Sony's Dearth of PlayStation Consoles Reveals Reliance on Fickle Industry
By ROBERT A. GUTH
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- The disclosure by Sony Corp. that it won't have enough PlayStation 2 consoles for the Christmas season underscores the company's increasingly strained reliance on the videogame business, one of the most fickle industries.
Last week, Sony Computer Entertainment America Inc. said that it would halve -- to 500,000 -- the number of PlayStation 2 consoles it will ship at the machine's Oct. 26 debut in North America. The news shocked U.S. retailers, who had been expecting one of the biggest and most-lucrative consumer-product rollouts ever and who have already taken pre-Christmas orders for the consoles.
On Tuesday, a spokesman at the Japanese headquarters of Sony Computer Entertainment said in order to meet that target, the company will redeploy to the U.S. market some PlayStation 2 machines that had been earmarked for Japanese retailers.
The delay is significant because game-machine makers count on shipping huge volumes of their wares immediately after launching them. Sony sold one million PlayStation 2 consoles within one week of hitting store shelves in Japan in March. Sony is sinking billions of dollars into marketing and manufacturing the machine, and last quarter said costs associated with the launch were one factor behind an $841 million net loss for the quarter ended in June.
In-House Delays
Sony is blaming the PlayStation 2 delay on unspecified parts shortages. A person close to the company said the likely culprit is Sony's in-house designed and manufactured Graphics Synthesizer, a graphics chip that helps the PlayStation 2 churn out lifelike images such as flowing water and wind-blown hair. Sony won't comment.
Contrary to speculation by some industry analysts, crucial PlayStation 2 parts supplied by Toshiba Corp., including the machine's processor, called the Emotion Engine, aren't in short supply, according to several people familiar with Toshiba's production of the chips.
Chances are Sony will be able to recover if it can meet its promise to ship 500,000 units immediately and then gradually release more machines through the end of the year. Sony already enjoys a strong position as the leading maker of videogame hardware and software, and has a healthy time cushion: rivals Microsoft Corp. and Nintendo Co. won't have their competing machines out until the second half of next year.
The Sony Computer Entertainment spokesman in Tokyo said even with the delay, Sony is on track to meet its initial PlayStation 2 shipment plans of 10 million units world-wide by March 2001.
A spokesman for the parent company said, "As far as earnings go, we do not see any impact at this stage."
Still, the PlayStation 2 problem underscores the increasing burden Sony bears as it tries to hold its lead in the fast-changing videogame business.
Ambitious Executive's Vision
The PlayStation 2 is the brainchild of Ken Kutaragi, the aggressive president of Sony Computer Entertainment and the man who defied many of his peers by pushing Sony into the games business in late 1994. That proved a smart move. The PlayStation quickly became the world's most-popular game machine and in short order was Sony's largest profit spinner.
Sony's game business has helped sustain the consumer-electronics giant through several tough years as it struggled to repair damage from Japan's slumping economy and Sony's own expansion into Hollywood. At its peak, the PlayStation contributed to nearly 40% of Sony's operating profit. Last year that number dropped to 32%, still more than the combined profits of Sony's music and movie operations.
Ever ambitious, Mr. Kutaragi wanted to push Sony and its partners to even-greater heights with the PlayStation 2. Mr. Kutaragi has produced a machine that by far outperforms the original PlayStation and all competitors' machines. That meant the machine had to have graphics on par with expensive work station computers, and meeting that standard has been an expensive goal.
During the two years prior to March 2001, Sony will invest about $2.4 billion in the PlayStation, much of that in graphics-chip manufacturing. That sum has been particularly difficult for some Sony executives to swallow, given Mr. Kutaragi's increasingly critical attitude of the way the rest of Sony is run. At a large meeting of Sony managers from around the world two years ago, Mr. Kutaragi said Sony should cut its aging top executives, a comment that was met with stunned silence. A Sony spokesman acknowledges that Mr. Kutaragi "is very vocal about the slowness of Sony's business."
Perhaps more significant than the parts shortage, the PlayStation 2's performance level makes it expensive and tricky for developers to write games for the machine, a fact that has slowed the introduction of new versions of some popular games.
On this score, Sony should be fearful. In the early 1990s, Nintendo seemed to have the home videogame market locked up. But game developers, tripped up by Nintendo's transition to a faster game machine, defected to the then-fledgling PlayStation.
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