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With Sony's PlayStation 4 on Deck, Three Tough Questions for the Video Game Bulls

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Sony announced the latest version of its PlayStation console last night.

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Last night at a press conference, Sony (NYSE:SNE) unveiled the PlayStation 4 video game console. Sort of.

Sony did not reveal the actual console, an unusual move given the electronics giant's design prowess. Nor did it announce a price or exact release date, though it did indicate that it would arrive during the 2013 holiday season.

Now, if you have a short memory, you may not recall that Sony was an absolute powerhouse in gaming from 1994 on with the release of the groundbreaking original PlayStation console.

Its success continued with 2000's PlayStation 2, which beat the living daylights out of the Microsoft (NASDAQ:MSFT) Xbox, the Nintendo (PINK:NTDOY) GameCube, and the Sega Dreamcast.

However, the tide turned during the current console cycle. In 2005, Microsoft beat Sony to market with the Xbox 360. And when Sony's PlayStation 3 launched the following year, it went up against the revolutionary Nintendo Wii, whose motion control system captivated both gamers and non-gamers alike.

Sony's PlayStation 3 launch was hampered by an unimpressive game lineup and a massive price premium. In terms of unit sales, it fell to third place behind Nintendo and Microsoft.

In fact, the PS3 has sold less than half the units of the PS2, which has over 150 million life-to-date sales. Meanwhile, the Xbox 360 more than tripled the sales over the first Xbox, while the Wii outsold the GameCube fivefold.

So given Sony's fall into third place, let's ask the tough questions.

1. Do Consoles Even Matter Any More?

I've made the case that the console gaming business has already seen its best days, simply because the population of console gamers does not seem to be increasing by a meaningful number, and may actually be decreasing. (See: 'Modern Warfare 3' Will Mark the End of the Video Game Console Era.)

Cycle-over-cycle, Sony/Microsoft/Nintendo console unit sales are up 25%, which frankly, isn't very impressive when the smartphone and tablet markets grew by 36% and 75% respectively in Q4 of 2012, according to IDC.

And in dollar terms, NPD has reported that US industry sales were down every year from 2009 through 2012 -- what kind bull market is that?

The industry boomed in 2007 and 2008 on a combination of 2007's magic lineup of hardcore games (BioShock, Halo 3, Assassin's Creed, Call of Duty: Modern Warfare, etc.), and perhaps more importantly, the surging popularity of casual-friendly fare, namely the Nintendo Wii and music games like Activision's (NASDAQ:ATVI) blockbuster Guitar Hero series.

But since then? No growth.

To make a long story short, the Wii and Guitar Hero got everyone from Grandma to hipsters in Brooklyn bars playing video games, driving a short-term industry boom.

My contention all along has been that this casual audience has largely shifted over to smartphone games like Angry Birds, and this shift is hampering the console business at the edges. The serious gaming audience will always value consoles, but for the industry to grow, it needs more bodies.

And what are the bodies carrying? Apple (NASDAQ:AAPL) iPads and iPhones, and Samsung (PINK:SSNLF) Galaxy phones.

2. Is Sony Simply Stealing Microsoft's Strategy?

Microsoft's move to get the Xbox 360 out early played a major role in taking market share away from Sony. So it may make sense for Sony to turn the tables and do the same with the PS4.

However, the fact that Sony did not show the actual console or reveal the price may indicate that the PS4 is being rushed to market.

This introduces some risk in terms of engineering.

The Xbox 360 infamously suffered from quality control problems. A study from SquareTrade indicated that within the first two years of ownership, 23.7% of Xbox 360s suffered system failures vs. 10% for PS3 owners and 2.7% of Wii owners.

I suffered through this personally. My Xbox 360 had two bouts with the infamous "red rings of death," and even after repair, it would get so hot during gameplay that I could make steak and eggs on it. And of course, it didn't help that it was so loud that I needed 500 watts' worth of surround sound to hear what I was playing. But to its credit, Microsoft's customer service team was very responsive and helpful, and they eventually worked out the kinks.

Now, if Sony is going gangbusters to get to market this holiday season, there is a chance that their devices will suffer from quality-control problems, which will be very costly. Console gaming is a razor and blades business. The consoles sell at a loss to generate highly-profitable royalties on individual game sales. If the PS4 suffers from a high repair or return rate, the losses are going to pile up.

3. Does Sony Have to Offer a Rock Bottom Price?

As I stated above, the PS3 launched at a premium price relative to the Xbox 360 and Wii.

The lower priced PS3 was $499 at launch, while the most expensive Xbox 360 package was $399 and the Wii was just $249 including a game.

Now, look at what's happened with recent video game hardware. The Nintendo 3DS and Wii U (see: Weak Wii U Sales Are Dragging Nintendo Down) have bombed, as has Sony's own PS Vita handheld.

Assuming Sony wants to move some units in this tired market, will it have to charge a lower price, driving larger-than-expected losses on PS4 console sales?

And coming back to the smartphone/tablet issue, will mass market consumers (read: the casual audience) be willing to shell out another $400-500 for a gaming device after they've spent money on smartphones and tablets, whose technological sophistication is growing at a rapid rate?

Conclusion

Until we see the final PS4 design, and get full details on the pricing, game lineup, and exact launch date, it will be tough to determine just how well it's going to do.

But right now, looking at the industry from the top down, it's looking pretty rough out there.

Twitter: @MichaelComeau

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