Analysis, E3 2013, Ramblings, What's going on?

Sony, PlayStation 4 and the low-cost value proposition

You’ve heard the news. You know the details. Maybe you’ve even made up your mind and you already know which console you’re going to get this holiday. I know I did and that’s why I’m writing this piece, instead of watching all those lovely streams from E3. I realized what I am getting into and I’d like to spread the message. Behind all this hype and excitement, there is a piece of hidden truth that you should be aware of, so let’s see what’s this all about Sony, PlayStation 4 and their low-cost value proposition.

“There’s no such thing as problems, Mr. Green, only situations…”

It all started back in February with an event called Dive Into Media. Back then, Yusuf Mehdi and Nancy Tellem sat down and talked about their projects and Microsoft’s future in entertainment. They’ve said things like “We do things that are big and premium and Xbox has fantastic content. The best, most interactive entertainment you can get” and “Simple, complete and instant in one box. We are pioneering a hit in interactive entertainment“. And they did just that. With Xbox One Microsoft delivered what they promised, a big hit in premium interactive entertainment.

“The longer you listen, the sweeter the pitch.”

That’s why there’s a 499 USD price tag attached to their offer. Premium offers demand premium prices. Everything Xbox from now on will be premium, every single service and product they will sell via their upcoming box will be marketed as a premium offer. That’s what high income men aged 18-34 are paying for. Do you think they don’t have an internet connection? Do you think they need to sell their games? Do you think they care about their privacy with all those gadgets around them? They need people to tell them how cool and succesful they are, to confirm their status quo and that’s what Xbox One helps them achieve. Microsoft shapes their desires and empowers their emotions. That’s what a premium product and service does and that’s what Microsoft should do if they want their Xbox One successfully out on the market. If they don’t, they fail.

Fast forward to May 21st. We all know what happened back then. What you probably don’t know is what Don Mattrick said after the presentation was over (to BBC). They’ve designed an “unrivalled device” which competes not only with Sony and Nintendo, Google and Apple, but with any other company within the consumer electronics space. The truth behind this statement is that you’re not competing with anyone, when you’re trying to compete with everyone everywhere. Microsoft has gone after such a broad market that sincerely speaking, there’s no alternative for them, other than premium. So that’s where Microsoft stands now. What about Sony?

The greatest enemy will hide in the last place you would ever look.

Value Proposition

Revenue model

You’re probably glad like many of us that Sony has gone back to their roots. Gaming! PS4 is all about games for now and Sony has come to E3 with a variety of titles across all their platforms. Yes, there are additional services for the PS4 and there was even a small introduction during their E3 conference on that particular subject, but no one cared. Everyone wanted to see games. And they did. One of the features of a low-cost business model is that you offer the basic product or service, without any frills and then you charge for options and/or other services.

Well, you need PS Plus to play online multiplayer games. Of course, PS Plus is a great offer, but this kind of breakdown is a totally different proposition than what they delivered back in 2006, when PS3 was launched. Do you know why are you paying for multiplayer? Because you’re not paying 700 of 2013 dollars for the console. Look, 399 USD in 2013 equals 345 USD in 2006, which is almost half of what you paid for a PS3 back then (599 USD was their launch price in 2006 which is about 700 USD in 2013). With such a premium price, of course everything was included. There was no PS Plus back then. You paid for the console and the games. Case closed. Xbox 360 launched for a smaller price, but you had to pay extra for Xbox LIVE. That earned them a huge install base, despite PlayStation being such a big hit on the gaming market. Unfortunately, Microsoft has to grow even more, especially in the USA. That’s why they’ve gone beyond core gaming and into the broad entertainment market, while Sony still sees plenty of opportunity with core gamers. That’s low-cost.

Target segments

During the last decade, the gaming market has seen the rise of the mobile platforms. Some would say we’ve also witnessed the fall of PC, but I think that’s debatable. There’s clearly a lot of pressure on all three companies (Sony, Microsoft and Nintendo), especially from Apple and Google. Again, they’re not direct competitors, but when someone starts thinking with his/her wallet, things change. That’s what happened, especially with the economic crisis in the background. Some have chosen to stay inside and play games. Others have cut their spending and turned to mobile gaming, which is usually cheaper. What I’m saying is that entertainment consumers or at least some of them have become price sensitive.

Sony is clearly targeting price sensitive entertainment consumers, first by setting their console price lower than Microsoft did, then by setting their PS Plus price lower than Microsoft’s Xbox LIVE Gold and then by declaring they are supporting all business models, from f2p to p2p titles ranging from 0.99 USD all the way to those 60 USD games. I also have a problem with this statement. Everyone took it as a confirmation that next-gen titles will have prices locked at 60 USD, which might not be true. It was an interview on CNBC with Jack Tretton (back in February) where he was asked about the business models they would support with the launch of PS4. Jack gave a broad answer and examples for the p2p model, not a confirmation that next-gen games will be 60 USD. It’s true you can now pre-order at 60 USD and my advice would be to do it as soon as possible. It’s a good price and I don’t think it will stay like that for long.

What I’m saying is that once PS4 launches, you’ll be able to get the console for a good price, get PS Plus if you want to, get some games, either AAA disc-based ones or small indie downloadable titles and then you can enjoy your gaming experience, tweaked as you’d like it to be. If you want multiplayer, you pay for it. If you don’t want it, you can opt out. If you want to trade your games and lend them to a friend, have it your way. If you don’t have an internet connection sometimes, don’t sweat, you can still play your single-player games. The basics, GAMING, is always there once you pay for it. You don’t have to get it all to enjoy a simple experience like a single-player game. That’s low-cost.

Product/Service Offering

Would you say that Sony has designed a provocative new offer with strong appeal to the target segments? I’d say… Yes, they did. They kept it simple with the PS4 (one SKU for now and cheaper but effective x86 architecture), with simple policies on important aspects like connectivity, privacy and ownership. They focus on basics (gaming) eliminating (and charging) for other attributes like multiplayer gaming, movies, tv shows and music.The PS Eye is also sold separately, so if you’d like to video chat with your friends via the PS4, you’ll need to pay for it, unlike Microsoft with their bundled Kinect and Skype app.

They have also established high core-service standards and they are delivering this message even if they have failed before. I think everyone remembers the PSN hack. Those were dark times for Sony, but despite such drawbacks they managed to keep it together, be transparent about it and finally solve their problem. They are now charging for multiplayer gaming on the PS4, true, but there’s also the confidence for a thing well done, once you have to pay for it.Their first-party games are really raising the bar in terms of graphics and gameplay, so their internal production studios are committed to some serious gaming experiences and that’s an important message to deliver.

Not only they have some great partnerships (like Microsoft does), but they have their own studios to pull more entertainment from (like Sony Pictures Entertainment). They’ve also announced that PS3 is the most popular Netflix streaming device. They have become more developer friendly and they have announced that indie developers will be able to self publish on the PS4. They have set some really high standards when it comes to gaming or online services via internal production and succesful partnerships and even if they are not quite there yet (we still have to see the PS4 launched and its online services up and running), they pull all their resources together to achieve the goals with a minimum financial impact and a higher profit margin, which they so desperately need to survive. That’s low-cost.

Operating model

Similarly to the value proposition section, the operating model of a low-cost business includes three important segments like organizational planning, value chain optimization and cost control. I will very briefly say a few things about them, partly because it’s all about Sony’s internal processes which are not that exposed to the public, as their value proposition is.

Organizational planning for a low-cost business means that you’ll be tasked to operate efficiently. What this essentially means is that you must assign your available resources better (including human), you’ll have to rely on new, standardized assets (like low-cost companies which tend to have a younger and thus better fleet) and you’ll have to limit operating expenses (or overhead), which helps your business function, but is not clearly associated to the products or services you are offering. Sony has made some big decisions during the past few years regarding their human resources and they have announced restructuring plans, which seem to have turned their ship on a new and profitable course.

Value chain optimization is all about activities. You will have to decide which activities are core to you and improve those. They are tied to your basic offer and you should be able to launch your service or product on the market for a low price, while charging extra for everything else. The main goal here is to improve your processes to save time and money (basically resources). You have to establish which should be your core activities and what assets you need to perform them (also check the link above on Sony’s decisions). This helps you decide what you will keep in-house and what you can outsource to other parties, such as Sony’s decision to partner with Ustream.

Cost control means that you will have to keep your costs to a certain level across all your value chain. It all starts with your suppliers and it seems Sony has solved the problem, at least on the PlayStation front. They are launching PS4 in both NA and EU regions this year, so this means they are confident in their ability to secure enough components for millions of units shipped this year to retailers. The x86 architecture is easy to work with, so there shouldn’t be any production problems on the way. Back in the PS3 days I remember Sony had issues with the Blu-ray diode and the Cell processor. This is not the case today (unless there’s another disaster looming in the background and waiting to happen, like a terrifying earthquake or huge floods).

Last, but not least, Sony got cocky in public. Ryanair tends to do just that and usually mocks their competitors for their high and unjustified prices. That’s low-cost. Well, no, that’s not. That’s just their “I won!” attitude.

“A wise man once told me… there’s only one rule in this world, a small question that drives all success. The more a man invests in that question, the more powerful that man will become. Can you guess what that question is, Mr. Green?”

What’s in it for me?

This is the ultimate question. To answer it I’ll just appeal to your imagination and memory. Have you ever travelled with a low-cost company? How was your on-board experience? Of course, you had to pay for everything, sometimes you depart or arrive on secondary airports and it’s usually crowded. Expect the same with the PS4. Don’t get me wrong. It’s not a bad thing. It means we’ll probably see more people playing a multiplayer game on the PS4 than any other platform.

It also means that we’ll pay for any little extra service we’ll get, that games will probably cost more on launch day (same with low-cost airlines charging way more on the day of departure), that after sales support and services will be shaky at best, that not all third-parties would like to partner with a low-cost manufacturer and provider (and I’m not talking about game developers and publishers here), that you’re not someone special to them, but just a customer among many, many others.

The greatest con, that he ever pulled… was making you believe… that he is you.

Microsoft, however, has chosen a different path. It’s an expensive one for the average consumer. It’s something that Apple did with its iPhone and Macs. You want it because it’s an iPhone. You want it because it’s a Mac. You want it because it’s Xbox and it’s the only One. That’s why Microsoft’s customers will get the Xbox One, because of what it is and because of all the perks and advantages that come with premium products and high quality services.

What should you do? Well, value, the same as beauty, is in the eye of the beholder. You can find yourself chained to Mr. Gold, Mr. Black Magic, Mr. “I-run-this-game” Gold or you can choose whatever formula suits you best with Sony’s low-cost value proposition. Just remember that everything comes at a price. Nothing is free.

UPDATE

I soon learned that many people think low-cost is about the price. It’s not. It’s about volumes. It’s about concentrating on a basic offer (gaming) without all the bells and whistles other companies have (see MS with all-in-one entertainment) and charging less to attract more price-sensitive customers. Alone, Sony doesn’t seem to be adopting a low-cost path, but when you look at Microsoft and their premium entertainment as they call it, everything is cheaper and more focused with Sony and this screams low-cost.

So, having a lower price, focusing on a core activity, targeting price-sensitive consumers, as well as cutting costs and achieving strict operational and financial discipline means that you are going the low-cost route. Of course, there are many types of low-cost companies. There’s Ryanair and then there’s easyJet (if you’re in the UK you know them very well). They are both low-cost, but they are different. Look at Sony like you’d look at easyJet and you’ll understand where I’m heading with my reasoning.

2 Comments

  1. datdude says:

    This author, in my opinion, has got it all wrong. Just because Microsoft chooses to charge a premium, doesn’t mean the Xbox One is a premium device. The PS4 has technically superior specifications. Your argument could only be true if the One were offering a better experience with superior hardware. It is quite the opposite. And your analogy stating “That’s what high income men aged 18-34 are paying for. Do you think they
    don’t have an internet connection? Do you think they need to sell their
    games? Do you think they care about their privacy with all those
    gadgets around them? They need people to tell them how cool and
    succesful they are, to confirm their status quo and that’s what Xbox One
    helps them achieve.” is false. High income individuals already control their A/V setups with proprietary apps on their tablets or smart TV’s. These apps allow a far greater level of control than the Xbox One could ever offer. So out of the box, the device is obsolete. As the owner of a fairly substantial A/V system, I already have the functionality Microsoft is trying to peddle with the One. I can do it better. Right now. So what exactly are they selling? An overpriced, underperforming box that may have some interesting exclusive games Microsoft has paid through the teeth for, but little else of value to me. Sony, meanwhile, has the better horsepower, a better design of the system from an engineering perspective, better first party exclusives, and no restrictions on the content I buy. Game over.

    • Vlad Zotta says:

      First of all, thanks for reading my opinion piece and posting your comment!! I really thought I’d be crucified for what I’m saying here.

      Second, I agree with you that Sony has the better proposition. I never said it’s a bad proposition and I will buy a PS4 day one (can’t wait for Shadowfall). I know the PS4 is superior in terms of hardware and I know all the advantages (the one regarding disc-based used games is of vital importance to me).

      Third, I also agree Xbox One is not a premium device if you compare it to the PS4. But, and there is a very big “but” here, Microsoft is trying desperately to position, to market the Xbox One as a premium entertainment device and I think we all know that it’s advertisement what counts for the masses. If they manage to sell this idea, then Xbox One will be perceived as a premium device.

      Sony has confirmed recently that you will not need PS Plus to enjoy video services, as well as some f2p MMOs (it’s up to the publishers). On Xbox One, you will need Gold if you want all those video services, apps like Skype and other features like OneGuide, Game DVR and SmartMatch. It’s integration/premium versus segmentation/low-cost. Sony’s offer is shaping bit by bit pretty much like a low-cost offer and it’s not a bad thing. If you don’t want video services, you don’t get them and that’s it. On Xbox One, once you pay for Gold, you got it all (theoretically, as some services are extra).

      Regarding hardware, Sony needs to have more horsepower and better specs. Low-cost companies usually have a younger fleet to keep operating and maintenance costs down and to send a powerful message to their customers who in turn will trust them. Sony did the same and that’s why everyone now trusts them to deliver a great gaming experience. This is the core experience you will get with the PS4. Everything extra will cost more.

      On Xbox One there are many other integrated features that come at no extra cost and I am sure they will expand their offer, as they need to respond somehow to Sony’s devastating blow. They will add more features and they will improve their “premium” offer. Maybe they will even change some of their policies (as they did between May 21st and now with the always-on Kinect which can now be turned off completely if you want).

      The first time I realized that Sony’s offer is more of a low-cost one, I was like “Wait, it can’t be”. I’m such a huge Sony fan and I have a PS3 since day one (march 2007). I then checked everything in my mind and started writing and the more I did that I thought “Oh man, Sony is soooo smart. It takes so much guts to come up with such a proposition and make Microsoft look bad with their “premium” device.”

      The trick here is that now Microsoft has no other alternative. They must somehow shape the Xbox One as a true premium device. The hardware is already there, so we shouldn’t expect any more changes on that front, but I expect them to step up their game with better LIVE Gold features (AC2 and Halo 3 are a joke), better exclusives, more support for indie developers and maybe some policy changes. Sony forced their hand and they are now cornered. They have to come with something better and even more premium than what they’ve already got. And fast.

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