Are Wii seeing the demise of the Playstation – Part 2

Read the earlier post from August 2007 here.

During some of last year Nintendo’s Wii was outselling Sony’s Playstation 3 by two to one. At the time it looked like we were seeing a fundamental shift in console market dynamics. NPD has just released the latest console sales figures for February (New York Times 3/14/08), so let’s see what’s been happening.

According to NPD, the top selling console was Nintendo’s DS at 587,600 units. Next was the Wii at 432,000 units amid supply constraints. In other words, if there had been more Wiis available in stores then they would likely have been sold.

Microsoft’s Xbox 360 sold 254,600 units, also amid supply constraints. Sony’s Playstation 3 sold 280,800 with no reported supply constraints, although interestingly consumers continue to prefer the positioning of the previous generation model – the Playstation 2 sold 351,800 units.

What does this mean?

1. PS3 is gaining ground

The ratio of Wii to PS3 sales has narrowed to 1.5 : 1. So although Wii continues to sell better than PS3, the trending suggests that their relative monthly sales volumes may become equal or possibly inverse over time. I.e. PS3 may start to outsell Wii in the future. However I expect it unlikely that PS3 will ever achieve a higher total sales volume than Wii, unless its production lifespan significantly outlasts Wii’s.

2. Upcoming mega-games will have an impact

Major releases this year will be key, now that PS3 is more affordable. I anticipate that Wii Fit, which is a big Wii release due in May, is likely to trigger significant cross-generational game and console purchasing. Sales of the much awaited GTA4 for Xbox 360 and PS3 are expected to be 2 to 1 on each console respectively throughout most of 2008 according to an analyst quoted in the aforementioned NY Times article.

If we assume that 360 and PS3 owners buy similar titles, then based on current figures we can predict that PS3 is unlikely to ever have a total console sales volume greater than Xbox 360, all other factors being equal. This leaves PS3 in a highly probable third place at the end of the 3rd gen life cycle unless PS3 sales start increasing significantly.

3. The Blu-Ray victory factor

Blu-Ray’s recent victory as the next gen DVD format should help PS3 sales during 2008, although it is too early to assess an impact from just the February sales figures.

4. Market positioning

Sony has been only partially competing in the 3rd gen console market. This is because the PS3 is still positioned at the upper end of the market and so is not yet within the budget of many mass market consumers. Sony has continued to market the 2nd gen PS2 at the opposite end of the market.

In doing so, Sony has failed to win the all-important middle of the bell curve, which is owned by Wii and Xbox 360. Microsoft compromised on hardware but offered next gen (and now defunct) HD DVD as an accesory option. This allowed Xbox 360 to sell at a reasonable price, which is still significantly less than the basic PS3.

The recent PS3 price cuts have attempted to move the console towards this mainstream price range of $200-350. However Sony has huge R&D costs to recover either through console or game sales so how much further can it really drop the price?

5. Franchise building

The fact that PS2 is still significantly outselling PS3 does have some benefit to Sony, because those owners experience the Playstation franchise. Sony now has to figure out how to turn these customers into future PS3 buyers.

I expect that a poll of Wii and 360 owners would reveal that many converted across from PS2s due to either the new gaming experience (Wii) or price (360), rather than buying a Ps3. Many modern day first time PS2 buyers are probably choosing that model because of its low price in the overall market.

Sony is likely to have a tough time converting them into future PS3 owners rather than losing them to Nintendo or Microsoft, unless the PS3 price falls significantly further. I would anticipate that a base PS3 model would need to cost $249 to appeal to current PS2 buyers as a follow-on purchase.

So has the market dynamic changed since August?

Yes, PS3 does seem to be making inroads. The price drop has helped and I expect the Blu-Ray studio victory will win it extra sales during 2008. But Wii’s position in the lead seems strong and Xbox 360 continues to look like a solid second.

Would a further PS3 price cut help? Perhaps. Sony might end up selling more of them but the payback period to recover the huge R&D costs would probably lengthen…and that I think is what will be taught in business schools once when we look back on the 3rd gen console wars: Sony’s over-engineering led to an inability to compete on the shelves; Nintendo and Microsoft played a better game.

Read the earlier post from August 2007 here.

Neil Berman

www.neilberman.com