Sony's Comeback Gamble to Reclaim the Mainstream CE Market

Not just recent statements from its executives, but recent actions by Sony have made it clear that the company is fully aware that its reputation suffered a beating in 2006. Once synonymous with innovation, Sony today conjures up images among CE enthusiasts of exploding lithium batteries, overpriced HD components, rootkits lodged on CDs published by a company that unfortunately bears the same name, and most recently, lines of hundreds of hopeful customers whose Christmas wishes last year were left unfulfilled.

Yesterday, Sony launched the next stage in a comeback campaign to reposition itself, not only in its key markets but in the public mind. The campaign involves some controversial moves, including expanding its high-end Bravia brand to smaller and less expensive HD displays - some of which are not 1080p; launching a new wave of less expensive surround-sound audio systems; and perhaps staking a good chunk of the company on a $300 set-top box that connects Bravia HDTV viewers to IPTV content supplied by AOL Video and others.

There's more: Sony decided to cut a few corners with its upcoming European edition of PlayStation 3, which will swap hardware-based PS2 compatibility for a less-assured software-based module that may be less compatible with older games. But to help alleviate some of the performance pressure on the embattled PS3, Sony is scaling down the size and price of its entry-level Blu-ray Disc player, introducing the BDP-S300 this summer at $599 - $400 less than its predecessor, the BDP-S1.

That new, lower price point may help Sony carry the Bravia brand into more living rooms by including the Bravia HDMI connection that will more directly link the player to Sony's new displays, as well as to its IPTV platform. So Sony may still be counting on a "doorbuster" to help Blu-ray crash into more households, only now the PS3 won't be doing the job alone.

In recent months, Sony has taken considerable flak for having lowered its shipment expectations for PS3, and then celebrating for having met the easier standard. While the company's recent shipment efforts may very well have pushed more boxes out the door than for any other console in history - independent numbers may yet confirm this claim - Sony had a lot of ground to make up, and those shipments aren't exactly sales from the consumer perspective just yet.

This morning, Sony Computer Entertainment America CEO Jack Tretton told Reuters that he anticipates that PS3 shortage problems will be resolved by this May, as the company continues pushing new products out the door. But shortage problems may not be what retailers throughout the US and Canada are actually experiencing, as many have reported surpluses of PS3s clogging their shelves - remnants of a launch bonanza whose buzz has prematurely faded.

Faced with that fact, Tretton responded, "Our goal is not to have empty shelves, it's to have full shelves. If we have empty shelves, that's one less consumer who could have bought a PlayStation 3."

As retailers will tell you, there's a nice balance that a successful CE product maintains, which is measured in terms of "inventory on-hand." It's a measure of whether a company is producing enough units to meet retail demand, or producing more units than consumers may actually want. Typically, CE manufacturers like to maintain a six-week supply, meaning enough manufactured units to satisfy anticipated consumer demand for the next six weeks. With video game consoles, however, that optimum number is generally more like four weeks.

Tretton told Reuters his company is "on track" to have shipped 2 million PS3s to date worldwide by the end of March. At this rate, the company is probably shipping a half-million PS3 units per month. Meanwhile, US game console sales data from NPD released today shows the PS3 as the #4 selling game console in this country with 244,000 units sold in January - 22.5% below Xbox 360, and about 79% behind the Nintendo Wii.

While #4 is not where Sony wanted the PS3 to be, it may very well be a good place to start finding its way back "on track" again. Adding Asia and Europe back into the picture, worldwide demand for PS3 may grow to about two thirds of a million units per month. At the rate Sony is accelerating monthly shipments, that would just about even out, giving the company that four-week inventory-on-hand window that retailers appreciate. From there, the PS3 could go on to build a healthy customer base the old fashioned way.

But as analysts are pointing out this morning, Sony's biggest competitor isn't so much Nintendo as it is Sony itself. The BDP-300 may not only extend Blu-ray's appeal to a market anxious to see the artificial premiums on high-def prices finally lifted, but it may also extend its Bravia Internet link and accompanying online community into households.

And because the new player has the Bravia flavor of HDMI where the PS3 doesn't, it could appeal to consumers who don't perceive the game console as adding value to the entertainment platform. That could limit future PS3 sales to hardcore gamers - which is what the gaming community wanted last year, as evidenced by complaints prior to PS3's launch that Sony was watering down its marketing to appeal to a broader base.

Next: The Bravia family, and whether PS3 has a place in it