A Question of Price

When is a price cut not a price cut? Simple answer; when it's a "change to the value proposition" - or a bit of fancy PR footwork designed to distract your consumers from the fact that you've just downgraded the hardware you're selling to them.

When is a price cut not a price cut? When you're Sony, six months into the lifespan of the PS3. Going into the week of E3, we believed that we had already seen a price cut in North America and were about to see it matched with a European cut.

Five days later, it turned out that the American price cut was largely smoke and mirrors - and the European "adjustment" didn't actually make a blind bit of difference to the price tag on the PS3's box.

Consumer outrage was to be expected, and it came through loud and clear, especially in Europe - where there is a strong sense that the firm has given the territory short shrift once again. We have absolutely no idea whether Sony actually expected this backlash, but given that the market had been primed by the US announcement to anticipate a price cut, anything less than that was bound to provoke ire.

In the event, the ire has been pretty significant - so much so that it even made the main evening news programmes in some countries. SCEE boss David Reeves probably hoped to calm consumer anger with the revelation that the US "price-cut", which dropped the 60GB system to USD 499 while introducing an 80GB system at USD 599, is only tempo-rary - with the 60GB system to disappear when stock runs out, leaving the US entry point back at USD 599.

This backfired; Europeans remained as annoyed as ever, and now US consumers, too, began to question their much vaunted "price cut".

With the benefit of hindsight, this all looks painfully inevitable. European consumers and media are incredibly sensitive to the idea that they're being ripped off compared to their American counterparts, and the decision to create a new PS3 bundle deal rather than dropping the price outright seemed a perfect example of this in action.

The American media, meanwhile, could hardly be expected never to notice that they'd just essentially seen the PS3 downgraded (with the removal of hardware backwards compati-bility chips) in return for a paltry extra 20GB of storage and a quick fire-sale of the existing stock.

Two weeks later, enough of the dust has settled on Sony's contentious decision to be able to take stock of the reality of the platform holder's new pricing strategy - and, perhaps, at some of the reasoning behind what seems, on the surface, to be a very foolish move.

Firstly, it's worth assessing the real impact of the E3 price shuffle on the value of the Play-Station 3 in North America and Europe - which reveals an interesting and unexpected aside to this whole debate. Somewhat lost in the upset over the lack of a genuine price cut is the startling fact that the PS3 is now, for the first time, better value in Europe than in the USA.

Admittedly, you have to jump through some hoops to reach this conclusion. Firstly, it would seem that the USD 499 price point is a red herring, with the price of entry in North Amer-ica reverting to USD 599 when stock of the 60GB model sells out.

(One of the industry's few genuinely well-informed analysts, Wedbush Morgan's Michael Pachter, argues that the 80GB model will promptly drop to fill the USD 499 price point when this happens, but it's tricky to see how Sony would justify such a rapid cut.)

Secondly, it's important to recall that the US price doesn't include sales tax, while the European prices include Value Added Tax - a sales tax levied at 17.5 per cent in the UK.

Assuming the dollar conversion rate to be USD 2 to the UK pound, a rough estimate which has held broadly true for some months, this means that the UK equivalent of the US price point is GBP 300. The UK price point, meanwhile, comes out at approximately GBP 362 once you subtract the VAT from the price - a much fairer comparison with the US price point.

In addition, in the wake of E3, the PS3 in the UK comes bundled with a second controller and two games - a bundle deal which has attracted much derision in the media, but which is actually much more sensible than many bundles the industry has attempted to foist upon consumers in the past.

After all, few consumers buy a new console without a second pad and a couple of games; including them in the bundle may not reduce the headline price of the console, but it cer-tainly reduces the real-world entry cost.

In the US, consumers get one controller and one game - Motorstorm - with their PS3. In essence, this means that UK customers are getting an extra game (RRP of around GBP 50, but regularly available for 10 to 15 pounds less) and an extra controller (RRP GBP 35, available online and elsewhere for around GBP 28).

That covers the price discrepancy with the USA, and leaves the UK console actually slightly less expensive than its US equivalent.

It's a perfectly logical conclusion, and there is no trickery in the maths or figures used to reach it - but like we said; you have to jump through some hoops to get there. This, argua-bly, is Sony's vast, stupid mistake - many would say the latest in a long line. Neither con-sumers nor the mainstream media are prepared to jump through these hoops of reason-ing.

While for some consumers, the value of the new bundle is self-evident, for many others the direct comparisons with the USA remain incredibly negative for Sony (although it's worth noting that UK consumers also pay significant premiums over the US prices for both the Xbox 360 and the Wii hardware, even after VAT is taken into account).

Even worse, this episode has - once again - made Sony appear like the bad guys of the videogames world in the eyes of the mainstream media.

Out with the Old?

Which, inevitably, leads us back to the question which hangs over this whole issue - why not just lop money off the price tag and be done with it?

The answer, we believe, lies with Sony's incredibly unusual position in the games market. For Microsoft, its approach to the videogames sector is very simple, and the reasoning be-hind its various decisions is correspondingly simple.

It has one product in the market, and its aim is to gain the maximum possible market share for that product. The original Xbox was killed off before the Xbox 360 even launched; there is no existing installed base to worry about or support. Better again, the firm has showed no qualms about sinking billions of dollars into gaining market share; the original Xbox made vast losses, and few who have any insight into the figures underlying Microsoft's console business believe that the Xbox 360 will ever bring the Xbox division into the black. For the odd quarter here and there, perhaps; but overall? Not a chance.

Sony, by comparison, has a vast number of factors to take into account when it makes de-cisions on pricing and market positioning. At the heart of this is the fact that right now, the PlayStation 3 is not Sony's main product in the videogames space - that honour belongs to the PlayStation 2, a system which recently passed 118 million units sold and is by many measures the most successful videogames console ever created.

PlayStation 2 is Sony's work horse, its cash cow, and probably a menagerie of other barn animal metaphors to boot. It is a vastly profitable business, both for Sony - thanks to prof-itable hardware sales, profitable accessories and lucrative licensing fees - and for most of the industry's major third party publishers, many of whom enjoy far better profit margins on PS2 software than on next-gen titles.

It is, in other words, the engine which continues to drive not just Sony's business, but the business of many third-party publishers. Sony's determination to keep it alive, combined with the introduction of the PSP - a portable platform whose hardware shares many simi-larities with the PS2 - guarantees that its lifespan will be even longer than that of the PSone, a platform which was still going fairly strong eight years after launch.

Sony's dilemma is apparent. PS3 is the future, of course - for Sony at least, if not neces-sarily for the industry as a whole. However, the harsh reality of the present is that Sony cannot afford to do anything that will damage the PS2's lifespan and profitability. Unlike Microsoft, it is faced with an almost impossible balancing act; attempting to establish the PS3, without crushing the PS2.

If Sony rushed to cut the price of the PS3, it would of course spur sales - and would drive Sony Computer Entertainment spiralling into billions of dollars of loss. By pushing the PS3 too quickly into the mass-market price points occupied by Nintendo, and coveted by Mi-crosoft, Sony would effectively be replacing the profitable PS2 business with the loss-making PS3 business. It would kill the goose that lays the golden eggs (we knew there was another barnyard metaphor there somewhere) and replace it with a product which, at present, does nothing but devour gold.

As such, the firm's dalliances with "value proposition" take on a different meaning. Sony wants consumers to feel that the company is responding to their concerns, and it wants to ensure that the Xbox 360 doesn't grow its head start any further - but equally, it does not want to do too much, too soon.

For now, the firm's strategy is to maintain the PS3 as a very high-end, expensive and pre-sumably desirable system, which is out of reach for the average consumer but provides them with a clear upgrade path at some point in future. In the meanwhile, in theory, they will continue to buy PlayStation 2 and PlayStation Portable hardware and software.

This is what David Reeves means when he says that Sony acknowledges that sales of the PS3 are not enormous, but that the company is satisfied that it is hitting its targets. Sony's targets aren't just for PS3 sales; they encompass PSP and PS2 sales, not to mention software sales for those platforms.

Right now, PS3 is, indeed, not selling in enormous numbers - but PSP and PS2, the firm's profitable platforms and by extension the most important, are ticking along nicely despite strong competition from Nintendo around their price points.

It is, of course, a terribly risky game to play - but it's the only game in town for Sony. Bal-ancing the need to maintain sales of previous generation hardware against its battle with Microsoft in the next-gen is an extraordinary high-wire to walk along. Doing too little to spur PS3 sales could erode consumer confidence and hand the next generation to Microsoft. Doing too much would ensure victory in the next-gen battle, but would leave Sony finan-cially devastated and facing disaster.

Whether this month's value adjustments strike the balance correctly remains to be seen. However, it's vital to remember, when watching Sony's movements in the market, that its position is more complex than that of its rivals. That is, of course, no excuse for misleading or disappointing consumers; but compared to Microsoft's deep pockets and single-platform strategy, Sony's situation is altogether more difficult.

When is a price cut not a price cut? When, instead, it's a careful step along a very high tight rope. Sony's next steps, in the coming six months, will be crucial - the firm is accom-plished at this stunt, but there's no safety net below.