The Blu-Ray of Damocles

sony’s perch at the top of the video game pile is perilous indeed. is it greed or foolishness that puts the sword over their necks? the blu-ray player is creaking heavily overhead.

it may just be me, but i can’t think of another time in history where the launch of a new, standardized media format built on cutting edge technology required taking a loss on hardware. original cd players were spendy. the same thing goes for dvd players. (i paid almost $500 for my 3rd generation dvd player in 1998.) always, the hardware manufacturers priced their EARLY models for EARLY adopters — not the mainstream crowd.

this has even been so with game consoles. not a one has done this before. cartridges were old school technology. cd’s were already an established format. so was dvd-9. even proprietary disc formats have been based on established technology if not the established media itself.

no one has ever tried to put a mainstream, $1000+ piece of bleeding edge technology in place of an $80 standard component — and purposefully taken a loss on it.

the reason? two little words: channel conflict.

channel conflict is confusingly defined thusly:
“Dischord in the channel, which can be due to a number of factors. Some varieties include Horizontal Conflict, involving partners on the same channel level (such as 2 retailers) and Vertical Conflict, involving members on different channel levels (such as wholesaler and a retailer).”

let’s use hp as an example to help everyone understand this crazy problem sony has thrown itself into.

hp manufactures computers. say, a laptop. well. hp also sells computers directly to consumers — like the very same laptop. circuit city also sells hp laptops.

in order for hp to make money, they mark up the cost of manufacturing the laptop a bit, call it a “wholesale price” and sell it in bulk to circuit city. circuit city marks it up a bit, turns around and sells it to consumers at a “retail price.” everyone makes money.

so. what if hp sold that laptop to general public for the wholesale price? circuit city would never, ever be able to price it lower and hp would retain all of the business and make all of the money from that laptop. since hp makes it that means no one EVER would EVER be able to beat their prices and make a profit.

so why doesn’t hp do that? because they don’t want to be the only one who sells their product. they like leveraging the marketing dollars and customer recognition and convenient locations of circuit city. as the saying goes, they make it up in volume. so, they price their laptops just over circuit city’s price. everyone wins. circuit city and hp both make money on the laptops. hp just makes more on the ones they sell direct. consumers see a consistent price.

that’s an example of potential channel conflict. basically screwing your retail channel to make a buck.

now, that’s exactly what sony is doing with their blu-ray player. only, instead of making a buck, they are going to lose $400.

ouch.

at ces, stand-alone blu-ray players came out at $1000 and $1800. for the sake of argument, let’s say an average, stand-alone blu-ray player is priced at $1200.

stand-alone blu-ray player: $1200
ps3: $400

which one do you think people are going to buy? the ps3 of course! that’s sony’s big push. “it’s a cheap blu-ray player to get into the home!” woo hoo!

here’s the problem, tho. where’s the incentive for other companies to manufacture a product no one is going to buy?

that’s right. there’s not one. big. gigantic. huge channel conflict.

when dvd’s on consoles came out, it was already an established format. the players were already down in the $300 range. same with cd’s back in the day. there was no need to worry about the channel.

if sony comes out with a blu-ray player called the “playstation 3” for $400, $500 or even $600, they are going to end up the only player on the market. normally, as history has shown us, that’s generally good for the manufacturer. monopolies and all.

the problem comes in when you realize sony is losing a huge chunk of cash by pricing their blu-ray player so low. they aren’t just leaving money on the table, they are going into the red. and deep. it’s going to drive them into bankruptcy court if the technology takes off. in order for them to get the format adopted, they’ll need to push it hard.

the harder they push, the more money they lose.

something has to give. they can’t be the only player on the market AND a popular format AND take a gigantic loss on it AND survive.

from where i’m sitting, they have a few choices:

1) admit blu-ray is too expensive to build into a game console right now and make it an add-on.

or

2) stick it out, take the loss and sink the company.

or

3) launch the ps3 in late 2007 giving blu-ray time to cement itself in the market.

or

4) make the blu-ray player in the ps3 a crappy implementation so enthusiasts will see the value in an expensive player from samsung.

pick one that’s good for sony.

i’d bet you a beer that’s the exact discussion sony entertainment’s executives are having right now. that’s why we’re not really hearing much about the ps3. that’s why there are no details on pricing or launch dates. that’s why when the president of the company says “it’s going to be expensive” you should believe him.

power and pride sure are dangerous.

m3mnoch.

p.s. i’m not even going to mention that an hd-dvd player looks to cost $400. maybe sony could swap out for hd-dvd instead of blu-ray? ha!

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8 comments so far

  1. […] our only differentiator is a brand new blu-ray format which is likely to destroy the company because of a greedy move for securing the media as a standard without thinking about channel conflict. […]

  2. Anonymouse on

    Until something’s actually released, any comment on it is purely speculation. This is the same whether it’s the PS3, the Xbox 360 HD-DVD drive, a new phone, etc.

  3. m3mnoch on

    yet, you realize there is a gigantic industry that makes enormous amounts of cash by analyzing such trends? that, and maybe it should be taken with a grain of salt if there wasn’t blatant evidence in history to suggest my suppositions to be accurate.

    typically, a bad (as in bad for the company, not poorly done) analysis acts as sort of a self-fulfilling prophecy. especially when the likes of idc or gartner answer market questions and make recomendations based on such analysis to other companies on how to do business.

    unfortunately, it’s not just a ‘put your money where your mouth is’ type of thing. if a company is going to make estimates and do some grand posturing for their shareholders, they should absolutely have their feet held to the fire to answer tough questions on how it fits in the marketplace.

    if someone from sony (or anywhere else) wants to explain to me any fallacies in my reasoning? well. i’m open for it.

    bring it.

    m3mnoch.

  4. waiting4PS3HDTV on

    hears the thing, sony can put out the PS3 with blu ray cheaper, because it will make it’s money back from 1)the games, 2) the movies and 3) the accesories, not to mention sheer popularity(a lot of consumers). Now the reason other folks will buy the more expensive players are for those nice additional features such as, zoom, picture stretch, i don’t know but something like that. There is always some feature thats not on a barebones player like the one that will most likely be on the PS3, to help cut or keep cost down. Also the consumer his/herself may just want simplier ways of watching movies. Yes PS3 will probably implement the dvd portion as simple as possible, but you have those few(or shall i say many) who are just intimidated with all those extras. “I just want a dvd player to play my movies, i dont need to play games and download things”, go figure, but thats what people actually say and do. So of course the sales person at bestbuy will show the high price bluray player rather than the PS3, because thats what the consumer wants and its better for bestbuy to sell the more expensive product anyway. Overall its this, followers and early adopters will buy anything new, will shell out as much as needed for that good ol’ name they can trust (SONY) and pass the word around, “oh its great, i love it”. meanwhile PS3 is out, pumping up sales of BDs, other manufacturers or more manufacturers jump on the bandwagon, ex., samsung will make a BD player sell it for cheaper, people will buy, BD sales continue to soar, Sony still sells there players for the same price, wait…. $50 less, people still buy it because of there its Sony and i trust the sony brand their products are superior attitude and Sony stays afloat, and with that, come out with their BD recorders, now a must have to get those shows in HD and thus another feature the PS3 wont have, continuing their success in the media/entertainment industry.

  5. m3mnoch on

    my reply got too large, really, and i thought it deserved a fresh post on it’s own.
    https://m3mnoch.wordpress.com/2006/01/10/sony-blu-ray-mistake-faq/

    good job with the questions.

    m3mnoch.

  6. […] this is from a comment over on a previous post about channel conflict with blu-ray drives in the ps3.  responding to waiting4PS3HDTV. — […]

  7. […] this time around, sony is going to blast mass quantities of players into the marketplace.  (at a huge lost and partner cost, i might add)  and, in order for price justification of adding the blu-ray drive (when games are all going to be on dvd the first year or two anyway), they are going to have to shell-shock the world with playable media. […]

  8. […] you may also want to read my post on The Blu-Ray of Damocles or even why DVD-9 is Not Too Small.  my favorite that i think you’d like?  probably the one about sony Breaking Consumer Economic Principles. and, hell, i’ll even quote some stuff i wrote on joystiq about why — get this — high definition dvd formats are stupid! the trickle of hd content is actually just a symptom. […]


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