Thursday, February 23, 2012

Sony Bets Big on Its New Handheld Gaming System

While the handheld gaming market has evolved dramatically in recent years, Sony's betting there's still money to be made there – and it's betting a lot.

The PS Vita, the company's next generation handheld gaming system, went on sale in the U.S. today. And though the electronics giant remains optimistic about the market, analysts are significantly less certain.

"I think it's a really nice gaming device and it's definitely a step up from what they had before, but the reality is the market size for this kind of dedicated handheld gaming device is small," says Colin Sebastian of R.W. Baird. "In general, the overall tablet trends are a significant headwind for dedicated game devices."

That's something Nintendo [NTDOY  Loading...      ()   ] discovered last year with the launch of its 3DS system. Once the initial rush that comes with every new gaming device was over, sales plunged. Ultimately, the company was forced to cut the system's price (which jump started sales once again).

The challenge Sony [SNE  Loading...      ()   ] faces is a similar one. The Vita is loaded with bleeding edge technology, including an OLED screen, blazingly fast processor, gyroscope and not one, but two touchscreens (on the front and the back of the system). That's all reflected in the price: A Wi-Fi enabled Vita will cost $250, while a 3G equipped one will run $300.

That's not cheap, but given Apple's [AAPL  Loading...      ()   ] growing influence in the portable gaming space, it might be a smart move on Sony's part to maximize its initial returns.

And capitalizing on that initial burst of interest in the system could be critical. When the Vita went on sale in Japan last December, it was a hit – but only briefly. First week sales topped 325,000 units. Since then, the numbers have fallen precipitously – with less than 14,000 selling last week, according to Media Create, which tracks game sales in that country. To put that number in perspective, the aging PSP outsold the Vita by almost 2,00 units in Japan last week.

In the U.S., where consumers can buy a smart phone or (in some cases) tablet for less than what Vita will cost, the device runs the risk of being marginalized as a one-trick pony.

"My sense is Sony is marketing this as a radical change to the handheld gaming system and something that can compete with all other platforms – and that's an optimistic scenario."

Colin Sebastian
R.W. BairdThat's not an accurate assessment, though gaming is the chief focus of the device. Through Sony's online store, users can download music, television shows and movies (as well as games) to their Vita. It also comes with a Web browser installed. The question is: Will people care?

"We believe Vita will serve as key litmus test as to whether consumers still want a dedicated handheld in a world increasingly dominated by smartphones and tablets," says Edward Williams of BMO Capital Markets.

Sony intends to showcase all of Vita's functionality to its potential audience with a $50 million marketing campaign to support the launch. But even with that, the Vita is not expected to be a significant contributor to Sony's bottom line – nor is it expected to give any notable boost to game developers.

"It's not going to be a big needle mover for the video game industry," says Sebastian.

However, he adds, over the Vita's lifetime, the system's technological advances and the larger gaming audience worldwide could help it outsell the PSP, which launched in 2004. Life to date, that system has sold more than 71 million units worldwide (an impressive number, but still less than half of what Nintendo sold with its DS unit.)

While Sony has some big franchises boosting the launch of the Vita (including current fan favorite "Uncharted"), software could be a problem for it down the road. While it does own major franchises like "God of War" and "Gran Turismo," it doesn't have a stable as rich as Nintendo's. And internally developed games have historically been among the most important factors in determining a handheld system's fate – at least before Apple came onto the scene.

That, ultimately, could be why the system's tech features have been so prominently featured so far.

"My sense is Sony is marketing this as a radical change to the handheld gaming system and something that can compete with all other platforms – and that's an optimistic scenario," says Sebastian.


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