Playstation 3 Pricing Models: Has Versioning Gone Too Far?

Rumors Abound

"As we have stated previously, we do not have plans for a PS3 price drop, and any rumors to that effect are false and are the result of speculation."
--Al De Leon, Public Relations, Sony Computer Entertainment America

(Sigh.) With this announcement, gamers across the world let out one synchronized breath of disappointment. For the last several weeks buzz built all over the internets (it's a series of tubes) regarding the possibility of a PS3 price drop announcement. On May 31, De Leon's comment quelled the rumor and insinuated an entirely different Playstation announcement for April 1.






Launch Pricing and SKU Proliferation

The Playstation 3 launched in the United States on November 17, 2006 with two SKUs (stock keeping units): a 20GB model for $499 and a 60GB model with premium features for $599. At first, this appeared to an intelligent use of the versioning pricing model in order to maximize early adopter revenue.

Following a tepid reception from critics and consumers, Sony began to introduce a series of new product SKUs designed to take advantage of manufacturing improvements and to increase sales. These packages, differentiated in features and hard drive capacity, included:

• Launch (Nov. 2006): 20GB
• Launch (Nov. 2006): 60GB
• Aug. 2007: 80GB (version 1)
• Nov. 2007: 40GB
• Aug. 2008: 80GB (version 2)
• Nov. 2008: 160GB

Needless to say, the PS3 versioning environment is confusing and crowded. Only the 2008 models are still in production, priced at $399 and $499 respectively. Even after this post-launch discount, the PS3 is still priced far above its competitors with the Wii holding steady at $249 and a new Xbox 360 "Arcade" at only $199. Sony must quickly decide if it can sacrifice market share in the interest of profit margins--or if other factors may allow them to achieve both.

Diminishing Operating Losses

Manufacturing costs have been a major factor in Sony's inability to remain price competitive relative to its console gaming rivals. Next-genbiz.com released a November 2006 estimate that Sony's production costs stood at an amazingly high $805 for its 20GB unit and $840 for its 60GB unit. Many console manufacturers had historically implemented a loss leader strategy--recovering high operating costs with strong licensing fees--but none had ever gambled as boldly as Sony with the PS3. The graphics processor and Blu-ray drive (two major points of differentiation) were the primary source of high costs.

Starting as early as 2007, several reports surfaced suggesting lowering costs, culminating in a Sony announcement that the gaming division had regained profitability in Q3 2008. These announcements were a major factor in fueling the rumors surrounding a PS3 price drop coming into 2009.

The PS2 Panacea

The Playstation 2, by any account, is a massive commercial success. The resilient console continues to sell tens of thousands of units in the United States and Japan and has one of the largest game libraries in industry history. Looking to reposition the PS2 in its waning days, Sony announced on April 1, 2009 a price drop to only $99. This budget-friendly pricing scheme will maintain sales of the low-cost, high-margin unit which may be subsidizing the low-margin PS3 business.

The Future

Sony has to make a decision:

• Maintain margin and hope for further cost decreases
• or
• Cut the PS3 price in August to generate buzz and sales for the 2009 holiday season

In my opinion, Sony cannot give Microsoft and Nintendo another holiday season to gobble up the remaining next-generation console market share and must act swiftly. An August 2009 price cut would present consumers with a very attractive value proposition. Now is when we must all stop to remember that the PS3 is not just a gaming console--it is a fully capable multimedia machine with top-notch graphics and the high-definition Blu-ray disc drive. Once the PS2 has run its last race, Sony could also add backwards-compatibility back into the PS3, further increasing the value of the console and opening up new Sony customers to a critically-acclaimed back-catalog. At a marginally lower price and enhanced functionality, Sony could overtake Microsoft for dominance in the high-performance console wars.