As Earnings Slump, Video Game Price Cuts More Likely

Sony and Nintendo may tell anybody who will listen that they're not planning to drop console prices this year, but judging by the results from each company's first fiscal quarter, neither video game console maker may have a choice.

Sony Playstation 3
Source: Sony
Sony Playstation 3

Sony's game business declined 18 percent in the 2009 April-June time period, compared to a year ago. Nintendo saw its profits fall 60 percent, largely due to a tough year-to-year comparison.

In hard numbers, Sony sold 1.1 million PS3s last quarter, compared to 1.6 million in 2008. Wii sales fell from 5.17 million to 2.23 million.

Analysts, retailers and, increasingly, publishing partners have been demanding price cuts from both companies of late. This week alone THQ CEO Brian Farrell and Ubisoft CEO Yves Guillemot both hinted they believed Sony and Nintendo would reduce their hardware retail prices.

"The fact that Nintendo Wii is still at its launch price and PlayStation 3 is still at a relatively high price point by historical standards ... it would seem that a price cut would be in order by at least two of the three manufacturers," said Farrell. "We do anticipate price cuts coming this fall. ... Something on the higher end of the range certainly wouldn't surprise us."

The range Farrell is talking about is mostly aimed at Sony. Since the beginning of the year, industry chatter has been about whether Sony would lower the price of the PS3 by $50 or $100. Lately, though, analysts agree that anything less than $100 would be a major disappointment.

For the Wii, most industry observers are expecting a $50 price cut.

Microsoft, meanwhile, is not expected to cut prices on the Box 360 after doing so last year. Publishers seem happy with that console’s price for now.

While 2008 was a very strong year for the video game industry, making 2009 comparisons look weak no matter what, it is impossible to deny the fact that the recession is starting to have a significant impact on video games.

June software sales were the worst in nine years, falling 29 percent. Hardware sales plunged 38 percent.

Many were anticipating the holiday period would rescue the industry, but a recent string of significant game delays have quelled those hopes.

Analysts now say the only way to salvage the industry is with price cuts.

"As for hardware sales, there is clear cause for concern around both the PlayStation 3 and the Wii," wrote Ben Schachter of Broadpoint AmTech earlier this week. "In our view, in order for the industry to recover in the back half of the year, we will need to see a $100 price cut for the Sony PS3 and a $50 price cut for the Wii. And while we expect both of these to be forthcoming this fall, industry expectations of price cuts have been wrong throughout this hardware generation."

It's not quite so easy of course. Nintendo can easily afford the price cut, as it has been making a profit on Wii sales since day one — and has significantly lowered its production costs over the past three years. It could also bundle the recently released "Wii Sports Resort" and "Wii motion plus" peripheral with the hardware to boost consumer interest.

Sony, though, still sells the PS3 at a 10 percent loss per unit (roughly $50). A notable price cut could further hurt the company’s struggling bottom line.

If price cuts are coming, as everyone except public relations representatives for the two companies seems to expect, the larger question is when. The best guess is October, to fully capitalize on the increased willingness of consumers to spend as they enter the holiday season.

Either way, should Sony or Nintendo stick to their guns and not adjust prices, it's not just consumers who will pay the price.

"Price cuts are priced in," says Michael Pachter of Wedbush Morgan Securities. "Everyone expects them, so the absence of something expected would be received very negatively and I'd say the publishers would suffer."

"It’s not like Sony and Nintendo are going to put out a press release saying 'we're not cutting prices'," says Pachter. "Every day it doesn't come in October, it will be a slow bleed. Every day in November it doesn't come will be a slow bleed. And if there’s no price cut by December, it’s obviously not coming."