When we say the PlayStation 3 could end up in third place that is a worst case scenario for Sony. Furthermore, much will depend on variables such as Sony's execution and most importantly how rapidly they can bring down the PS3 price.
Sony's clear strength is brand strength and current market position. The glaring weakness of the PlayStation 3 is price, especially when compared to the competition.
It has often been said that it all comes down to software, i.e. the games. However, we think hit software is only one part of the equation. It is our view that the PlayStation systems have been successful not because of hit software but mainly because of software diversity and third-party support. In essence, Sony helped expand the market by reaching a more casual consumer that wasn't so concerned with the latest big hit.
Of course, the PlayStation 2 had more than its share of big hits, most notably the Grand Theft Auto series. However, we estimate that less than 20% of PlayStation 2 owners bought a GTA game. Without GTA buyers, the PS2 would still have outsold the competition by more than 3 to 1. The secret to the PS2's success was more in the wide range of product offerings: all kinds of sports games, racing games, RPGs, action titles, big name licenses, kid friendly products, RPGs with Disney characters, etc. Japan had Final Fantasy and Dragon Quest, Europe had EyeToy and SingStar. In all markets, the PlayStation2 was a complete entertainment system for the family priced under $300.
It now appears all that wasn't good enough for Sony. With the PlayStation 3 the company is going after the high-end power user. It is almost as if Coca-Cola not only decided to go with a new formula, but also decided to exit the low brow soft drink business to go into high-end wines. Of course, there is a market for high-end products but it is 1) a very different consumer type and 2) not nearly as big as the blue collar mass market. Wal-mart sells more toys than FAO Schwartz and McDonald's sells more beef than Ruth's Chris Steak House.
Looking at Sony's portable PSP system shows some other dangers in trying to be too many things at once. The PSP is designed to be much more than a game system, it is a complete portable entertainment package. With a beautiful, sleek look, the ability to play music, movies, games, wi-fi connectivity etc, the PSP seemed like a bargain at $250 and less.
On the surface it seems like the PSP has been a huge success. By the end of fiscal 2006, Sony announced they had shipped over 17 million PSP systems worldwide. This was comparable to the Nintendo DS shipments at almost twice the price. However, underneath the surface the PSP seems more about style than substance. The system truly excels at none of its functions. Meanwhile, the DS seems to be really expanding the market where the PlayStation brand had been dominant. Titles like Nintendogs and Brain Age add the type of product diversity that drove over 100 million consumers to buy each of the first two PlayStation systems.