony may be able to put the hurt on its cost-leading competitors. In an interview with Reuters, Mizuho Investors Securities analyst Mitsuhiro Osawa commented: “Achieving volume production of Cell chips for the game console and then putting them in its digital electronic products is Sony’s strategy. If Sony fails to sell PlayStation 3 in volume, this business model crumbles.”

The success or failure of the PS3 will leave indelible medals or scars on all that is Sony. The company is risking their position as the dominant force in videogames, the outcome of the next-gen DVD format wars, the future of the Cell Processor as a uniting force in consumer electronics, the billions already spent in development, and the billions more that will be spent selling the console at a loss. With so much at stake, it’s no surprise that a degree of skepticism surrounds Sony’s business plan. Mitsushige Akino, Chief Fund Manager at Ichiyoshi Investment Management, gave Reuters his take on the situation: “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. I wonder just how much return they can get from that.”

The answer to that question will come with time. PS3 failure will be disaster, and even success could be squandered if Sony can’t positively leverage such an outcome in many other markets. It’ll be an exciting show without doubt, and it certainly speaks highly of the significance of the videogame market when giant corporations bet their very futures upon it.