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Sony's Tretton on Smart Phones and the Future of Gaming

Black Friday marks the official kick off to the holiday shopping season and the battle over the gaming space is no child's play. This is serious business and it has come a long way from its meager beginnings in 2000 when total video game sales including PC games totaled $7.98 billion. According to researchers at NPD, game sales at brick-and-mortar retail alone has since grown more than 250 percent in recent years.

One of the companies in this tech gauntlet is Sony's PlayStation. The company has also been in the news as of late with the rumors surrounding a smart phone which, if the rumors are true, the may come to be considered the ultimate gamer "must have."

I sat down with Jack Tretton, President and CEO of Sony Computer Entertainment America , to talk about his expectations this holiday season and to dig into the rumors on a phone launch.

LL: I have been hearing from lots of analysts that this holiday shopping season we'll see a lot of pent of demand and sales might reflect numbers from 3 years ago. What are your expectations?

JT: I think Black Friday is becoming more and more important. One of our concerns maybe two or three years ago was are you jump starting the season—ultimately trading a sale after Black Friday just so you can capture sales for just one day? But I think Black Friday has evolved to a point where you are actually capable of generating incremental sales. Rewarding consumers for going out one day during the holiday season where you are going to discount things more aggressively, than you do the rest of the holiday season and I think that is a new phenomenon. There is bonafide discounting exclusively on that day so it is a big opportunity for consumers.

We are very confident on the holiday season, although, given we are in an industry that is dependent on the fourth quarter, everything tends to be a dress rehearsal until you reach Black Friday and you take yourself through the holidays. All signs are very positive right now and we are looking forward to a great holiday season. And we've got a nice silver bullet in our gun with Gran Turismo 5 which will be on shelves just in time for Black Friday, so we think that will give us a lot of pick up as well.

LL: There are alot of exciting titles for 2010 in PlayStation 3 like Gods of War 3. Will any of those will be discounted or is that up to the retailer?

JT: I think you'll see bundling with the software titles where retailers will have the opportunity to differentiate their hardware offerings with a specific software title. And then you'll see more promotional efforts geared toward catalog and greatest hits releases and less towards the new releases. But if you want to round out a catalog or your getting someone a new PlayStation 3 for the first time and you want to grab some of the greatest hits titles, that will be the type of software you will see promoted. New releases will be promoted more in a bundle but I don't know if you will see any significant discounting on the new release software.

LL: There has been a lot of buzz on the Playstation Phone. Is this just rumor and a techie dream?

JT: I think the whole discussion on the PlayStation Phone is all rumor and speculation at this point. Nothing is officially announced. What we can officially say is PlayStation lives wherever gaming lives and I think we have redefined the console space and we've redefined the portable space and we are certainly cognisant of the fact that smart phones are playing a bigger role in gaming and I think there is a place for certain PlayStation franchises there and you'll see that going forward. But in terms of a PlayStation Phone, definitely nothing to discuss there. I would characterize that as under rumor and innuendo.

LL: Well, if it ever does come true, you know there will be lots of gamers and tech enthusiasts out there who will buy it.

JT: We want to sell them a dedicated, portable gaming device but I think there is a place for a smart phone and hopefully get them in for the entry level gamer and then have them graduate to a dedicated device. That's the PlayStation hope anyway.

LL: How would you characterize the consumer?

JT: I have seen a lot of anecdotal stuff. Restaurant spending is up for the first time in three years, home entertainment is still the focus for many consumers but they do seem to be traveling more. I think consumer confidence is on the rise. But in the worst of times or the best of times, home entertainment is a key focus and we feel like we are the absolute bulls eye of home entertainment. And the message for this Christmas is you've got to get a PlayStation 3 because it does everything- tying into our campaign. Anyone who is interested in interacting with their t.v. needs a PlayStation 3. Whether you are watching Blu-Ray movies, or tapping into our services like NetFlix, etc. its the ultimate gaming machine. I think we have worked long and hard in the last year to get that message across and we have been harvesting that message and this holiday we're really hoping with the focus on entertainment and on value, that message will play very, very, well this Christmas season.

LL: PlayStation as you have pointed out have put a lot of thought, planning and executing on evolving. PlayStation took "the gamble" if you will on Blu-Ray. Now you have Move. Are you surprised at the adoption of this latest technology?

JT: You saw our competition go after this generation of hardware very differently. We made a significant investment both financially and technologically back when we launched the PlayStation 3 in 2006 to make sure the product could evolve and offer new entertainment experiences for consumers as well as gaming for years to come. In order to do that, you need to have the horsepower under the hood. And a lot of the technology we were talking about in 2006 was foreign to people.

What's Blu-Ray? Why do I need Blu-Ray? Why would I need 50 gigabytes on a disk? Why would I need this big hard drive? And now it has clearly evolved into a point that the hard drive is absolutely necessary, Blu-Ray has since been established, the Internet connectivity and built in Wi-Fi is something we have done from day one.

So, whether you were the first person to buy a PlayStation 3 or whether you are buying one this Christmas, there's definitely a trend over the last five years that PlayStation has evolved significantly. And as we move forward, you are seeing more of the same.

You hit on Move, and Move is something consumers can buy either in a hardware bundle or in a software bundle, as well as a stand alone.

The thing that has surprised us from the Move adoption is the fact people have been completely on board since day one. So they're not just going out to buy the hardware bundle or software bundle depending whether they own a PlayStation 3, they are going out buying a separate controller, they are going out buying the software. They are on board with our motion gaming technology. They're seeing the software support that gives them the confidence to make a much greater investment day one. Quite frankly than we bargained for when we did our launch strategy.

LL: Will there be enough product to meet demand this year when it comes to Move?

JT: Its always a moving target and its a nice problem to have. We started talking to the industry about Move back prior to the start of 2010 and we doubled our production based on the initial feedback we got in the Spring. And then we doubled it again in the Summer-time in anticipation for launch and all those numbers were a little bit scary going into it. We clearly could have been more aggressive.

I think the biggest shortfall we'll experience this holiday is the stand alone controller. Now that is typically going out to somebody who has already bought the hardware bundle or software bundle and wants a second controller. Or it maybe is someone who owns the Eye Toy camera for its other uses so they're buying an À la carte stand alone controller and stand alone pieces of software. So I think we'll be able to meet demand in general but down to the last SKU I think we'll definitely have shortfalls. We've been chasing that Move controller since we launched it.

LL: Let's look at UK and horse race between PlayStation and Microsoft.

JT: The numbers in Europe clearly indicate that we have been in the lead position for quite some time so it was a matter of not taking the lead but catching up to the install base numbers from previous consumers.

I think the other thing that the install base numbers don't really tell is last gamers- people that have traded in a hardware unit for another hardware unit or people that are just not playing it anymore. I think software numbers are the biggest indicators and that's where we have seen tremendous growth. Not only in our market but across the world.

You see more and more multi-platform games being sold in the PlayStation 3 version which is clearly an indication that PlayStation 3 is a system of choice for gamers and this is the home front for Microsoft. That's the market people are going to defend with the greatest amount of effort but clearly in Europe, and the Asian markets, we feel the competition is in the rear-view mirror.

In the U.S. market we still have a fight on our hands, but we feel very good on how we're doing. We have plenty of data that says the PlayStation 3 consumer not only buys more software than the competition, they spend more dollars on entertainment period. So, we have a much more aggressive entertainment consumer spending more on movie tickets, concert tickets, and other forms of entertainment and I think that just bodes well that we've got the Über user, the ultimate entertainment junkie on PlayStation 3.

Lori LaRocco is a Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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