Sony sticker shock: $500 PS3, $249 PSP are possibilities

In a year-end report that puts Leo Tolstoy to shame, industry analysts Michael Pachter and Edward Woo of Wedbush Morgan Securities presented the industry today with a 144-page tome of charts, theories, prognostications, and predictions. Unlike Tolstoy's books, however, their book has a happy ending.

In their report, titled The Definition of Insanity: Why The Next Console Cycle Will Start Off With A Whimper, the analysts present an "in-depth look at interactive entertainment software." And while many of the report's data points were revealed in May, during a Pachter-hosted E3 Conference Program luncheon, most of the data is, in fact, new.

Probably the most exotic of the report's predictions was a reference to Sony's PlayStation 2 update. The report suggests that Sony is considering adding PSX and TiVo-like functionality to the PlayStation 3. If it does, the sticker price on the unit could climb as high as $500. The report states: "We expect Sony to introduce its next console with more functionality than its current console. We base this conclusion on the introduction of the PSX, planned for late this year. The PSX will include a Digital Video Recorder (similar to TiVo) functionality; broadband Internet accessibility; wireless LAN functionality; and DVD read-write functionality. These features add approximately $500 per unit to the cost of production, resulting in an expected launch price of around $700. By late 2006, we expect the cost to include these features to decline to around $250, but speculate that the next generation console, should it include these features, could debut at $500. At this level, we believe that many consumers will be alienated."

Other key findings include an industrywide growth rate (of revenues) of 10 percent per year through 2010 and a growth rate of 14.5 percent in revenues for console and handheld software in the US for the next three to four years.

The report also suggests that US publishers will begin to see a significant increase in sales of game software in Japan and that software sales will surpass domestic music sales (in revenues) over the next two years. Of note on the hardware front, the analysts expect that, due to increasing multimedia functionality (DVD playback, high-def capabilities, and Web access), the percentage of households that own at least one console will climb from 38 percent seen during the 32-/64-bit cycle to 52 percent during the ongoing 128-bit cycle.

On the PC front, the report isolates three games that will act as key market movers--Doom 3, The Sims 2, and Half-Life 2--and states that PC sales overall will be driven to "near record levels."

As well, the Wedbush analysts check in with their estimate of the PSP launch price, pegging the hardware to sell at $249.99 and the software to retail for around $30.

Ultimately, it will be female gamers, the increased spending power of "tween" gamers (8- to 14-year-olds), and aging but committed gamers introduced to interactive entertainment on the Atari 2600, for example, that will fuel the continued and dramatic growth of the industry.

The report's summary closes with the following brave prediction: "We expect interactive entertainment to be the fastest growing entertainment sector over the next five to 10 years. We forecast the interactive entertainment industry to grow US software sales by approximately 11.4 percent per year over the next three years. We project book and music sales to grow less than 5 percent per year over the next three years and we believe that box-office movie receipts will grow in the 2-4 percent range over the same time period. Using our projected growth rates, we forecast that the US interactive entertainment industry in 2004 will continue to be larger than these competing entertainment sectors (with the exception of the music industry which we believe will be surpassed over the next three years), becoming the largest of these major entertainment sectors within the US."