Sony Refuses to Change
By Dennis Day, News Editor
Published May 17, 2004 -- 07:56 pm CDT
While sales of Sony's PlayStation 2 game console have
significantly outpaced rivals, experts believe Sony's business model may ultimately cripple profits.
According to a recent report by the Economist, Sony suffers from their dependence on a vertical business model. Thereby, Sony has a principal role in manufacturing and assembling key components for their game consoles and electronics products. By comparison, many of Sony's rivals both in the gaming industry and larger electronics market rely on a horizontal business model.
A horizontal business model relies on other companies to supply key components and assemble products to take advantage of lower costs.
To put things into perspective, Sony spent an estimated 46% of their total budget last year to fund semiconductor research and production. Over the next three years Sony is expected to spent 500 billion yen ($4.4 billion) on revitalizing their semiconductor business. The financial gamble will include the production of CELL processor technology which is expected to power Sony's next-generation game console and network computers.
According to Goldman Sachs analyst Shin Horie, "Firms outside Japan are increasingly focusing on specific areas of the production chain, from chips to sophisticated components, assembly to marketing. This allows, say, American, European and even Korean firms to marry their particular strengths with the advantages of cheap manufacturing in China and Taiwan. The Japanese are fighting this trend by upgrading their existing vertical (do everything in-house) model."
Likewise, the Economist suggests the long-term projections of Sony's gaming business are in jeopardy,
"The weakness in games, where operating profits fell by 40%, is especially worrying, as this division has lately generated most of Sony's profits. Sales of its PlayStation 2 are falling. To slow the decline in unit sales, on May 11th Sony announced that it would cut the price of its consoles in America. Moreover, the PSX which launched last year, which combines a game console and video recorder, has disappointed. Sony expects a fillip from the PSP, a portable game console that it will release in Japan later this year. But the successor to PlayStation 2, due in 2006, will have a far bigger effect on its fortunes—and will face stiff competition from Microsoft's Xbox."
http://www.polygonmag.com/news/index.php?id=2202
By Dennis Day, News Editor
Published May 17, 2004 -- 07:56 pm CDT
While sales of Sony's PlayStation 2 game console have
significantly outpaced rivals, experts believe Sony's business model may ultimately cripple profits.
According to a recent report by the Economist, Sony suffers from their dependence on a vertical business model. Thereby, Sony has a principal role in manufacturing and assembling key components for their game consoles and electronics products. By comparison, many of Sony's rivals both in the gaming industry and larger electronics market rely on a horizontal business model.
A horizontal business model relies on other companies to supply key components and assemble products to take advantage of lower costs.
To put things into perspective, Sony spent an estimated 46% of their total budget last year to fund semiconductor research and production. Over the next three years Sony is expected to spent 500 billion yen ($4.4 billion) on revitalizing their semiconductor business. The financial gamble will include the production of CELL processor technology which is expected to power Sony's next-generation game console and network computers.
According to Goldman Sachs analyst Shin Horie, "Firms outside Japan are increasingly focusing on specific areas of the production chain, from chips to sophisticated components, assembly to marketing. This allows, say, American, European and even Korean firms to marry their particular strengths with the advantages of cheap manufacturing in China and Taiwan. The Japanese are fighting this trend by upgrading their existing vertical (do everything in-house) model."
Likewise, the Economist suggests the long-term projections of Sony's gaming business are in jeopardy,
"The weakness in games, where operating profits fell by 40%, is especially worrying, as this division has lately generated most of Sony's profits. Sales of its PlayStation 2 are falling. To slow the decline in unit sales, on May 11th Sony announced that it would cut the price of its consoles in America. Moreover, the PSX which launched last year, which combines a game console and video recorder, has disappointed. Sony expects a fillip from the PSP, a portable game console that it will release in Japan later this year. But the successor to PlayStation 2, due in 2006, will have a far bigger effect on its fortunes—and will face stiff competition from Microsoft's Xbox."
http://www.polygonmag.com/news/index.php?id=2202
