Wall Street Journal: PSP/PS3 $596M R&D Investment?

Sony Gambles on PlayStation Parts

Homemade Chip Content
For New Portable Gadget
Aimed at Boosting Profit
By PHRED DVORAK
Staff Reporter of THE WALL STREET JOURNAL
December 10, 2004

When Sony Corp. on Sunday in Japan launches the PlayStation Portable -- a hand-held gadget that plays not only games, but movies and music -- the device will pit the company in hot competition with a host of portable game and music players.

But there will be more at stake for Sony: It's counting on the PSP to boost profits by making the key parts of its gadgets itself.

The PSP, Sony's first new videogame machine since the wildly successful PlayStation 2, won't get to the U.S. and Europe until next year. And even the Japan rollout will be a more modest affair than that of the PlayStation 2 in 2000, when thousands of buyers lined up overnight in front of Tokyo videogame stores. (One million units were sold in a weekend.)

Sony is planning to ship only 200,000 units of PSP on Sunday and 100,000 more per week in December. Many Tokyo stores are anticipating a shortage of the PSP, which will sell here for ¥19,800 ($190.) They are already warning buyers they are limited to purchasing just one PSP per person.

The relatively low-key launch belies the importance of the PSP to Sony. The gadget puts the PSP head-to-head not only with Nintendo Co.'s Game Boy, the No. 1 hand-held game player, but also portable video and music players ranging from Apple Computer Inc.'s iPod to Microsoft Corp.-backed Portable Media Players.

More importantly, Sony's strategy is part of a push to reinvigorate the company's electronics business, and help raise electronics operating-profit margins to a promised 10% by 2006 from around 0.6% in the latest quarter. In the case of semiconductors, for instance, Sony is trying to boost profits by raising the ratio of homemade chips it uses to 40% from around 20% now.

"This is part of a Sony group business model that calls for increasing the ratio of parts we make ourselves," says PlayStation creator Ken Kutaragi.

The feature-crammed PSP is one of the best illustrations so far of how this strategy is supposed to work. Around half of the gadget's parts, by value, were made by Sony.

There's the processor, which lets the little hand-held show graphics that are similar in quality to the powerful PlayStation 2 console. That was made at a cutting-edge chip factory Sony built recently. And there's the little optical disk, called a UMD, that PSP games and eventually movies will come stored on. Sony makes the disks as well as the lasers that read the disk data. Sony also makes the removable memory cards that store data -- like music or photo files -- in the PSP, and the batteries that power it.

That self-reliance is a double-edged sword. Because Sony makes so much of the PSP's guts, it can better control costs -- a fact Mr. Kutaragi has used to pare the PSP's Japan price down. And if the PSP is a hit, Sony stands to make a lot more money on it than if it had to buy lots of expensive parts from other companies.

But if the PSP flops, Sony could lose big too, especially since the company has sunk a lot of money into the research and manufacturing facilities needed to make those parts. Sony has spent around 62 billion yen ($596 million), for example, on the facilities.

The key to success, Mr. Kutaragi says, is volume: Sony has to sell lots of PSPs. Although Sony expects to ship only around 500,000 units this year, it is aiming to have sold three million by the end of March 2005.

Part of the trick will be enticing buyers with the new multimedia features of the PSP. Mr. Kutaragi has plenty of ideas, including downloading video and music onto the PSP from Sony's Connect music site, as well as an upcoming movie-download site. Eventually, he says, people may even use the PSP's wireless connection to download, for instance, an image of a car for their racing game.

Sony's campaign to make the PSP a success is already facing challenges. Delays in software development mean only a handful of game titles will be ready when the PSP launches on Sunday; time-consuming negotiations with Hollywood mean movies won't be widely available until sometime next year.

The PSP missed the all-important Christmas season in the U.S., even as a new game hand-held from Nintendo, the DS, posts strong sales. Nintendo said yesterday it expects to ship 2.8 million DS units in the U.S. and Japan this year -- up from a previous estimate of two million.
 
I'm pretty sure that Sony said that they were comitting 1 billion dollars to the R&D of Cell back in 2002
 
The key to success, Mr. Kutaragi says, is volume: Sony has to sell lots of PSPs. Although Sony expects to ship only around 500,000 units this year, it is aiming to have sold three million by the end of March 2005.

It's kinda funny, but its this strategy that makes Sony successful IMO.

Failure is absolutely not an option.

The only way to make profit off projects like PS2 or PSP is to sell a ton of them.
 
"including downloading video and music onto the PSP from Sony's Connect music site"


Oh god ....that connect software is such a piece of shit.
 
Wow. Sony is not afraid to take huge risks at all, and that's what really sets them apart from everyone else. They are very agressive when it comes to marketshare. But when will they stop being so wreckless? Losing so much money and having no "guarentee" to make it back is kind of stupid in my opinion...
 
Sony's R&D spend on PS3 alone is more like $2 billion +. The $596M number appears to just be plant and equipment cost for components.
 
PS2 was at least a $1 billion investment, probably more.

PS3 is a multi $billion investment

PS4 will be even more :D
 
Hardknock said:
Wow. Sony is not afraid to take huge risks at all, and that's what really sets them apart from everyone else. They are very agressive when it comes to marketshare. But when will they stop being so wreckless? Losing so much money and having no "guarentee" to make it back is kind of stupid in my opinion...

I do not think either PlayStation 3 or PSP will tank that badly, so they know that the PlayStation sector can provide a not too bad ROI.

The thing is that semiconductors was one of the answers they have been needing for quite sometimes: more experience high-perfomance manufacturing processes, more fab volume, etc.... Sony as a group was very un-coordinated in this as well as other areas.

Too many components were outsourced and bought from other manufacturers when they could have been at least manufactured in-house if not designed: tons of different department tried to re-invent the wheeel or purchase it froma competitor/external vendor: ti is difficult to push the technology envelope when you are buying chips someone else is making, without spending infinite mountains of money).

The other issue was lack of cohesive strategy between all Sony's subdivisions, but even that should be on the right track now... at least quite closer to the right track.

PlayStation 3 is not the only product that will receive chips designed and/or manufactured thanks to the investments in Semiconductors that the whole Sony group has been making.

Sony is not planning to run those fabs at low capaciy ;): they want them to be firing on "all cyclinders" as people say.

Samsung wanted to push the technology edge at good profits and relatively low consumer prices: they also knew that a GIANT focus on in-house R&D and in-house chip-manufacturing has on these matters.
 
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