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Sony's Latest Gaming Device Cuts Out Retailers

Chris Morris|Special to CNBC.com
Thursday, 24 Sep 2009 | 10:27 AM ET

For Sony, the PSP Go represents a bold leap forward in the field of digital content distribution.

For retailers, it might as well be called the PSP No.

Image of the PSP Go by Sony
Photo: Sony
Image of the PSP Go by Sony

Unlike its predecessors, the new portable gaming system from Sony does not run on traditional packaged software. Any game or movie the user wants has to be downloaded — and that leaves retailers out of the loop on the most profitable part of any gaming system.

While Sony will pocket a substantial profit from sales of the PSP Go itself (the device is, at its heart, a redesigned — and more expensive — version of existing hardware), the real money in gaming made is on the software side. By cutting retailers out of the mix, the electronics company is able to make more off of each transaction, boosting its revenues, while negatively impacting the bottom line of specialty stores like GameStop and Game Crazy — and even big box retailers like Best Buy and Wal-Mart.

As a result, it appears most retailers won't be giving the PSP Go launch the pomp and circumstance most new console devices receive.

Though it goes on sale Oct. 1, the PSP Go is barely mentioned on GameStop's Web site. And analysts don't believe brick & mortar locations will go out of their way to promote the device during the holiday season either.

"They're not getting a significant profit margin off of the hardware," says Eric Handler, senior equity analyst at MKM Partners. "If you're not benefiting from software sales, why should you allocate any significant floor space to it?"

To be clear, no U.S. retailer is refusing to sell the PSP Go. And most of the complaints have been indirect ones — never on the record.

One analyst likens the sniping by retailers to that of a petulant child.

"I think they're all kind of greedy," says Michael Pachter, managing director of equity research at Wedbush Morgan Securities. "Retailers that sell consumer electronics should never feel they have the right to sell content for those products. For example, many retailers sell iPods — but they have no chance of ever selling content for those."

Still, facing the potential of a less than enthusiastic retail push, Sony will have two choices — spent heavy marketing dollars for ads and premium floor space at key retailers or look for alternate ways to sell the PSP Go.

One of those alternative may be targeting its existing customer base.

"I would think the best way to reach the consumer is to offer it via PlayStation Home (the PS3's virtual community, which also has a shopping component)," he says. "In my mind, you have a core base of Sony gamers there and it seems like a logical way to reach that audience."

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The PSP has a moderate share of the portable gaming market. Launched with great fanfare in 2005, the device has worldwide lifetime sales of 52.9 million units. Nintendo's DS (along with its two variations — the DS Lite and DSi) have sold over 108 million units.

Retail foot-dragging aside, the PSP Go faces some additional challenges with consumers. At $250, the device costs substantially more than both Microsoft's Xbox 360 and the Nintendo Wii.

And because games can only be downloadable from Sony, the company is firmly in charge of pricing. At present, it does not plan to offer AAA titles at a discount from what they would cost at retail, which has angered some gamers.

Pachter only expects Sony to sell 1 million units of the device over the holiday period — mostly to hardcore enthusiasts who feel driven to always own the newest hardware system.

By early next year, he says, look for Sony to have to make some changes.

"I think they're going to be put in the position of having to discount that thing after the holidays," he says. "I think it settles down to $199 and the [existing] PSP-3000 goes to $149."

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