The Strategies Of Sony For The Playstation
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Published: Tue, 16 May 2017
PlayStation is a subsidiary from Sony Corporation, which means that Sony owns all operations that occur within PlayStation. Sony Corporation was first developed in the 1950s after WWII by two Japanese men that started off as radio repair shop workers. Their names are Masaru Ibuka and Tsushin Kogyo. People thought that these two workers had miraculous talent and skills in electronics and they would most likely apply their talent towards military technology research and development. To the contrary, these men decided to put their efforts towards communications development such as transistor radios.
In 1958 was when Sony finally emerged as a successful business. Sony is currently stationed in Tokyo, Japan and has widely distributed headquarters throughout the world. Sony makes many types of electronics ranging from radios, television sets, video game console with stupendous amounts of video games, cameras, and computers (their VAIO trademarked laptop) with computer accessories.
In 1994, Sony decided to release a gaming console called PlayStation in Japan. PlayStation emerged into America a year later in 1995. It received so many good reviews that Sony continued to manufacture its products. Sony Computer Entertainment Inc. (SCEI) is a subsidiary of Sony wholly dedicated into manufacturing and distributing PlayStation compatible video games. SCEI was first developed in 1993 before the release of the original PlayStation console.
Later on in 2000, the original PlayStation product was succeeded by a newer generation called the PlayStation 2 (PS2), which historically became on of the most successful gaming consoles sold in the world. The PS2 alone sold over 50 million units in North America. The PlayStation 2 became legendary because it was one of the most universal and versatile piece of electronics in its time. Not only can it play PS2 games, but also CDs and DVDs, which were just beginning to emerge as a norm in society. The PS2 was basically an all-around entertainment system.
Realizing how often people travel in modern times, Sony decided to release a portable version of the PlayStation console called the PlayStation Portable (PSP) in 2005. The PSP was successful towards the portable entertainment industry. Not only can people play video games on the go with the Universal Media Disk (UMD) formatted games, but they can also watch movies, and connect their PSP to their computer to upload the their own photos, videos, and music to view and play as well.
In 2006, PlayStation released an even newer generation of the PS2 called the PlayStation 3 (PS3). The PS3 is currently very successful in the gaming market and offers consumers more options and varieties compared to the PS2. It can play games, CDs, DVDs, and now offers larger hard drive storage that is currently either 120 or 250 GB capacity. The older PS3 models can hold up to 60-80 GB and can play all formats of the PlayStation games. Furthermore, the PS3 is seen as highly customizable- meaning that there is a lot that the owner can do to personalize it. They can now treat it like the PSP and upload music, movies, photos, and download games onto the system’s hard drive. People can also play on the PlayStation Network (also released in 2006) – free of charge, meaning that they can play online with other people around the world that is also on the network. There are currently about 69 million PlayStation Network accounts created throughout the world.
PlayStation is currently very successful towards making profits and are not facing economic problems. This specific business entity is successful towards diversification. They continue to sell products worldwide, which has positive outcomes. For example, if one location wanted to lower the quantity shipped (thus reducing profits), it does not effect how much other locations are willing to buy.
Sony’s PlayStation is part of the retail sector in the market and is in the video console and gaming industry. It is part of the oligopoly market structure, meaning that it consists of only a few firms that controls 70% or more of the market share in that industry. Since only a few sellers are dominant in this industry, competitors often practice the “game theory.” Game theory is studying the tactics of other opponents (competitors), and taking their business strategies into account on how to make better profits in the long run.
The largest competitors of PlayStation are Nintendo and the Xbox. Nintendo is also a Japanese gaming console, but instead of its main headquarters being located in the heart of Japan, Tokyo, it is located in Kyoto, Japan. Kyoto is one of Japan’s major metropolitan cities. Nintendo surprisingly emerged into this industry before PlayStation did (1889). Because Nintendo was one of the first video game consoles to release into the public, it is often referred to as “one of the original gaming consoles” to loyal consumers. The Xbox console is owned by Microsoft Corporation, which is an American Company. This specific gaming console was first released in 2001. Xbox is known for their advanced game selections and quality.
Games are often ranked based upon their quality and amount of enjoyment when playing them. IGN is one of the most widely known game ranking websites throughout the world, and they rank their games from 1-5 (5 being the best rank and 1 being the lowest rank). In 2008, IGN created averages of percentage of the most popular games that ranked below a 4 for that year for each gaming console competitor:
Based on Amt of Games:
% of Games Ranked Below 4
Being part of the oligopoly market structure, PlayStation has three main characteristics. First, is that PlayStation often has increased, and even intensified international competition. Microsoft’s Xbox offers the most competition overseas from the American market. Of course, PlayStation- like many other successful businesses have people from other countries competing with cheaper versions of their products (knock-offs).
Second is that PlayStation offers limited pricing. Oligopolies are “price makers” meaning that they can set prices of their products and services and output levels to maximize profit. An oligopoly’s firm is considered to be mutual interdependent, so their pricing strategies can also depend on other firms’ pricing strategies. For example, a price war can occur, where each firm tries to lower their price more than their competitors in order to get more profits. So if Nintendo or Xbox attempts to lower prices, PlayStation would most likely lower their pricing as well to lure in customers.
Lastly, is that PlayStation contributes to technological advancement. This company is always undergoing system performance maintenance and research to better improve the overall operating system. Different mass production methods are also being done to further lower the production cost of making each unit of output and also making it more efficient. For example, PlayStation found cheaper microchips to incorporate into the hard drive to lower the capital costs.
Elasticity & Demand Curve
PlayStation’s demand curve was created based upon one of their major products in the market today, which is the PS3. The prices are based on estimation of the cheapest console package throughout the years from 2006, when it first launched, to 2009. The quantity sold is based upon the how many units were sold throughout the world after every fiscal year. The down-sloping shape of the demand curve proves the law of demand that more people are willing and able to buy more of a product or service when it is cheaper.
The midpoint elasticity formula was too based upon the price of the PS3 when it first released in 2006 compared to the price in 2009. The prices used were also based upon the cheapest console package sold during that time. For example, when it first came out in 2006, the cheapest was for the 60GB model for about $600. In 2009, the cheapest was about $300 for the 160GB model. The quantity used was also based upon how many units were sold worldwide in the 2006 and 2009 fiscal years. Quantity of units sold dramatically changed throughout the years in response to the price changes.
Ed= (New Quantity- Old Quantity)/ [(New Quantity+ Old Quantity)/2]
(New Price- Old Price)/ [(New Price+ Old Price)/2]
Ed= (13,000,000- 3,500,000)/ [(13,000,000+ 3,500,000)/2]
($300- $600)/ [($300+ $600)/2]
Ed= 1.15/ -.667= 1.72
After plugging the information into the midpoint formula, the result came out to be 1.72. Since it is over 1, it is considered as being elastic. When a product or service is elastic, it means that lowering the price would increase the quantity demanded. Based upon this specific calculation, the price change over 3 years practically lowered by fifty percent, and quantity sold more than doubled.
PlayStation’s pricing strategy is very much like their competitor’s pricing strategies. Gaming consoles are known for their packaged deals. The simplest packaged deal is the basic console with a free PS3 game for about $300. In addition, PlayStation offers a large variety of bundles to choose from based on the consumer’s preference. For example, if somebody wants to buy the PS3 Move as well (a device that comes with a webcam and uses the movement of the body as a remote controller), they can buy it with the PS3 as a packaged deal. The purpose of these packages is to provide an incentive for consumers to save money when they purchase their product.
Also, if the consumer is more of a movie person, they can choose a different type of package that comes with the console. The PS3 is known to be Blu-Ray movie compatible, so the PS3 bundle would come with about two to three free Blu-Ray movies. Packaged deals are usually around $400. People can save a lot of money this way compared to buying everything separately. For instance, the PlayStation Move software can easily add up to $100 if purchased separately.
PlayStation should make prices for the newest games cheaper. When the newest games first come out, they are about $60 on average. This price is too expensive for families on a budget. Currently, the newest games for each competing console cost the same, so if PlayStation lowered their prices, they would surely have a better chance at getting more profit. The newest games at most should be around $40. When games are too cheap, consumers often are skeptical about the quality of the game.
Major Cost Categories
Sony’s PlayStation, like every other business out there has both fixed costs and variable costs. Fixed costs are costs that do not vary with the changes in output. Some examples of fixed costs are labor (most people who work for PlayStation and Sony in general have permanent job positions), insurance premiums for running safe factories and headquarters, and fixed interest rates or the tariff paid for importing and exporting capital goods.
Variable costs are costs that change depending on the amount of output. The major variable cost is the cost of the sub-technologies needed to make each gaming console. Some examples of sub-technologies are hard drives (various types depending on the memory capacity being used), microprocessors, and disk drives. If there is a higher demand for more consoles being manufactured, then there are more sub-technologies needed to make each console.
In addition, it is very costly to keep an online business up and running. The PlayStation Network is a place where people can purchase and download games online and play demos. The cost of the streaming network is not imposed onto the consumers because they can use it free of charge. PlayStation, unlike its opponent, Xbox, does not require a paid annual subscription to online play. The only thing that PlayStation requires for online play is access to internet.
PlayStation is doing numerous amounts of things to keep production costs low. PlayStation used to be a profit-losing business until it discovered ways to save money. It used to cost around $800 to make each console, but now it costs about $400 to make each. Changing how much it would cost for the sub-technologies is the major source of lowering costs. PlayStation found cheaper microprocessors to use, lasers required for reading the disk in the drive, and even reduced the overall size of the components needed. A lot of money is put into Research and Development for nanotechnology. Nanotechnology contributes to society by discovering how to make individual pieces of technology smaller, and more integrated, so it would be cheaper and more efficient to process.
To lower the cost of developing the gaming consoles, PlayStation could participate in a legal vertical merger to lower manufacturing costs. Vertical mergers occur when firms come together into a single entity and engage in different stages of productions. PlayStation could make a deal with one of their gaming microprocessor developers and have them work with the company for cheaper costs and more profits. Furthermore, PlayStation should also develop more games available to download online so that fewer games would be manufactured the traditional way (standard disk).
Profit Maximization Strategies
Since PlayStation is part of the oligopoly market structure, they also participate in product differentiation methods to increase profits. Product differentiation is how different companies compete against each other using different tactics besides price to distinguish themselves apart from the rest.
Product attributes is one of the product differentiation methods. Even though PlayStation is looking for cheaper methods of production, they will always use products of high quality to ensure good workmanship. For example, Sony will not use the cheaper version of their current processor if they are not sure that it can handle the graphics quality of most of their games. When processors are overused constantly, it can lead to system crashes.
Another method of product differentiation is location. PlayStation is stationed in Japan, and they often make negotiations with their product distributers in America to offer a reasonable price compared to their competitors. Xbox is part of an American Corporation and often have higher prices on average compared to other consoles outside of the US.
To further maximize profits, PlayStation should offer more options of personalized packaged deals. Even though people can get some free movies or games along with their console in a packaged deal, they can offer the choice of the consumer choosing specific games and movies that they would want included into the package. There seems to be no point in purchasing the packaged deal if the movies or games that come along with it do not interest the consumer’s specific preferences.
Also, PlayStation could offer more varieties of products to purchase from their main website. Instead of being limited to only PlayStation game downloads for their console, it can also include games that could be played directly on the computer (PC games), and also movies to download and upload onto the console.
The PlayStation Slim is currently the most updated model of the PlayStation 3 generation console. It is considered to be better than the older PS3 models because it has a smaller exterior, better system performance, and comes with a bigger hard drive capacity.
What sparked many consumers to buy the Slim was its “Star Certified” guarantee. Energy Star is a standard that was first developed in the United States, but Japan also adapted to it. It is basically a type of standard that certain technological products go through that is regulated by the government to be more energy efficient. As a result, the Slim uses less power than the older models. This regulation is actually creating more profits because consumers are more willing to buy a product that is more efficient and uses less power.
PlayStation appears to have a clear vision on how to strategize for better profits in the future. In the short run, this firm is working on developing more top-notch games with even more advanced graphics. Also, once every few months, the consoles receive an automatic systems update. The updates have a purpose of providing better security and newer versions of specific programs that run better.
In the long run, this firm is working on developing newer console models that would best fit the consumers’ needs. For example, the PSP Go device surpassed the first PSP model because it is lighter, have more memory, and have a larger screen. Currently, PlayStation plans on releasing an even newer version of the PSP, which would be touch screen compatible. The older PlayStation models would still attract consumers once the newer products get released because the prices for the older versions would be cut down even more.
Firm’s Financial Strength
The income statement for 2009 indicates that Sony received both net profits and losses on a quarterly basis. The net incomes in the ending months of 2009 shows that it had net losses that ranged from $292 million to $1.69 billion. In the beginning of 2009, Sony received a net profit of $200 million. Gross profit did not fluctuate throughout this specific year, but only ranged from $5.3- $6.5 billion every quarter.
Operating expenses was the cheapest in the beginning and end of 2009, which was from $14-18 billion. In the middle of 2009, operating expenses rose to $22 billion. Operating incomes became more stable in the ending months of 2009 and ranged from a loss of $103 million to a gain of $1.67 billion. The diluted net on earnings per share data in 2009 changed from .19 to -.29.
The balance sheet for Sony in 2009 deciphered that the total current assets were cheaper in the middle months. It ranged from $36.21 billion to $49.32 billion. Net property, plant, and equipment ranged from $38.54 billion to $34.31 billion. It progressively got lower as the year passed. Total long term assets also decreased throughout the year from $65 billion to $54 billion. Total assets in 2009 came out to be $124.73 billion in the end.
Total current liabilities in 2009 all ranged in the $40 billion ballpark. Total long term debt first started off as $11 billion and ended as $6.24 billion. Total long term liabilities first started off as $60.77 billion and ended with $45.58 billion. Total liabilities in 2009 had a pattern of fluctuating around $100 billion. The shareholders’ equity throughout all of 2009 averaged to $35 billion. The total liabilities and shareholders’ equity in 2009 were all about $130 billion in all quarters.
The income statement in 2010 indicates that Sony mostly received net profits except for one quarter. Net income was the lowest in the middle months, $200 million, and highest in the beginning and ending months, $800 million. Gross profit slightly increased from $7 billion to $8 throughout 2010.
Operating expenses in 2010 increased by $2 billion on average compared to the previous year. The diluted net on earnings per share data in 2010 changed from .86 to .89.
The balance sheet for Sony in 2010 showed that the total current assets became more expensive in the end of the year and was $52.29 billion. Net property, plant, and equipment were at $35 billion. Total long term assets were unusually high in the middle of 2010 at $62 billion, but ended in $23.91 billion. Total assets in 2010 ended up to be $161.56 billion. Total current liabilities increased from $43 billion to $51.7 billion. Total long term debt remained stationary at $10 billion. Total long term liabilities increased by $10 billion from $59 to $69 billion. Total liabilities in 2010 on average increased from $103.5 billion to $121.23 billion. The shareholder’s Equity increased by $5 billion from $35 to $40 billion. Lastly, the total liabilities and shareholders’ equity in 2010 increased from $139 billion to $161.56 billion.
Financially speaking, Sony is progressively becoming stronger. As the quarters build up to years, Sony’s net profits are receiving more stable outcomes. Fewer net losses are occurring. Sony is also learning how to keep more stable long term debts so that it would not put the entire firm in panic if a specific quarter receives a debt that could be too high.
PlayStation has done plenty to spur sales, growth, and client retention- from pricing to numerous product differentiation methods. This firm has even adapted to the modern technological advancing society by offering more advanced products. To further increase sales and growth, PlayStation should create a type of universal gaming network that has the ability of multiplatform online play. Multiplatform online play would forever change the gaming industry because it would be the first time that people who have a Nintendo or another console could play against people on the Xbox, PlayStation, and PC. This universal gaming network would provide more possibilities for people who feel restricted to only being able to play against people with the same console.
This type of network would obviously be more expensive than the free PlayStation Network. People who want to use the universal network should be charged a small annual subscription fee of about $40. Moreover, people would still have the option of using the free PlayStation Network if they wanted to.
Sony’s stock would be a great investment for the long run. Over the past decade, Sony’s stock rose from a few hundred to over $2,000 a share. If Sony can keep their good profiting strategies up, their stockowners are surely going to make a lot of money as well.
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