Sony: PS3 Slump Did Not Spur Layoffs

Sony, maker of the embattled PlayStation 3 (PS3) video game console, said Thursday it plans to lay off employees of its U.S.-based game unit. The job cuts, according to Sony, are part of a corporation-wide restructuring effort.

In April, Sony announced that it would cut up to 160 jobs from its European facilities. The layoffs, which represented an 8.4 percent reduction in its European workforce, were also said to be part of an effort to streamline operations. The company said at the time that it was also considering restructuring its U.S. and Japanese arms.

Pink Slips All Around

Sony did not disclose the positions or number of employees its Foster City, Calif., facilities will lose. Reports vary, with numbers ranging from fewer than 50 workers to up to 100.

The layoffs, however, are neither in response to lackluster sales of the company’s latest gaming console, the PS3, or the $1.91 billion operating loss Sony reported for the fiscal year ending March 31, according to Dave Karraker, spokesperson for Sony Computer Entertainment America. The red ink was largely attributed to the high cost of launching the PS3.

“This move is not wholly related to any one product in our portfolio,” he stated. “More accurately, it is reflective of shifts in the marketplace and in consumers’ wants and needs, such as the rise of digital content delivery and networked services. In order to maintain our market leadership, the management of SCEA has found it necessary to analyze the business and restructure the company as necessary.”

How the Mighty Fall

With some 140 million PlayStation 2 (PS2) consoles in households around the world, it seemed a certainty that the much-anticipated release of the PS3 would continue the company’s decade-long run as the market leader in the $30 billion gaming console industry.

However, a one-year delay combined with the system’s hefty $600 price tag and a dearth of must-have games have left Sony’s PS3 trailing Nintendo’s Wii and Microsoft’s Xbox 360 by a considerable margin.

In the U.S., sales records showed that the Wii sold some 360,000 units in April, making it the No. 1 seller for the fourth month in a row, research firm NPD Group said. The Xbox 360 came in second with 174,000 units purchased and the PS3 trailed by more than four to one with only 82,000 consoles bought by consumers.

The depression in PS3 sales could be the culprit behind the U.S. layoffs, according to Forrester Research analyst Paul Jackson. Adding to Sony’s troubles are slower sales for the PlayStation Portable as well.

“It is difficult to say if this would be happening if the PS3 were selling more units and was much more profitable,” he told the E-Commerce Times.

The excised positions are more than likely extraneous personnel taken on while Sony was ramping up toward the release of the PS3, as was the case with the European unit, Jackson explained.

However, Sony’s workforce in Foster City was already supposedly streamlined, according to Mike Goodman, an analyst at Yankee Group.

“They are make cuts to something that was at least internally at SCEA thought of as already a fairly lean organization,” he told the E-Commerce Times.

“Streamlined,” he said, was just a euphemism for “We’re really hurting.”

“In this case it is. Look at all the red ink in the games division. I think it is arguably a response to that [$2 billion dollar loss]. And they are not Microsoft,” he pointed out.

Nowhere to Go but Up

As with its resurgent performance with the Bravia television, Jackson said Sony still has time to reverse the company’s fortunes with the PS3.

“Just because they’re late to realize they have made an error doesn’t necessarily count them out. They can still apply their excellent development resources and their excellent engineering to turn this around. And unfortunately some of that might involve major structural changes and redundancies in the meantime,” he explained.

What Sony will have to do, said Jackson, Goodman and Brian O’Rourke, an analyst at Instat, is drop the price of the PS3 and put out some exclusive titles that will move the consoles of the shelf such as a new “Final Fantasy” or “Metal Gear Solid.”

“Historically, those are titles that have been exclusive to the PlayStation and they have been titles that have driven console sales. So far the PS3 is lacking titles that will drive unit sales,” Goodman noted.

Sony may drop the PS3’s price in time for the holiday season by as much as $150 to $200, the analysts said. Anything less — for instance a $50 or $100 reduction — will not be sufficient, Goodman asserted. However, more drastic cuts would mean make Sony lose somewhere around $300 on each console sold.

“The only real out [for Sony] is to produce the PS3 more cheaply, cut prices and get it into more homes. That’s what they have to do,” O’Rourke explained.

“The game business is often referred to as a razor and razor blades business,” he continued. “You don’t have to make money selling the razor. You want people to come back and keep buying razor blades. It’s just like that in the game business. You can lose some money on the console, but if you can get them to buy five, 10, 15 games over a couple-year period you can offset losses on the console.”