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Thursday, November 09, 2006

Why Does Sony Stay In The PlayStation Business?

Stocks: (SNE)(MSFT)

It is not often that investors can legitimately question why a company would stay in a business that at one point drove 60% of its operating profit. But, as Sony moves from the highly profitable PlayStation and PlayStation2, the company's ability to make money on gaming may be disappearing.

The new PlayStation3 will be more expensive than rival Xbox from Microsoft and Nintendo's new Wii platform. And, when earlier Playstation models launched, the competition from other game devices and online game products was minimal. That has changed.

Reuters points out that the new Xbox will probably sell 10 million units by the end of this year. By contrast, Sony may sell only 2 million Playstation3 units before the close of 2006. So, the debate about the success of the new Sony product will revolve around whether the units have enough attractive new features, like Blu-Ray capability, to hold a large share of the market.

Sony is doing well in electronics as its last earnings report shows. Sales of PCs and televisions are going well. The company's movie studio and financial businesses are also strong performers. The PC/television electronics and financial units are currently driving Sony's operating income. It game unit (Playstation) is a huge drag on profits.

Some investors would argue that Sony's game operations can return to a place where they contirbute the majority of the company's profit. But, the Playstation3 could also be a permanent drag on the company, and Sony's string of problems does not need any additions.

If Playstation3 is a train wreck a year from now, maybe Microsoft will buy the business. Sony may not be able to afford it.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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