AUG. 14, 2007 • These are momentous days for Sony Computer Entertainment of America. In what is arguably the PlayStation 3’s largest market, the system has trolled in third place far behind Nintendo’s surprising Wii and Microsoft’s Xbox 360. Neither has the PlayStation Portable had an easy time. In addition to competing with the ascendant Nintendo DS, retailers and consumers have openly questioned the utility of the PSP as a movie-playback device, impairing the performance of UMD format discs as a result.

At the E3 Media & Business Summit in Santa Monica, Calif. last July, SCEA addressed the PS3’s biggest hurdle – cutting the price of the 60MB system to $499. While revelations after the conference confirmed that model has been discontinued and showed the $100 savings as a price-clearing mechanism on existing inventory, in our view it will be difficult for Sony not to have a $499 PlayStation 3 SKU by the time the 80GB system arrives in numbers.

Similarly, SCEA made strides in freshening up the PSP. Not only did SCEA announce a lighter and slimmer model at E3, the division squarely addressed the UMD movie problem by adding a seamless connection between the handeld and living room TVs. The new feature turns the PSP into a UMD player, and eliminates the old consumer complaint of Sony coercing the sale of films twice on both DVD and UMD. Sony may be forced to release the bulk of UMD movies in the short-term, but this new feature may save the format from extinction.

What’s more, the PlayStation portable is getting new colors. Sony will ship a $200 PSP Entertainment Pack featuring a silver PSP, the game Daxter, a memory stick and a Family Guy Freakin’ Sweet UMD from Fox. Arriving in October is a $200 limited edition Star Wars package featuring a white PSP sporting a Darth Vader silhouette, and bundled with LucasArts’ upcoming Star Wars Battlefront: Renegade Squadron.

Coming out of E3 the prospects for SCEA looked brighter than going in. To get a better handle on the road ahead, DFC went to SCEA president and chief executive Jack Tretton.

DFC: The Wii is getting a lot of buzz, but the PS2 has managed to still sell robustly, does this mean consumers simply aren’t ready to commit big bucks to a high-end game system – even at $499 – until they see a little more? Does this play into your 10 year strategy or is it something you didn’t foresee?

Jack: I see Sony and Nintendo taking two very different approaches. Comparing Sony to Nintendo is a lot like comparing Sony to Nike. You have to give all the credit in the world to Nintendo. Through all of the ups and downs, year after year, they’ve always been incredibly profitable, even though they always haven’t had the number one machine or necessarily advanced the industry.

With the PlayStation brand our focus has been on both a long term strategy that helps grow the overall market while at the same time making a solid profit. However, compared to Microsoft and Nintendo I think we have found a strong middle ground. Microsoft has been all about investing to build market share with no concern for profits. Nintendo has focused solely on profits. I think we are in-between and that will serve us well in the long-term. Sony historically has had a major impact in expanding the video game market from $5 billion to $12 billion in the U.S. Expanding the market is our goal, not year-to-year profitability.

DFC: All of a sudden, with Wii sales strong, we’re hearing Microsoft executives mention that focusing primarily on the core gamer may not have been sufficient as a strategy for success. How does SCEA go about convincing mainstream consumers to think less about the PS3’s $499-$599 MSRP, more about such assets as Ratchet and Clank and SOE’s Free Realms?

Jack: Is Nintendo really carving out new gamers? Are they really expanding the market with the DS and the Wii? The DS doesn’t expand the demographic in the way the PSP does. Are all of those people dancing around in front of their TVs with a Wiimote going to be converted into active gamers? The Wii may be just selling to existing Nintendo fans, but you can probably bet that a person buying a PS2 in 2007 represents a new video game consumer. And that new video game consumer represents a potential PS3 consumer several years down the road. We’ve sold 1.5 million units of PS3 hardware so far, but you can’t forget that the PS2 is selling to new gamers in huge numbers today. The PS2 has a 115 million installed base, and growing. We swung for the fences with the PS1 and PS2 and in the same way we are going in a new direction with the PS3. We have kept our existing base alive, while continually growing the business. Microsoft killed their original Xbox business, Nintendo killed their GameCube business. We are selling PS3 hardware, but we continue to build new consumers for the PS2. The PS2 will be the gateway into the PS3, and the broader PlayStation family of products like the PSP. We’re not quite into a Proctor & Gamble approach, but we don’t want to leave any consumer behind. We have a complete console experience and a complete portable experience and now the PS3 represents a quantum leap for the market.

DFC: Nintendo has its powerhouse franchises, Microsoft has Halo and Gears of War, third-party publishers seem less willing to commit to exclusives. Would you say that first-party development may be the crucial distinguishing factor over the next few years? If so do you feel SCE can compete with Nintendo and Microsoft on this front with a greater number of titles that can sell more than 1 million units?

Jack: Nintendo deserves all of the credit they are getting for how well the Wii is selling right now. It would be crazy to discount the loyal Nintendo audience, but that audience didn’t help them lead the market with the GameCube. Yes, that audience will definitely be a factor in the success of the Wii, but to get to where they are today, they had to do something radically different in appealing to new gamers. Our biggest selling PS2 franchise was Grand Theft Auto. But we’ve sold over 115 million machines. I would give Grand Theft Auto credit for selling 5 million of them. I think the role of third-party exclusives to our success gets over-exaggerated. Much more goes into it. If Sony didn’t have such a strong position in first-party development, maybe there would be a case, but look at the string of 1 million-plus titles from us for the PlayStation 2. Sony has the largest number of franchises and a strong diversity of content. We have 18 first-party titles that have sold over 1 million units and we have smash hit franchises like Gran Turismo that can sell over 10 million units. Halo and Gears of War are all Microsoft has got, and I don’t know how many 35-year-olds that Mario or Yoshi bring in. Ask a lot of people who bought a Wii and they’ll tell you they love Wii Sports. Ask them what they want to play after Wii Sports and they haven’t thought about it. But I can tell you Resistance: Fall of Man has sold more than 1 million units, the Gran Turismo franchise isn’t too shabby in worldwide sales, and sales of MLB ‘07: The Show are looking pretty sweet.

DFC: But don’t you need more 5 million-sellers to boost adoption of the PS3?

Jack: Game franchises that can sell 5 million units are important to our success, but I don’t think any game franchise can drive a $400-plus hardware sale. Big franchises can help, but they aren’t the most important item in the equation. At $249, Wii Sports can sell Wii hardware. It would be great if we could sell the PS3 at $249, but you get what you pay for. Looking toward the 2007 holidays, pricing is something we always have to address – the intro pricing is always too high. Yet in talking with consumers, our message has got to center around how much better our hardware availability is, and how much fuller our software library is, compared to last year.

DFC: Software MSRP for Sony systems now is across-theboard higher than it is for Nintendo systems. This is a complete reversal of the situation 10 years ago when Sony was a leader at driving software prices down and it was the N64 titles that were priced at a premium. Is this sustainable?

Jack: Ten years ago the $49 price point for games on the PlayStation was less expensive than titles for the N64. Yet when you look at it closely, more goes into the decision to purchase console hardware than the price of software to run on that hardware. If you look at Madden on the PS3 versus Madden on the Wii I think consumers will be able to see a huge difference. Consumers are willing to pay for quality software. PS3 games cost $59, the same price games for the Xbox 360. That doesn’t mean the majority of people are going to run out and buy the Wii since they can buy Madden for that system at $49. And if that were the case, we’re sitting pretty because those folks can buy Madden for the PS2 at $39.

DFC: What is Sony’s biggest challenge in North America as we approach the holidays?

Jack: Our number one job is to educate the consumer on what our system can do. Today we can’t rely on that education happening at the point of sale. We’re not sure anymore if retail is where product education is happening. And the days are long gone when you could drop boxes of systems on the store floor and expect the consumer to always know what’s inside the box. That’s why we have invested a lot of our budget into event marketing where we can get the PlayStation 3 into the hands of more people. Our support of retail co-op advertising remains substantial, but changes in the marketplace have forced us to change our approach. If you look at the audits, we far outspend the rest of the industry in advertising. We outspend Nintendo and Microsoft combined. We also invest heavily in event marketing to get in front of the consumer and we have spent $50 million on interactivity promotions.

DFC: How do you define success for your division?

Jack: Our business strategy is not based on the first six-month hardware sales, or sales in the first three to five years. The equation hasn’t changed in the last 20 years, and won’t change in the next 20 years. You introduce a system, sales build as production increases and availability improves, and the platform with preponderance of software drives hardware sales and market growth over time. Our vision of success is relative to how well we meet our goals.

For the PS3 that is a 10-year vision. You may see Microsoft and Nintendo abandon their existing systems in the next three years, as they just did with the Xbox and the GameCube. You won’t see that happen with the PlayStation 3. We will not abandon this machine because we designed it with the power and sophistication to last 10 years.

Our goal for this fiscal year is to sell the number of units we intend to ship: 11 million PS3s, 10 million PS2s, 9 million PSPs and 250 million software units. We have never said we want “X” market share, we want to drive our vision of the marketplace. We are committed to the PS3 marketplace for the next decade. It is difficult to unveil a decade long vision in the first six months. Our current stated PS3 and PSP numbers are where we think we should be for strategy. When you look at the numbers we are used to dealing with of 100 million-plus, the first 18 months is only a small part of the process.