Sony Executives Unite To Admit Failure

TOKYO --Sony pulled the plug on its Playstation 3 game machine today, saying that it would suffer a record loss by ending production of the console in March in a dramatic refocusing by the company.

Promising to shift its focus to content development, the company immediately announced plans to make games for the Palm Pilot.

The world's third-biggest maker of game hardware said the end of Playstation 3 will generate 80 billion yen ($689 million) in extraordinary losses, leading to a consolidated net loss of 58.3 billion yen for the fiscal year ending on March 31.

That exceeded analysts' forecasts for a 50 billion yen special loss to abandon Playstation 3, the world's first Blu-ray video game machine when it was launched in 2006.

Sony’s dream of dominating the market with the world's first Blu-ray console wired for online gaming quickly became a nightmare as the machine floundered against smoother, faster rivals from Microsoft and Nintendo.

"We will rapidly shift our focus to the content business," Sony said in a statement today. He promised new Sony games for Palm Inc.'s handheld computers would be out by the end of the year.

"Once we start applying our development effort to bring characters like Kratos to a Palm, I think you will see the business model open up immediately," SCEA president Kazuo Hirai told Reuters.

U.S. sales of personal digital assistants, such as the popular Palm Pilot, more than doubled in 2000, according to industry data, in sharp contrast to slack growth in the personal computer market.

Palm dominated with a market share of 78 percent in 1999, according to research firm NPD Intelect. Hirai said Palm users will increasingly seek out compelling games for the handheld devices.

"The ability to get quality games moving forward in either premium pay-for-play or a subscription-based model is becoming more relevant to that consumer," he said.

An 85 billion yen fund injection by Sony chairman Sir Howard Stringer will help staunch the red ink, and most analysts applauded Playstation’s end as a key step towards returning to profitability. Sony is facing four straight years of losses.

"This is positive in a sense that bleeding is finally going to be staunched," said Hajime Yagi, senior portfolio manager at Meiji Dresdner Asset Management. "Sony would be able to make the better use of its strong team of software creators by letting them make games for more widely used consoles, rather than Playstation 3."

Sony said it will now focus on returning to the black by providing game software content and entertainment titles to other video-game makers, including Nintendo and Microsoft.

"Up until now, our business model was to sell a variety of software for a single affordable game machine ... but maintaining the balance between our hardware and software enterprises while securing profits has become extremely difficult," Sony said.

Analysts said Sony’s tough decision to exit what it considered its core business was encouraging and would push the company back into the black in the next business year.

Sony said it will continue making games for existing Playstation machines, but analysts said it would be better off it concentrated on making games for machines like Nintendo’s Wii system, the world's top-selling next generation video-game machine.

"In a best case scenario under which Sony completely stops developing games for the Playstation, the shares would have the potential to rise to 2,500 yen," said Daiwa Institute of Research analyst Eiji Maeda said.

The move came as no surprise to the industry and investors after Sony said last week it was considering such a move, although it would continue to focus on its software business and to support the machine with software.

Sales of the Playstation 3 have struggled since its launch just under two years ago in the face of strong competition from Microsoft’s Xbox consoles, including the new Internet-enabled and DVD (digital versatile disc) video-playing Xbox 360.

Sony slipped deep into the red, managing to sell 14.41 million Playstation 3 machines worldwide by the end of June 2008, compared to the 29.62 million Wiis shipped by Nintendo at the end of June.

Not surprisingly, its new rival in the game software market, Electronics Arts, said that Sony will face a tough struggle to provide software for other platforms. Sony will be handicapped by its unfamiliarity with the programming requirements of rival consoles and the long development cycle for video games.

"They're starting from scratch," said John Riccitiello, CEO of EA, which is the top game vendor for Microsoft’s Xbox 360 in the United States.

"It's not quite as though this is GM saying we'll make BMWs, but it's the same kind of proposition," Riccitiello said. "They may look like BMWs, but I doubt if they'll drive like BMWs."

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