From Xanter at www.purevideogames.com:

As we enter the last few weeks before E3, everybody is making predictions about who is going to show what, who is going to win the heart of the fans, and whether Shigeru Miyamoto is going to finally land a booth babe for himself (ok, most aren't actually speculating on that last one). In that respect, I'm no different, but after watching the news for the past few years, a slightly different approach occurred to me.

This 4-part series analyzes the major players of the videogame industry from the most profound perspective of all: within their heads. In the first three sporadically published articles, I will attempt to discover what makes each of them tick, what their neuroses are and the obstacles they will have to overcome to achieve their goal. And then in the fourth article, I will bring it all together to try to formulate a new way of looking at the way the future of videogaming will play out. And just as Freud discovered back when he invented the psychoanalysis, it turns out that some of the biggest stumbling blocks that Sony, Nintendo and Microsoft face come not from each other but from themselves.

We begin with a look at the industry leader, Sony.

Sony: Schizophrenia

There is a meme circulating around certain circles that Sony is now in the same position that Nintendo was in ten years ago before the Playstation era. Like Nintendo, Sony is the winner of two generations of console wars in a row with a name that is synonymous with videogames. And like Nintendo, so the thinking goes, Sony has grown undeservedly arrogant and complacent in their power—just in time for the inevitable defeat just as the same happened to Nintendo. So if we were to give a diagnosis for Sony’s mental problems, the most obvious choice would seem to be megalomania or perhaps delusions of grandeur.

But the world is a different place now than it was in 1995, and the comparison between Sony and Nintendo is easily overstated. Nintendo was the undisputed king of videogames going into the N64/Playstation era, but the videogame world at that time was still relegated to the geek culture, barely even worthy of mention in Time magazine or the New York Times. Today, videogame launches appear on the covers of news magazines that normally devote most of their space to crime, politics and health. The Playstation is not simply the king of the videogame world. It is one of the kings of world entertainment, period. Dislodging such a company will be much harder than toppling Nintendo ever was.

All the same, Sony has a dysfunction. The problem is not that Sony sees more in itself than there really is but that Sony doesn’t know what it sees when it looks in the mirror. The framework I propose to use is schizophrenia. Admittedly, schizophrenia is a very vague and controversial diagnosis, but for our purposes it serves pretty well. The current thinking on schizophrenia is that it arises from contradictory signals flying about the brain. To give a very grossly simplified example that will likely horrify any clinical psychologists reading this, one part of the brain signals, “The ear hears something” whereas the other parts of the brain signal “the eyes don’t see anything that might be making noise” and “the skin does not feel any pressure waves associated with sound.” A normal brain takes these signals and concludes that maybe there’s something wrong with the ears. A schizophrenic brain takes these signals and concludes that there are thought waves being transmitted directly into the brain by the federal government (or aliens).

This kind of thinking can be applied to large organizations as well. One of the most profound lessons of political science is that when a bureaucracy is split into several departments all advising one central command on what to do, the departments will strive to justify their own existence more often than they will try to work together as a cohesive whole to achieve the ends. In other words, a military force would work best if every branch stuck to what it does best with the Air Force providing reconnaissance (and occasional bombs), the Navy providing transportation of heavy cargo over long distances and the Army providing ground transport and human beings with guns. But because each of the branches has their own budget and needs to justify the millions spent on them, they all try to argue to the commander in chief that they can actually fulfill some of the roles of the other branches. For example, the German Luftwaffe in World War II thought it could keep troops supplied on the Russian front all by itself, and the American Navy sometimes argues that its aircraft carriers provide most of the services that the Air Force could provide.

Similarly, Sony is divided into several divisions which each produce movies, music, consumer electronics, computers and videogames. Sony spends money on research and production in each of those divisions, and each of the divisions must in turn justify their expenses to the top executives. The problem Sony has (and the source of its neurosis) is that all of its divisions are in big trouble with the exception of the SCEA, the videogames division, and perhaps its computer division. With the exception of the Spider-Man series, Sony’s movies have had mediocre performance at the box office. Their music division has fallen victim to the declining CD sales that have afflicted the entire industry. Sony is no longer the cutting edge producer of high-end TVs—they were overtaken long ago by Sharp and Samsung. And in computers, although the Vaio line is doing quite well, Sony is not nearly as big a player in the industry as Dell or Compaq—even Apple arguably has more mindshare. Incidentally, this is the major difference between Sony and Microsoft. Although both are large, multinational corporations doing business in several areas at once, Sony’s gaming division is propping up its other businesses whereas Microsoft’s other businesses prop up its gaming division. This creates unique problems for both, but we’ll talk about Microsoft in a later article. The point is that right now, Sony would literally become a more profitable company if it stopped producing several of its products and liquidated a couple departments. Read their financial reports if you don’t believe me. The heads of the various divisions know this, and so they try as hard as possible to obscure their individual weaknesses in order to convince the central authority that they are essential to success.

And what better way to do that than to piggyback on the corporation’s biggest success? The arguments likely went something like this: “The next Playstation product should include the ability to play movies. That will distinguish it from the other competitors (and boost revenue for the movie division” or “The next Playstation product should make use of Memory Sticks. This way, we’ll be able to tell customers that they can transfer videos or digital photos from their cameras, making the Playstation more attractive (and boost revenue for the consumer electronics division)” or “The next Playstation product should play music. This will make it...” and so on.

At first blush, these arguments can be pretty persuasive. Surely if the next Playstation has several multimedia functions, then it will be more attractive than similar products from Microsoft or Nintendo. If a potential buyer is shopping for handhelds and sees that the PSP can play videos and music in addition to games, surely that will be a more attractive proposal than Nintendo's game-only offerings. Apparently, Sony's central command found these arguments very convincing because they proceeded to release the PSP with some very neutered multimedia functionalities. The PSP could play music, but at first it came standard with only a 32 MB Memory Stick and wouldn’t play songs in mp3 format. It could play movies, but only on Sony's proprietary UMD format or by using a program to re-format videos so that they could be loaded onto a Memory Stick.

A schizophrenic man might hallucinate visions of angels and accept them because the logic centers of his brain fail to reason that the angels he sees violate the laws of physics, that they make no evolutionary sense and that other people can't see them. Similarly, Sony looked at its PSP and saw a highly desirable product, apparently failing to realize that proprietary formats are almost always doomed, that music playing requires decent storage capacity and that multimedia functions must not only be present but also easy and convenient to use. The proof is in the results. I have to admit that I was taken aback at first when UMDs actually sold pretty well in the beginning, but now movie studios are cutting back on UMD releases due to slow sales. Sony does not even bother to advertise music playing in its publicity any more. Instead, they moved on to introduce a web browser for the PSP, perhaps at the prompting of the division that produces Vaio laptops. Once again, an internet browser for a portable machine seems like a smashing idea until you realize that it has no mouse or keyboard, ensuring that surfing the web would be a laborious affair (never mind typing e-mails or message board posts). To be fair, there was a PSP keyboard floating around at one point, but like most add-ons, it fizzled and disappeared. Sony’s latest project for the PSP is a PSOne emulator and download service. The news was met on some fronts with excitement as PSP owners eagerly looked forward to the prospect of playing Final Fantasy VII on their handheld. But even now, many have gotten over the initial euphoria and realized that the deal is not quite as sweet as it sounds. PSOne games came on CDs holding 650 MB, and many of them used two or even three discs. This means a 1 GB Memory Stick, which costs at least $50 anywhere you look, would be able to hold at most two PSOne games. The emulator itself comes on a UMD disc likely to cost the same as any other PSP game. And if Sony decides to charge for downloads, the economics get even worse for consumers. The EyeToy peripheral and video telephone functions also sound rather spiffy, but they are, once again, add-on features which will see very little uptake in the market.

Watching Sony throw more and more functions onto the PSP, only to see them flop in their turn, it is difficult not to sense a little desperation emanating from the company. Some part of Sony surely knows what it needs to do in order to make the PSP at least as successful as the Nintendo DS if not the Game Boy Advance: concentrate on putting out good games. It is not something they are incapable of doing. Sony has developed some very capable studios over the years which have put out such first-rate games as the Jak and Daxter series, Ico and Shadow of the Colossus. Direct some of that talent to the PSP and Sony could not only move units but also inspire third party developers to follow suit. But instead, Sony has allowed itself to become so distracted by the effort of adding new features that only now are there any games on the horizon that are drawing genuine excitement (Ready At Dawn’s upcoming Daxter). And it may be too little too late.

We can already see early schizophrenic symptoms in the PS3. In their most recent announcement about the PS3, Sony has shown remarkable discipline by focusing on the PS3's hard drive (which the Xbox 360 does not have standard), the free online playing (also not available on Xbox 360) and Blu-Ray (ditto). But at various points up until now, Sony has also promised Tivo functions, internet browsing, video chat and the ability to download videos and music. It is unclear exactly how all this can be done without a keyboard or at least a remote control, but perhaps for once Sony will have actually thought things through. Interestingly enough, rather than use proprietary formats for everything like the PSP, the PS3 has gone the opposite route. It is backwards compatible to the original Playstation, and includes ports not only for a Memory Stick but also an SD card, compact flash card and no less than six USB cables. Sony should be applauded for taking a more open approach to the PS3's design, but all those USB ports make me wonder if Sony plans to overkill their device with add-ons again. Even Apple computers only need two. The last thing Sony needs for the PS3 is to start introducing scanners or telephone attachments for Voice Over IP or a peripheral to connect an mp3 player, but with the way the PS3 is designed, Sony has left the door wide open to fall into the same morass that has afflicted the PSP.

Even if Sony manages to avoid the pitfalls of the PSP, it may find itself on the verge of a very dangerous mistake. Thanks to all the components that Sony has already crammed into the machine, its cost to manufature has been estimated at $800 per unit by Merrill Lynch. To perfectly fair, Merrill Lynch originally estimated a cost of $900 but then discovered that it had committed an error in arithmetic, so we must look with some skepticism no a report produced by a company that literally couldn't even add two numbers together. All the same, this is a breathtaking expense for Sony. Let's assume the PS3 retails for $500 (any higher would be suicide). And let's also assume that licensing gives Sony $30 per game sold. That's an absurdly high number because no developer would put up with losing half of a game's price to Sony in licensing fees. But even with that unrealistic estimate, Sony would have to achieve a tie-in ratio of 10 games per console just to break even. In the current generation, the PS2 has a tie-in ratio of 12 per console now near the end of its life. Effectively, the PS3 would lose money and lots of it for the first several years of its life, and all because Sony couldn't seem to resist adding more features to the thing.

And here's the danger: some part of Sony may realize what a colossal risk this is and attempt to remedy the situation. Like a schizophrenic struggling unsuccessfully to come to his senses and reconcile the reality he perceives, Sony may attempt to cut corners or sneak in hidden costs in order to save itself some of the loss. It has happened before. The PSP is sold at a loss, and Sony attempted to squeeze some extra profit out of it by forcing the use of UMDs and Memory Sticks (which cost more than SD cards for similar storage amounts and are also less widely used). Otherwise, music and movie playing would have simply added cost without generating any extra revenue for Sony. Similarly, although the PS3 is more open on paper, Sony may raise licensing fees to cover the cost of Blu-Ray or enact stringent anti-piracy protections to prevent downloaded content from being transferred to another PS3—meaning if you want to show a video to a friend on his PS3, you'll have to download and pay for it all over again (Sony has done that kind of thing before). So far, it hasn't happened, but that's only because Sony hasn't so much as announced the PS3's pricing structure yet.

Sony's problem is not that it has grown arrogant or complacent. In fact, Sony has been a trailblazer in some ways. The company's problem is that like a schizophrenic, it doesn't know what it thinks about itself or what it sees in reality. Microsoft more or less knows what it wants to give to the world: a great online experience and a network with which to receive everything from videos to computer programs. Nintendo also knows what it wants to be: an innovator who creates the next standard in electronic toys for people to have fun with. But thanks to the clamor of its multiple divisions who all want to snatch a ride on the Playstation gravy train, Sony hasn't been able to decide what it stands for. About the best guess anyone can make is that Sony wants to be the producer of every device you'll use in your living room. It is often said that the PSP can't decide whether it is a handheld gaming device or a jack-of-all-trades multimedia device, and consequently customers haven't known what to make of it either. Sony stands now an the same precipice with the PS3. Will they focus on the games or will they attempt to compete with DVD players, computers and music players (some of which are their own products) all at the same time? Hopefully, Sony's central authority will come to its senses and start saying no to its fractious divisions. After all, the truth is that movie audiences, internet surfers and videogame players are not all part of the same population, and as such no one device will cater perfectly to all of them. To overcome its schizophrenic behavior, Sony needs to take a clear-eyed look at the world and then grab a firm hold of its own identity as a company.

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