PS3’s pricing problem

Earlier this week a European Sony official supposedly slipped and said the PlayStation 3 will launch at 499 to 599 euros, which translates to roughly $600 to $750. Sony has backtracked on that now, but they didn’t need to. (GamesIndustry.Biz had already pointed out that “European prices are often quoted inclusive of local sales tax, which can be in the region of 20 per cent. As such, the final US price is likely to be significantly lower than a simple currency exchange would suggest – as low as $500 in fact.”) There’s no way the PS3 is launching, in the U.S. at least, at higher than $499. I think $399 is as good a possibility.

When the Xbox 360 launched, Tim Harford argued at Slate that given the shortage and demand at launch, Microsoft should have charged far more than they did and experimented with more elastic pricing. As a matter of economics, I think Harford is exactly right. When demand far outstrips supply, economics tells you to raise prices. But as a matter of establishing a consumer electronics product, that’s suicide. Microsoft knew it, and Sony sure knows it. Bet on $499, tops.

It’s odd to me that so many people seem to be unsure of the PS3 pricing, as though they’re taking seriously Sony’s line that no decision has been made, and taking analysts’ predictions of the cost per unit as evidence that Sony is still up in the air in terms of pricing. I think people are still acting confused because they aren’t taking the Blu-ray problem seriously enough.

Sony cannot afford to price the machine above $500, or the Xbox 360 will win. But Sony may not be able to afford pricing the machine under $500, or the Blu-ray (and Cell, to a lesser extent) costs could seriously hurt the company. If Blu-ray loses the next-gen DVD war (or if consumers are indifferent and both formats lose), the costs could do more than hurt the company.

So Sony has to take one of two bets. Either consumers will flock to a $600-$700 machine, or Blu-ray will win the DVD format war and eventually make up for the huge loss Sony will take on each PS3. No company worth its marketing VPs would take the first bet. And only a company so obsessed with past proprietary victories that it ignores a decade of consumer electronics trends would take the second bet. But all the evidence we’ve seen so far points to Blu-ray as the reason for the PS3 uncertainty: the delays, the high production costs, the production difficulties.

Sony’s choice is clear, and so is the PS3 price range. Let’s stop asking the obvious questions and start asking the bigger ones: Why on earth is Sony taking such a needless risk?

— April 7, 2006

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