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.
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
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.
2) stick it out, take the loss and sink the company.
3) launch the ps3 in late 2007 giving blu-ray time to cement itself in the market.
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.
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!