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In an apparent response to Japanese consumer outcry, Sony (NYSE: SNE) has slashed the price of its PlayStation 3 by about 20 percent in Japan.
"The Japanese users and media would not stop saying a price tag of over 60,000 yen (US$515), including tax, was too expensive," Ken Kutaragi, head of Sony Computer Entertainment, told reporters at the Tokyo Game Show on Friday.
The PS3's price tag was twice as much as Microsoft's (Nasdaq: MSFT) Xbox 360 and Nintendo's upcoming Wii. Sony will peddle its PS3 to Japanese consumers for 49,980 yen, or $430.
Protecting the Home Turf
"Sony definitely wants to protect its market share in its home market if it can. Microsoft is becoming more aggressive in going after those kids. You've seen it on pricing and some of the hardware upgrades Microsoft is making," Colin Sebastian, senior research analyst with Lazard Capital Markets, told TechNewsWorld.
Sony's news follows Microsoft's announcement that it would start selling its Xbox 360 in Japan for 29,800 yen ($256) on Nov. 2. Nintendo plans to offer its Wii console for 25,000 yen ($215).
Sony's move to lower its prices in time for the critical holiday shopping season communicates a clear message to Microsoft and Nintendo: Sony is willing to compete on price -- at least in the Japanese market.
"Sony's stance is going to be more important as the cycle evolves. After the first group of consoles are sold, you've picked off the low-hanging fruit -- the people who are willing to spend a premium on the hardware," Sebastian explained. "Then you have to go after more of a mass market. That's when price becomes more of an issue."
Supply Versus Demand
Where demand exceeds supply, price is less of an issue. Sebastian points to the eBay (Nasdaq: EBAY) market for the scarce Xbox 360s last Christmas. The consoles were selling for $1,000 or more to consumers who just couldn't wait.
"In reality, in the launch period there seems to be a demand for the PS3. I don't think there is an issue as to whether the consoles would have sold or not in Japan and I don't think it is an issue in the U.S. market, either," Sebastian said.
While Sony is no doubt pleased about the demand, it's not thrilled with the lack of supply because it stems from production problems. Sony is delaying the launch of the PS3 in Japan and is not hitting delivery targets in the U.S. due to problems related to the console's Blu-ray disc player.
A Ripple Effect?
Sony has not announced price cuts for the North American market, and Sebastian said it is difficult to predict what Sony will do. Still, the Japanese reductions remain a signal that Sony is willing to cut the price if executives believe the market demands it.
Does this mean Sony's component costs are lower than they thought? That is also difficult to predict at a company that holds information close the vest.
"If so, that would imply that there might be more pricing flexibility outside of Japan as well," Sebastian said. "The other side if it is that Sony is just going to lose more money on the hardware, which could be the reality."
Sony has already announced that its costs to develop the PS3 will lead to greater losses in its gaming division in the third quarter. Those losses, the company disclosed, could take five years to regain.
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