Gaming Legend to Exit Sony as PS3 Stumbles

The executive who led electronics giant Sony (NYSE: SNE) into the game console business is leaving his post atop the company's computer entertainment business.

The retirement of Ken Kutaragi, who is known within Sony as the "Father of the PlayStation," comes as Sony continues to struggle with the PlayStation 3, which has been bogged down by high costs and other production issues and beset by strong competitors, notably Microsoft's (Nasdaq: MSFT) Xbox 360 and Nintendo's Wii.

Kutaragi will step down June 19 as CEO of Sony Computer Entertainment. He will retain an honorary position on Sony's board and serve as what the company calls a "senior technology adviser" to Sony Chairman Howard Stringer.

Kutaragi helped revolutionize the modern gaming business by developing the first PlayStation console in 1994, putting Sony into a business that it came to dominate over the next decade with the original console, the PlayStation 2 and the PlayStation Portable, or PSP. The company has sold more than 200 million PlayStation consoles worldwide.

More recently, Sony has struggled to get enough of its PlayStation 3 consoles -- which feature advanced graphics, interactive capabilities and a built-in DVD player -- to market at the right time, especially during the 2006 holiday season. As a result, Sony has seen Nintendo and Microsoft sell far more of their next-generation devices.

Replacement Named

Sony may have been planning for the eventual departure of Kutaragi for some time and immediately announced he would be succeeded by Kaz Hirai, COO of the games unit. Kutaragi had handed over some of his duties to Hirai last year.

In addition to helping conceive of and design the PlayStation line, Kutaragi also prompted Sony to enter the online game-playing business in 2002, ahead of many competitors.

Hirai may be able to help boost the PS3 by using strong relationships with video game publishers to ensure a steady stream of titles is produced for the latest Sony platform.

Problems began with the PS3 early in production, when the high costs of components drove the price of the console above that of competitor's offerings. Though launched to mostly favorable reviews, the PS3 has been primarily embraced by hard-core gamers -- not the mass audience needed to drive volume sales .

As of the end of March, Sony sold 501,000 PlayStation 3 consoles compared to 1.03 million units for the Wii and 721,00 for the Xbox 360, according to the NPD Group.

Bad Timing

The PS3 has stumbled at a time when Sony can least afford it. During 2006, the company suffered through a massive worldwide recall of its laptop computer batteries that cost it more than US$500 million to fix. It has also seen demand for many of its other electronics eclipsed by more innovative offerings from competitors. For instance, its once strong portable music player business has been decimated by the Apple (Nasdaq: AAPL) iPod.

Instead of boosting results, however, the PS3 has become a drag on forward momentum, with losses from the unit expected to top $1 billion this year.

By contrast, Nintendo this week said its net income rose more than 600 percent over the same period last year, thanks in large part to sales of the Wii and its latest handheld, the DS.

Sony's error was to focus purely on technological advancement. The result is an exceedingly powerful device -- some mainframe computer makers are building machines around the chips made for the PS3 -- but one that has to be priced too high for the casual gamer.

Sony's overall lineup -- including the PS2, which remains a strong seller -- is still the most formidable in the market, Yankee Group analyst Mike Goodman said. However, the delays in getting the PS3 to market and the company's inability to offer it at a more competitive price point will mean Sony will have to fight from behind to overtake the Wii and Xbox.

While the novelty of the Wii helped make it a big seller, Goodman added, the availability of top titles is what drives game-console purchase decisions and by most accounts, Sony's platform remains at or near the top of the industry on that score. "Over time Sony will win back some of the ground it lost due to the missteps with the PlayStation 3," he said.