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Executive Summary

The video game console market is a fast growing market. Sony’s PlayStation 3 competes together with Nintendo’s Wii and Microsoft’s Xbox 360 for the market leader position. Compared with these competitors, Sony’s PS3 includes the newest technologies and provides the highest variety of functionalities. Therefore, Sony’s strategy is to target customers who focus on high technologies and multimedia-entertainment. However, this involves that the PS3 competes not only with console manufacturers, but also with other multimedia producers such as PC manufacturers. Due to the fact, that the Sony’s PS3 will be quite expensive, the console will be available in a premium edition and in a cheaper basic edition.

Considering the distribution of its PS3 games, Sony tries to change its traditional supply chain by providing an Internet platform, where users can download games. This results in saving costs and a faster distribution.

Furthermore, the most important marketing tool is the Internet for promoting the PlayStation 3. Blogs, MySpace, YouTube and other kind of websites enable an area-wide promotion of the game console and especially, it is done by consumers. Another important tool is the official website, which offers among others information about the console and about available games.

Additionally, Sony promotes its PlayStation 3 together with a meaningful slogan, which differs between Europe (This is living) and U.S. (Play Beyond).

Finally, Sony’s financing objectives are to sell 15 million exemplars in the first-year and to achieve total sales revenue of $8.25 billion. Its marketing goals are to sell more than 100 million exemplars in the long-run and to become the market leader.

1 Situation Analysis

1.1 Current marketing environment

The video game console market is highly influenced from its demographic and technological environment. The worldwide population is growing and more and more people have a strong need for entertainment. Many people require something against boredom in their free time. Furthermore, the technology environment creates a variety of new functionalities which are almost unlimited. According to Moore’s Law, processor speed and memory capability reduplicate almost every 18 months by constant prices. Additionally, technologies such as High Definition TV provide a new way of entertainment consumption. Finally, another important influence in people’s behavior is enabled by the Internet. Its introduction was a milestone of the new economy. It allows finding almost any required information and enables worldwide communication as well as interaction and it simplifies doing business.

1.2 Current Product Line

Before we describe the features and functionalities of Sony’s new video game console, the PlayStation 3, we would like to give a short overview of the company’s current home video game line:

• PlayStation (PS1)

• The Sony PlayStation is the company’s first video game console and was produced in the mid-1990s. It belongs to the fifth generation of video game consoles and provides a 32-bit processor. Furthermore, the PlayStation was the first game console that reached the 100 million mark.

• PlayStation 2 (PS2)

• Sony’s PlayStation 2 is part of the sixth generation era and was released in 2000. Besides its 128-bit processor, it was the fist video game console that provides DVD playback functionality. It placed first in number of units sold in its sixth generation of video game consoles and it became the fastest selling and most popular game console in history, with over 110 million units shipped worldwide by November 2006.[1]

• PlayStation Portable (PSP)

Sony’s PlayStation Portable was the company’s first handheld game console released in 2004. Besides playing games, it also provides different functionalities such as playing music, watching videos, viewing pictures and using Internet applications. Nowadays, the PSP is the main competitor of Nintendo’s Game Boy and Nintendo DS.

1.3 Product Analysis

The Sony PlayStation 3 (PS3) is the seventh generation video game console and the third in Sony’s PlayStation series. The console was launched in North America and Japan in November 2006 and is yet expected to be launched in Europe by March 2007. The reason for its delay in Europe is a shortness of supplies with parts of the Blu-ray drive.

The console offers high-end technology and it has been described as an engineering masterpiece because of its promising specification and use of new technology.[2]

Furthermore, the PS3 will be available in two different editions – on the one hand, a basic edition with a 20 GB hard disk drive (HDD), and on the other hand a premium edition with 60 GB HDD. Nevertheless, both editions will have key elements such the Blu-Ray Disc for High Definition movies, the Cell chip, Giga-bit Ethernet for high speed Internet-connection, and an HDMI connection for optimum output on HDTV. Compared with the basic edition, the premium edition will provide some extra features like support for multiple external memory storage devices (Memory stick, SD) and Wireless connectivity.

More information about the specification can you find in the Appendix.

Furthermore, Sony’s newest game console provides a Linux operating system and some Internet applications such as an Opera Web browser and multiplaying functionality.

Finally, another feature of the PlayStation 3 is the backward compatibility to Sony’s previous video games for PS1 and PS2.

1.4 Target Markets

The following section should provide an overview of Sony’s target market and of its targeted customers.

1.4.1 Target market approach

In our opinion, Sony should use a segmentation approach as their general strategy to reach targeted customers. Although mass-marketing would create the largest potential market, which leads to the lowest costs and results in lower prices or higher margins, we propose segment marketing because it can create a more fine-tuned product offering and price for the target segment. Moreover, this approach enables to select more easily the best distribution and communication channels, and to have a clearer picture of the main competitors.[3]

1.4.2 Segmenting consumer markets

Cultural distinctions, different needs and demands of individuals, and diversities in customers’ buying behaviours require market segmentation of companies to satisfy their customers effectively. Thereby, the market can be divided in geographic, demographic, psychographic and behavioural segmentation variables and the company can focus on target segments which it wants to attract.[4]

According to Sony, the main geographic segments of the PlayStation 3 consist of the Northern America market, the Japanese market and the European market.

When Sony released his first video game console PlayStation in 1994, the company’s main focus was on the marketplace from 12- to 17-year-old boys. But nowadays, Sony’s demographic segmentation divides the market of the PS3 in male and female, old and young players and expands its business vastly to a mainstream entertainment.[5] The PS3 offers a multifaceted repertoire of video games which includes something for everybody. There’s not merely one game to ultimately define the PS3 platform, but rather different must-have games for different segments of consumers. Additionally, an important and profitable demographic segment could be the college market because according to a study by Anderson Analytic’s GenX2Z only 26 percent of students report not playing video games.[6]

Furthermore, Sony concentrates on a strong customer loyalty status in the behavioural segment. Besides its popular brand and the high reputation of its products, the company tries to win over its former consumers by the implementation of a backward compatibility which enables to play video games from its previous video game consoles (PlayStation 1, PlayStation 2).

Finally, one of the important target segments of the PS3 involves consumers who require high technology. The company is convinced that its consumers desire and want to get the best out of the best.

1.4.3 Characteristics of the targeted customers / product uses

As already mentioned, Sony’s targeted customers want to have the newest technologies and functionalities. Moreover, they need an entertainment system which provides functionalities such as viewing pictures, movies or listening music.

The Playstation 3 can fulfil all this particular requirements and reach therewith a lot of different customers. First of all, video game players can use the console, because it provides high technology and a lot of different available games. Furthermore, movie lovers can use the PS3 because it involves a DVD drive and also allows watching movies in High Definition with its Blu-Ray drive. Moreover, customers can use the game console to see pictures from their last holidays easily by inserting their memory card in the included card-reader. Finally, customer can use the console to surf in the Internet or to use it instead of a computer, because its Linux operation system provides similar functionalities.

Summarized, all members of a family can use the PlayStation 3 for different needs. For instance, children play video games during the day and when the father arrives, he uses the PlayStation to read his emails. Thereafter, the mother inserts the SD card in the PS3 and shows him the pictures from her trip to Stockholm last weekend. And at the evening, the whole family watch a movie together. This multimedia functionality provides the biggest benefit for the PS3’s consumers.

1.4.4 Purchasing process

Some customers make their decision which game console they want to buy dependent from the number of available games. Not only the functionality and technology, but also the variety of games can be important for the decision-making process of customers. Therefore, the company has to offer information about the games which will be available for its game console. The primary channel for providing such information would be the official webpage.

Furthermore, the final end-user of the game console is not always responsible for the purchasing process. For instance, sometimes parents purchase the game console for their children, and therewith another party is involved in the purchasing process.

1.4.5 Market size estimations

The number of consumers in the video game console industry increased continuously during the last years. Due to the fact, that game consoles of the newest generation are comparable with an entertainment system, we estimate a market size of 400 million potential users in Europe if everybody would buy the product. Considering that one product would be enough for a family, our final estimation of potential consumers will be 100 million in Europe.

Furthermore, a forecast report of PricewaterhouseCoopers has shown that by 2010, the worldwide video game market will grow to $46.5 billion, at an average 11.4% compound annual rate.[7]

1.5 Competitive Analysis

Nintendo and Microsoft are the main competitors of Sony in the video game console industry. Considering the seventh generation, Sony’s PlayStation 3 compete with Nintendo’s Wii and Microsoft’s Xbox 360. These two consoles were released world-wide in November 2006 and November 2005 respectively.[8]

According to a study of the NPD Group about the best-selling video game consoles for December 2006, the Xbox 360 sold 1.1 million units, the Wii 604.2 thousand units and the PS3 490.7 thousand units. However, the PS3 sales figures include only the U.S. and Japan market, where it is released already.

More details about the competition situation will be discussed in chapter “3 Competition”.

1.6 Product/Market Analysis Tools

1.6.1 Product Life Cycle

According to Sony’s previous game consoles, the PlayStation 3 should have a 10-year product life-cycle. Its state-of-the-art technology involves that the usage of the PS3 resources and technology are just at the beginning and can fulfil all game requirements in the next years.[9]

The product life-cycle consists of four different stages:

• Introduction: At this stage, the sales growth increase slowly when the product is introduced to the market.

• In Europe, the PS 3 is already located in the middle of this stage, because many game-console lovers and fans have ordered the PS 3 in advance to become one of the first consumers after its release in March 2007. For instance, a new PS 3 is pre-ordered almost each 20 seconds in Great Britain.[10]

• Growth: At this period, a market acceptance of the product is recognizable and the number of sales units increases. First-users report about the product positively and other consumers are becoming curious.
• Maturity: A slowdown in sales growth will be at this stage because the product has achieved acceptance by most of the buyers.
• Decline: Most of the potential buyers have already the product and therewith the number of sales declines.

Different marketing strategies are necessary for each stage of the product life-cycle. We will discuss our recommended strategies in”6 Marketing Strategy”.

Due to the fact, that the PlayStation 3 was already released in Japan and U.S., Figure 2 shows that the PlayStation 3 is located in a higher position compared with Europe.

After shortness of supplies and an enormous rush demand in Japan and in the United States after the release in November 2006, a kind of stagnation is visible in these both markets today. Vendors report that a large contingent of the PlayStation 3 is still available in their shops.[11] Although Sony sees the reason for that in its optimized supply chain, the company has to consider new marketing strategies to increase its sales.

1.6.2 The Boston Consulting Group’s Growth-Share Matrix

In the following section, we would like to analyse and classify Sony’s game console product portfolio by profit potentials. Therefore, we used the Boston Consulting Group approach presented by Kotler.[12]

Due to the fact, that the PlayStation 1 is not be sold anymore, we didn’t regard it in our analysis.

First, we placed the PlayStation Portable in the “Question marks sector”, because the market of game handhelds is still growing and as the strongest competitor of the market leader Nintendo DS, the relative market share of the PSP increases. Therefore, Sony has to spend a lot of money in the development and advertising of the PSP to keep up with the fast-growing market, and to overtake the market leader.

Additionally, we also placed the PlayStation 3 in the “Question marks sector”, because the market of the seventh generation video game consoles is still increasing and it is not visible already if the PS 3 will take the position of the market leader.

Finally, we located the PlayStation 2 in the “Cash cow sector”. The PS2 has a falling market growth rate after the release of the next generation game console. Nevertheless, it is still the market leader in its generation and it achieved higher sales units (1.4 million) as the Xbox360 (1.1 million), Nintendo Wii (604.2 thousand), and the PlayStation 3 (490.7 thousand) in December 2006.[13] According to the 10-year product life-cycle, the PS2 is in the decline stage and will stay in the market for the next 3 years yet.

1.7 SWOT Analysis

The SWOT analysis is the overall Assessment of a company’s strengths, weaknesses, opportunities, and threats.[14] It is used as a framework to help an organization develop its marketing strategy. Thereby, strengths and weaknesses are internal factors which can be controlled by an organization, whereas opportunities and threats consist of external factors which are uncontrollable by an organization.

2 Objectives

Sony’s financial objectives are to:

• Achieve first-year total sales revenue of $8.25 billion, based on an average price of $550 per unit.

• Sony’s PlayStation 3 marketing objectives are to:

• Achieve a first-year unit sales volume of 15 million, which represent a projected market share of 25 percent.
• Increase second-year share to 40 percent and become the market leader.
• Sell more than 100 million units in the long-term.
• Arrange for distribution through the leading electric, video games and computer retailer in the top 100 and establish an Internet platform.

3 Competition

3.1 Game console industry

According to the industry concept of competition presented by Kotler[15], an industry is a group of firms that offer a product or class of products that are close substitutes for another product.

The structure type of the video game console industry is an oligopoly, because the Japanese Nintendo and Sony, and the U.S. Microsoft dominate the market. Particularly, the structure is a differentiated oligopoly, because only few companies producing products partially differentiated along lines of price and features.

Furthermore, the console industry is characterized by large cost of barriers to entry according to Porter’s model of five competitive forces. It may cost up to $2 billion to develop a competitive console platform and returns on investment may take several years.[16]

Furthermore, these three console manufacturer’s have a similar business model consisting of the following three income flows:

• Hardware sales
• Sales of own software/games
• Licences fees from other software/game developers that use the console platform

Finally, Nintendo, Microsoft, and Sony compete on a global basis with core markets in Japan, Europe and in the United States.

3.2 Direct competitors

The following section compares the direct competitors Nintendo, Microsoft and Sony with regard to their products, prices, sales units and game range.

3.2.1 Product differentiation

Furthermore, both competitors of Sony’s PS3 provide an internet platform:

• Microsoft: Xbox Live Arcade

• Xbox Live Arcade (XBLA) is an online service that is used to distribute video games to Xbox 360 owners. Thereby, Microsoft offers an Xbox Live Marketplace, a virtual market place, where consumers can download movie and game trailers, game demos, Xbox Live Arcade games, gamer tag images, and Xbox 360 Dashboard themes.[17] The consumers can pay with Microsoft Points, which can be purchased by credit cards.

• Nintendo: WiiConnect24

It allows distributing content such as software patches and updated game contents while the Wii is on stand-bye.[18]

3.2.2 Price strategy

Nintendo offers the cheapest price in the game console market. Therefore, the company dispense with some extra features such as DVD drives or HDTV quality. Contrary, Sony’s PlayStation 3 offers the newest technology with a plenty of accessories, but also the highest price. The following list shows the current prices in January 2007:[19]

3.2.3 Market share in Japan and U.S.

The following figures show how many game consoles each of the manufacturers has sold in Japan and U.S. during the last months:[20] [21]

Whereas Nintendo’s Wii was the market leader during the Christmas time in Japan, Microsoft’s Xbox 360 could sell the most units in the United States.

3.2.4 Games

An important criterion for buyers is the volume of games which are available for each game console. At the moment, Microsoft’s Xbox 360 consists of 82 exclusive games and 132 cross-platform games. In contrary, Nintendo offers 55 exclusive and 96 cross-platform games for its Wii. For Sony’s PlayStation 3, 43 exclusive and 77 cross-platform games are planned.

3.3 Market concept of competition

Due to the fact, that the PlayStation 3 is more a multimedia centre than only a game console, we have to consider more competitors as only game console manufacturers. Therefore, we used the approach of Rayport and Jaworski to identify direct and indirect competitors by mapping the buyer’s steps in using the product.[23] The following figure shows the PS3’s direct and indirect competitors:

Summarized, Sony’s PlayStation 3 competes not only with other video game console companies, but also with PC manufactures and other high technology producers.

Sony’s PS3 offers besides a Linux operating system a plenty of functionalities such as Internet to attract previous PC users and to expand its market. This approach is comparable with Coca-Cola which identifies milk, coffee, tea, and water products as its main competitors.[24]

Finally, Figure 7 shows Sony’s market position with regard to technology and price compared with its video game console competitors:

4 Product – Unique selling proposition

The unique selling proposition is a marketing approach to promote a product’s benefit and to convince customers that the company can deliver it.

For Sony’s PlayStation 3, the main benefit, especially compared with its competitors, is its functionality as a multimedia centre and its state-of-the-art technology. Nevertheless, Sony has to consider that its targeted consumers are located in different market segments with different demands and wishes. Therefore, the company has to develop different unique selling propositions.

First considering the video game hardcore fans segment, these costumers want to have the best and newest technology. Due to the fact, that the PS3 fulfil these requirements at best compared with its competitors, Sony should promote this in its advertisements, especially in game magazines.

Furthermore, Sony wants to attract also middle-age consumers and families. The most benefit for these customers is to use the PlayStation 3 as a multimedia system which offers a variety of functionalities. Therefore, the company should focus on its multimedia range.

Summarized, the company’s unique selling proposition should consist of “newest technology” and “multimedia-functionality”.

To emphasize this, Sony uses a short slogan after every mention of its products. In the United States, Sony evokes the following slogan: “Play Beyond”. People should associate therewith that the PS3 is not only a game console which enables playing video games, but also a system which allows playing in High Digital quality and getting a feeling of reality. Furthermore, the PS3 offers more than playing video games, it is a multimedia system that can be used for different pleasures such as Internet surfing or watching movies that can also be interpreted as a kind of playing.

However, Sony uses a different slogan for the European market. The reason is that people with few English skills will not understand the impact of “Play Beyond” or will be interpreted wrongly. Therefore, Sony uses the following slogan in Europe: “This is living”. The slogan is really simple and uses words which can be understood by not English-speakers. Consumers can associate that the PS3 delivers a kind of living standard and ensures to enjoy living. Furthermore, it’s a relation to PS3’s multimedia functionalities which are desired for every household these days. It emphasizes that the game console is the core of living room entertainment.

5 Distribution

5.1 Supply chain

With the video game industry being the fastest growing sector of the growing entertainment industry, the industry’s revenue has now reached $26 billion in annual revenue and there is currently no indication of decline in the industry. So, in order to identify how the revenue is distributed, it’s essential to look at the supply chain of the entire PS3 business. As seen in the supply chain, there are opportunities in many aspects of the console business, coming from the actual console sales as well as extras such as games.

The customers, as identified by our segmentation analysis table, are at the end of the supply chain, and their consuming of video games are distributes across several actors.

Additionally, the most known among the actors are of course the hardware manufacturers, which include Sony, Nintendo and Microsoft. Except for the revenue coming from the console sales, they also get about 20% of the market price for the games, which are mostly sold in the growth level of the product life-cycle. The additional revenue in the supply chain is split among the other actors.

Looking more closely at the publishers and developers, we realize that the publishers are likely to take a large portion of the revenue. Those are the large international companies that have sufficient funds to build a distribution network and employ developers to pull off new best-selling games for the consoles. Hardware manufacturers usually try to pull off deals with these companies when they identify potential best-selling games because the top 3.3% of the games bring in 55% of the sales revenue. For this reason, some hardware manufacturers, most notable Microsoft, tend to buy top-creative publishers to secure exclusive rights of new games for their console.

Because of the complexity with world-wide game launches, there are almost always distribution partners in the chain, those accounts for an estimate of 10% of the shelf price.

Next are the retail channels, which include online stores as well as retail stores. However, they are becoming increasingly bypassed in the supply chain, as discussed in the next generation supply chain (described in detail below). When they do exist in the supply chain though, they take an estimate of 30% of the shelf price.

Developers are a mix of artists and engineers that create the actual games played on the console. Typically, they are funded by the publishers and together they take between 40 to 60% of the shelf price.

Notably, in recent years another actor have also entered the supply chain as the industry have grown. Those are the middleware actors. Those create reusable software that is used by developers to increase their productivity in creating games. The reason for the shift towards middleware providers has to do with shifting the focus away from technology, and re-using the technology that is already out there.

5.2 Next generation supply chain

As discussed previously, there is a change in the supply chain taking place due to the connectivity and Internet capabilities that are becoming an increasingly integrated part of the console business. As illustrated in Figure 3, we can see how several actors in the supply chain are suddenly not present. Because of using Internet as an enabler of distributing and selling games, the need for distribution and retail is almost gone, whereas a larger piece of the revenue pie can be shared between the manufacturer (e.g. Sony) and the publishers of the games. At the same time, the manufacturer can act as a distributor because it’s the technology and technique they provide that will actually distribute the game over the Internet to the customer. At the present moment, it remains unclear how much Sony will charge for their part in this supply chain, but it’s possible that it may be around 47%.

5.3 Business Models

There are several business models contributing to the revenue income for the PS3. Obviously, sales of the actual console initially generate the biggest revenue. But, as reported by several news agencies, Sony actually makes a loss on each console bought by a consumer. [26] As reported by several sources, a PS3 costs between $725 and $905 to manufacture, but is sold for $599 in the US market. The reason for the high manufacturing price is the high cost of components such as the Blu-Ray DVD, XDR memory etc. (More on that chapter 8).

To support several streams of revenue there are three business models for distribution supported by the PS3. Since the console is making a loss per sold unit, there are other ways for Sony to catch up on the income and make a profit in the console business through other business models. The business models are:

However, comparing the business models for the PS3 tells us that there are several possible models for generating revenue and profit for the console. Most notably, the Internet Gaming via the PlayStation network and the developer licenses are possible sources of potential profit.

6 Marketing Strategy

The Playstation 3 has a broad marketing strategy set by Sony. Launched with slogans such as “This is living” and “Play beyond”, Playstation 3 is aiming for a large audience.

Thereby, Sony will have to apply a different marketing strategy depending on which level of the product-life-cycle the product currently placed in. For example, at this initial state of introduction the most evident need is to market the console itself, to make sure that it reaches as many customers as possible. A suitable strategy for the first year is to get the message out about the capabilities with the console, and a suitable channel for this message is the kind of Internet forums and channels that teenagers and game-players regularly visit, including MySpace, YouTube and Gaming magazine websites. The greatest benefit from using MySpace as a communication channel is that they reach potentially millions of interested customers and can thus get the message out about the console and its possibilities in gaming and entertainment.

The idea with this way of communicating through marketing is to “inform, entertain and encourage interaction and debate about all the different things the PS3 can do” according to a marketing director at Sony. With this particular way of communicating a marketing message, Sony hopes that the PS3 will be the natural choice not only for hardcore games enthusiasts but also anyone interested in the broad capabilities covered by the digital media and content creation that the PS3 offers.

So far, the blog approach seems to be successful because an estimate of 86,000 users interacts on the official PS3 blog.

For the second year, there is big need to start marketing the games more actively, to make sure the console owners buy as many games as possible. This stage is characterized by growth and Sony needs to put a lot of effort into taking advantage of the growth in the PS3 business. As seen in the financial projections, there is a big need to get the largest parts of the revenue from the game sales.

Throughout both years of the product life-cycle, there is a potential growth level, which can be boosted by getting the message out about the games and the game console. In both case the official webpage for the PS3 also works as an important channel for communication to the customers.

By customizing the website to the customers depending on their country origin, Sony makes sure they have a clear message customized for each potential customer by letting the customer specify their region and as well as country to get the information in their local language etc. The website provides information about the PS3 specification, advertisement spots and a list of all available games. Furthermore, users can sign in to get the newest information about the PS3 via newsletter and they can also find answers for Frequently Asked Questions (FAQ).

6.1 AIDA

By looking at the AIDA model that is suitable for the PS3, we’d expect it to look like this:

• A