Case Study: Sony

Believing that a three-dimensional (3D) game could provide a more immersive experience than a traditional two-dimensional (2D) game, the Sony PlayStation, launched in 1994, was designed as a fully three-dimensional machine. Ken Kutaragi, the lead architect for the PlayStation, believed game players were eager to navigate 3D environments that were more life-like than 2D, side-scrolling games such as Super Mario Brothers. Ready for the jump in complexity, gamers rushed to purchase the PlayStation. Within two years of launch, PlayStation revenues reached $700 million with profits of $70 million.

Sony opted for the compact-disc format instead of the traditional cartridge format that Nintendo historically utilized. CDs held up to 20 times more information than a standard cartridge and allowed game developers to create the more intricate characters and environments required for a 3D experience. The potential downside of the CD format was the "seek time" needed for information to be read from the disc, making CDs 50 times slower than a cartridge. Advanced data formatting, however, minimized disruptions to the game-play experience. CDs were also attractive to Sony and its licensed developers because their production costs were falling below costs for cartridges. By the late 1990s, the manufacturing cost for a CD game was about $1.50 per unit compared to $12.00 for a cartridge game.

When it came to the library of games that were available for the PlayStation, Sony took a much different approach than Nintendo and was less restrictive about the number of games that were released for the PlayStation. Sony recognized that competing with Nintendo on a game-to-game basis would be difficult. Nintendo had the very best game developers in the world. Sony believed that a greater selection of titles for the consumer would be the best chance to topple Nintendo. While still maintaining a detailed approval process for game developers, Sony succeeded in creating a robust library of titles. Retailers such as GameStop and Electronics Boutique soon had entire walls dedicated to PlayStation titles. 

With the PlayStation, Sony succeeded in capturing 60% of the U.S. market by 1999, dwarfing Nintendo's 30% share and Sega's 5%. Kutaragi, now president and CEO of Sony Computer Entertainment Interactive, was charged with improving on the PlayStation's success with its successor, the PlayStation 2 (PS2). With powerful graphics and a loyal following of experienced game development studios, the PS2, launched in October 2000, was again a resounding success. One of the main features responsible for the PS2's success was the additional functionality the console provided for consumers. The first PlayStation's ability to play audio CDs was considered a minor feature as many people already had CD players. But the PS2 had the ability to play DVDs. Launched in 1996, DVD players had yet to become a mainstream device and at the end of 1999 could be found in just 11% of U.S. homes. At $299, a price on par with DVD players, the PS2 gave users access to this new technology at a reasonable price. The PS2 enabled consumers to upgrade their movie-watching experience while getting a cutting-edge video game console. 

By early 2006, Sony's PS2 dominated the video console market with a 55% market share, followed by Microsoft's Xbox with 24%, Nintendo Game Cube with 15%, and the newest entry, Microsoft's Xbox 360 with 6%. Meanwhile, eight of the top 10 selling video games in 2005 were for the PS2 (Figure 3).