Uphill Struggle

Sony's quarterly results aren't due until January 29th, and its financial year still has two and a half months to run - but storm clouds are already gathering over the electronics giant, after an insider at the firm hinted that it could end up posting a USD 1.1 billion operating loss for the full year.

It's not a good time to be in the electronics business in general - rival firm Toshiba is also expected to report a loss, faced with similar issues of slowing demand for LCD televisions, PCs and laptops. In Sony's case, however, a downturn in its finances will focus attention back on what's widely seen as the company's lamest lame duck - the PlayStation 3.

It's worth being specific here - we really are just talking about the PlayStation 3, not Sony Computer Entertainment as a whole. The PlayStation Portable may not be any threat to the dominance of the Nintendo DS, but it's still a console with a very healthy installed base and fairly solid ongoing sales. (It compares far more favourably with the DS than either the PS3 or Xbox 360 do with the Wii, for a start.) The PlayStation 2, meanwhile, has been the most successful console in history, and even in its decline it continues to be a license to print money for Sony.

It's the PS3 that makes the whole operation look bad - or at least, less good than it might do otherwise. This time last year, many commentators were somewhat cautiously suggesting that 2008 might be the year when things came together for the PS3 - with the installed base rising, developers getting to grips with the hardware and a rash of exclusives (presumably) in the pipeline.

It didn't happen that way. Sony would protest that they sold a lot of PS3s in 2008, and they're right - it was by no means a terrible year for the company. By mid-year, the gap with the Xbox 360 was narrowing slowly, and even if the USA was expressing a clear preference for Microsoft's console, Sony could point to Europe and Japan and claim that two out of three ain't bad.

However, they needed something a lot better than "by no means terrible". By the end of the year, Microsoft's lead over Sony was widening again, with the Xbox 360 hammering its rival in most territories during the run-up to Christmas. Big games like Resistance 2 and LittleBigPlanet weren't flopping, but they weren't making the kind of impact Sony needed. Worst of all, the figures seemed to support Microsoft's claim to have wrested superiority in Europe from its rival.

If Sony reports an operating loss - its first in 14 years, despite the tough times it has endured in the past decade - then all of these things will be pointed to, discussed and dissected. This is, in some respects, a little unfair. The PS3 isn't doing well, but Sony's financial troubles have far more to do with the ludicrous strength of the Yen on the currency markets and the slowing sales of luxury consumer goods thanks to the global recession. The similar situation experienced by Toshiba, which has no hand in the games business, is a demonstration of this - and it's worth noting that Microsoft, too, has been surrounded by rumours of cost-cutting and layoffs in recent weeks.

(I'm reminded, in fact, of the large loss which Nintendo posted towards the tail end of the GameCube era - its first for a century - which was seen as a death knell for a company that had forgotten how to be relevant to the market. The reality was rather different to the commentary of the time. In fact, Nintendo's losses were almost entirely down to currency market fluctuations which had forced down the value of its "war chest" of overseas investments.)

In other regards, however, there's much about the PS3's performance which is worthy of consideration. Sony's console isn't selling as well as Microsoft's, and even when it does sell, it doesn't have the strong attach rate which its rival boasts. The situation only looks worse when you consider that both companies have been roundly trounced by Nintendo in this generation, at least in terms of straightforward hardware sales.

The problem isn't Sony's hardware, regardless of what internet forum arguments may rage. Consumers don't know or care about memory bottlenecks or comparisons of textured, lit polygon throughput, and the success of the PS2 ably demonstrates that developers will work around these issues if the market demands it. In hardware terms, the past few years have proved that from a purely consumer standpoint, the PS3 is more reliable, vastly quieter and offers more non-gaming functionality than the Xbox 360.

Yet they still don't want to buy the machine, and that can perhaps be explained by the areas in which Microsoft is unquestionably superior. Sony is a hardware company, and it has built a reliable, quiet, solid system. Microsoft is a software company currently going through a metamorphosis to become a services company, and it has built a great interface which ties in transparently and effectively with a superb online service.

Herein lies the rub, in two key ways. Firstly, Sony's superior hardware (and I say that purely in the sense of its reliability and build quality - arguments over its actual power are really not of interest to the majority of consumers) seems to make the PS3 into a much more expensive system to build than its rival. You can buy an Xbox 360 now for less than a Wii, while the PS3's price point remains stratospheric, a factor which is hurting the company more and more as the recession bites and its rivals drop prices.

Secondly, Microsoft's superior software and services influence both buying decisions and attach rates. The focus on online is still one that's less important than its advocates would claim, but this generation is the transition - it's the last generation of hardware in which any significant percentage of consoles will not be online, and already the figures are at a tipping point. Xbox Live, as a result, drives sales in a way which Sony's badly presented and altogether weaker service does not, because existing Xbox owners convince their friends to join them on the online service.

Moreover, Xbox Live drives sales of games and content in a way which Sony's system does not. The large Xbox Live community and the use of systems like Gamerpoints make owners of both systems (an appreciable number of innovators, early adopters and early majority consumers alike) more likely to pick up the 360 versions of multi-platform games, a view generally supported by the attach rates of both machines. In addition, Xbox Live (especially NXE) drives information and buying opportunities to consumers through an attractive, graphical interface. Sony's equivalent? A slightly pathetic RSS feed which scrolls in the corner of the screen.

Most of these disparities between the systems have existed from day one, but in the wake of 2008, they have become even more pronounced. The launch of NXE, while not exactly the massive event which Microsoft proclaimed it to be, does put even more open water between the Xbox 360's software and services and their equivalents on PS3. Meanwhile, more and more consoles are getting connected to broadband networks, and there's a valid argument which says that critical mass of connected gamers will snowball into domination for one system or the other - you could call it the World of Warcraft argument, perhaps, since that's almost exactly what has happened in the MMO space.

One other issue, however, is worthy of consideration - and this, arguably, is the most surprising failure on Sony's part of the past 12 months. For all that Sony has made mistakes in the past, it has always been extremely strong on the marketing front. However, in the latter part of 2008, it was Microsoft's marketing messages which dominated the airwaves.

In the UK, at least, the Xbox and its games seemed to be advertised in almost every ad break on prime-time television - with a canny and well-considered series of ads pushing home the message that the console has a wide variety of entertainment for all the family, and that it's cheaper than its rivals. It didn't help Microsoft to close the gap with Nintendo, admittedly, but it handily outsold the PS3 in the UK in 2008 - a significant victory given the region's strong affinity for the PlayStation brand. Where was Sony's marketing, during all of this? It was there, certainly, but it was surprisingly low-profile compared to Microsoft's push. Perhaps Microsoft plans to spend Sony out of the territory - and no matter how cynical you are about the power of marketing, the fact remains that with enough time and money, they probably can.

This race, however, isn't over yet. Perhaps more importantly, this race may not be the one that matters, since the Wii has effectively nixed the chances of either PS3 or 360 ever emulating the success of the PS2. The rest of this generation remains for Sony to get its act together, to learn how to be an effective, integrated software and services company as well as a hardware company that can produce systems which hit a market-friendly price point, rather than being excellent but unaffordable.

For 2009, nobody is predicting - no matter how cautiously - that it might be Sony's year, but that doesn't mean that the company can't or shouldn't be lifting its game with the PS3. After getting so much wrong in this generation, Sony needs to overhaul how it thinks about the market, how it approaches the market - and perhaps even who's in charge of its whole approach to the gaming space. Unless it can do that and start to pull the PS3 operation around, it'll be too late by the time new hardware appears and the whole merry-go-round starts again in a few years' time.