Just Observing, the following article from the New York Times outlines some of the obstacles Sony will face in bringing out the Playstation II. It was in the May 4th Business section.
Doug
Sony Takes Another Big Gamble on
Playstation
By STEPHANIE STROM
OKYO -- It all started with a broken contract.
In the early 1990s, Nintendo backed out of an agreement to include
Sony CD-ROM technology in the next generation of its video game
machines.
Sony Corp.'s chairman, Norio Ohga, a
notoriously grouchy business titan, apparently
regarded the change of heart as an affront to his
company. So against much internal opposition,
Ohga decided Sony itself would go into the
video game business and give Nintendo Co.,
then maker of the world's most popular game machine, a run for its
money.
But there was more to it than revenge. Ohga also needed a way to retain
one of his brightest engineers, Ken Kutaragi, who had sworn to leave if
Sony refused to pursue his dreams of making a game machine unlike
anything on the market.
Since then, more than 50 million Playstations have been sold worldwide,
and Sony Computer Entertainment, the business Kutaragi runs, now
accounts for nearly 40 percent of Sony's operating profits.
Now, Sony has made an even bigger gamble on Playstation,
announcing a corporate overhaul in March that will put the next version
of the game machine at the heart of its reconfigured empire.
Nobuyuki Idei, Sony's president, sees the machine, or at least the
revolutionary chip at its core, as the first significant challenge to the
Wintel empire, the combination of Intel microprocessors and Microsoft
operating systems that are the heart and soul of most personal
computers.
This has put Kutaragi, regarded at Sony as a bit of a wild card, in the hot
seat -- although he's not one to sweat. "I don't feel any different than I
did before we made the announcement," he said, perplexed by the
suggestion that all this might raise his stress level. "We're just going to be
forced to educate Sony Corp. a bit."
Idei is not at all fazed by such talk. "Sony Computer Entertainment will
play a very important role in changing Sony's future by encouraging the
rest of the company to embrace change," he said. "I don't see any danger
that it won't harmonize inside Sony."
Yet Idei himself has described Kutaragi, 52, as "a wild horse," and
already, the two seem to differ about how to handle the incredible
machine, now dubbed Playstation 2 but likely to be renamed.
"What they're going to do with this thing remains to be seen," said
Koichiro Chiwata, an analyst at Nikko Salomon Smith Barney.
The tech world is buzzing with speculation. "This machine has the power
of the highest-end computers masquerading as a game, an amazing
example of what one can do when one pushes the envelope to its limits,"
said Elias Antoun, executive vice president of the consumer product
division of LSI Logic Corp., which makes the central processor for the
original Playstation and is making the input-output processor for the
new one. It could "create opportunities that no one can foresee."
But Kutaragi, uncharacteristically, seems less ambitious for his machine,
or at least less willing to reveal his extended vision. "Having Playstation
2 become the core system for the home, that's Idei-san's point of view,"
he said. "But for now, we agree it's going to be for games."
That's somewhat disingenuous, for Kutaragi is the first to lay out the
machine's ability to connect at high speed to the Internet over cable and
satellite links. He notes the slots it will have to connect to modems and
hard drives and its capacity to recognize voices and even facial
expressions.
The possibilities of interacting with simulations of everyone from a
cartoon character to, say, Leonardo DiCaprio, the actor and heartthrob,
are myriad. "Imagine a virtual DiCaprio," Kutaragi said. "He'll be able to
wink back at you and smile. He will even be able to ask you how your
day has been."
Given the level of Sony's investment,
the Playstation 2 has to be more
than a game machine. Sony is
spending $1 billion to $2 billion, Idei
said, to produce the core chip and
graphics chips that make it so
revolutionary, and many analysts
doubt that it can recoup that
investment as a game machine alone.
Steven Myers, a veteran technology analyst at Jardine Fleming Securities
in Tokyo, estimates that it will cost Sony at least $100 to produce each
core chip, which Kutaragi has dubbed the Emotion Engine for its ability
to simulate real-time emotional responses in its lifelike characters.
Myers said Sony would have to charge at least $500 for a Playstation
2 to even begin to approach break-even, making it at least twice as
expensive as rival consoles -- and some have speculated the price will
actually run to $700 or $800.
Like many other analysts, Myers questions Sony's ability to produce
Emotion Engines as fast as it has anticipated. Sony has said it will start
selling Playstation 2 in Japan this winter.
The chip is, indeed, a technical challenge. It will be built using
cutting-edge 0.18 micron technology, meaning the circuitry wire is just
0.18 micron thick, not the 0.25 now typical. Sony has linked up with
Toshiba Corp., which has a strong reputation as a chip maker, to make
the Emotion Engine, but Toshiba has never mass-produced a chip using
0.18 micron technology.
It is also big and complex, which means there is greater room for error
and lower profitability. At 17 millimeters by 14.1 millimeters, the Emotion
Engine will be the biggest chip ever mass-produced. Chip makers say
that for a typical consumer product with sales in the millions, producing a
chip bigger than 8 millimeters has usually been a recipe for disaster.
Kutaragi is well aware that his plans are audacious and that skepticism
abounds, but he's not concerned. "The architecture is different from that
in current central processors, which are typically designed for a system of
calculation that was started in the 1970s," he said. "It's very aggressive
and powerful."
The Emotion Engine was developed by a team of Sony and Toshiba
designers and engineers who saw the project through from the earliest
stages of research and development to final production. He contrasted
that with the infamous central processor in the Sega Dreamcast game
console, which was designed by Video Logic, a British company, and
then passed on to NEC for production. Initially, NEC was able to
produce only half the chips it promised.
"During research and development," Kutaragi said, "there was no
collaboration between the designers and NEC."
Not so, said Aston Bridgman, an NEC spokesman. "You can't make a
high-performance machine like Dreamcast," he said, "without all kinds of
close cooperation."
Sony has also adopted the Intel model to churn out the Emotion Engine.
Intel has the same start-up problems that any chip maker has, but
because it typically dedicates one production line to one chip only, it
works out the kinks faster and can then produce mass quantities with
relatively few duds.
Sony is paying some $500 million to retrofit Toshiba's Oita plant, where
the new chip will be made. Kutaragi said he expected the factory to
produce 10,000 chips a month initially and in five years make enough
chips for Sony to sell 20 million Playstation 2 machines a year. Sony is
also spending $600 million to $700 million to build a new chip plant in
Nagasaki, which will have two lines dedicated to making graphics chips
for the Playstation 2.
"I'm not expecting the yields
to be that high in the
beginning, certainly not to
support demand in Japan,
the U.S. and Europe,"
Kutaragi said. "But it's very
important for us to reduce
the number of defective chips
and recoup our investment,
and we think we can easily
do that."
Antoun, who previously ran
LSI Logic's Japan business,
has known Kutaragi since
the beginning of Sony's
video game business and is
perhaps the foreigner who
knows him best. While
acknowledging that the
Emotion Engine will be hard
to make, he said he had no
doubts that Kutaragi would
live up to his promises.
"He has vision backed up with a strong understanding of what it takes to
get there," Antoun said. "The basic assumption he's using is simple: that
technology is moving in his favor."
Kutaragi's confidence is based on Moore's Law, the bedrock rule of
microelectronics that says the density of transistors packed on a chip will
double every 18 months. In other words, even if Emotion Engine is
pushing the envelope now, technology will catch up quickly.
That belief has guided him throughout his career. In the mid-1980s, he
encountered the first "chip" that delivered graphics in real time. Built by
Sony for use in broadcasting, it was 6 feet tall, 19 inches wide and 25
inches deep and housed around 20,000 chips. "I figured that in a decade,
that box would be a single chip," Kutaragi said.
At about the same time, he bought a Nintendo 8-bit game machine for his
son and found himself fooling around with it. "I realized then that in the
future, computers and computer science would change our lifestyle, the
way we played and lived," he said. He was upset, however, by the
machine's poor sound and pushed Sony to negotiate a deal with
Nintendo to use Sony sound components. That's the deal that later fell
apart, giving birth to Playstation.
Sony had no desire to enter the game business, which was dominated by
Nintendo and Sega and relied on digital technology at a time when Sony
was devoted to analog. Games were toys, after all, not serious business
like TVs and Walkmans.
The opposition discouraged Kutaragi. "I was very sad," he said. "But I
had a strong passion, so I decided to create my own space to make my
vision a reality, even if that meant leaving Sony." But Sony agreed to set
him up in his own company.
"I told Ohga-san when we set up Sony Computer Entertainment in 1993
that someday our business would become a big business and influence
our corporate betters in the same way that children influence their
parents," he said. "It's natural, the way of nature."
Kutaragi's willingness to leave Sony, highly unusual in risk-averse Japan,
perhaps grew out of his family history. His father, a native of Japan's
southernmost island, Kyushu, returned from World War II to nothing,
moved to Tokyo and started a printing company. It became quite
successful, Kutaragi said, in large part because the family did everything
-- sales, printing, logistics, accounting.
"I didn't grow up in the typical salaryman's family," he said. "It was more
like growing up in a Jewish family and a Jewish family business." When
Kutaragi was 21, his father learned he had cancer. Kutaragi had just
finished engineering studies but got ready to take over. "It was interesting
enough, it was profitable and I had known it from when I was one year
old," he said. "But my father told me he didn't want me to succeed him in
the business, he wanted me to be free."
It was 1975, the height of the first oil crisis in Japan, and companies had
all but stopped hiring. "I wanted to work at Sony and so I just went
directly to human resources at the headquarters," Kutaragi said.
"Someone at the top thought they should probably hire a few very funny,
unusual people."
He was one of 43 men and women Sony hired that year; the previous
year, he said, it had hired 660. "I don't know why they decided I was
interesting," he said. "I was just being myself."
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