Sony Computer Entertainment America CEO Jack Tretton

To gather some additional insights into the thinking behind the PS3's just-announced $100 price cut and the current state of the Playstation business, we spoke by phone last Friday with Sony Computer Entertainment America chief Jack Tretton. Though his 21-year career in the videogame industry has included stints at Activision and JVC, Tretton's 12-year stretch at SCEA--rising from director of sales to president and CEO--has made him one of the most visible public faces of the Playstation brand. Our conversation began with the vacationing Tretton gently ribbing the Level Up staff about its signature tool, the iGo Stowaway Ultra-Slim Bluetooth Keyboard. Read on.

Have you got out your magic keyboard? [Laughs.]

Well, no, I'm using my PC's keyboard.

I thought maybe you were so into that, that maybe you use that 24/7.

No, no. [Laughs.] I take a break from it when I'm not in the field. Thanks for taking the time to speak with me--I know you're on vacation.

Yeah. My pleasure. This beautiful E3 event being planned the week after the busiest vacation week in the country is another thing that I'll have to thank them for. But money never sleeps.

Exactly. Let's just jump right in.

Sure.

For the first PlayStation, SCEA cut the price by $100 eight months after launch. With PS2, however, SCEA was able to hold at its original price for 19 months. Now with PS3, you're cutting the price just seven months after its launch. You and I spoke extensively before, during and after launch about the value proposition that the PS3 represented: Cell, Blu-Ray, the built in hard drive and backwards compatibility. Why do you think that the perceived value of PS3 was unable to overcome the high launch prices?

Well, the value message is one that is extremely easy to appreciate once you understand it. I think the challenge is providing that education to consumers in a typical retail venue. There's so much for them to absorb before they can appreciate the value, that it's more of a challenge than we faced in previous generations.

So, in a little more plain English, what do you mean exactly by that? What were some of the specific challenges, and what were the plans to overcome them?

I'll try to address it, and I'll try to do it in fairly short order, but if I don't get where you want to go, please ask me again. When we talked about the original PlayStation to consumers, you're talking about a great gaming experience; CD-based technology; and oh, by the way, it also plays audio CDs. Once you digest that, what you see is what you get. In the case of the PlayStation 2, you had backwards compatibility factored in there, and you had DVD playback, which was certainly of great value, but again, a fairly simple message to understand. But when you're talking about Playstation 3, you've got the Blu-Ray movie player, which is obviously a new technology and something that people haven't fully grasped yet, although I think it's making great progress in the last six or seven months since Playstation 3's advent. You've got the hard disk drive built in with every device and the benefits that brings; but that's not something that consumers have ever had in a gaming system before, built in. You've got the implications of what the Blu-Ray drive does for gaming and the 50 of storage capacity. And last, but clearly not least, you've got all the downloadable content implications that the device gives you in terms of music, video, digital pictures.

These are things that I think people are fairly familiar with in a PC, but not necessarily familiar with and appreciative of in a gaming device. Like I said, if you digest all that, that's a tremendous value at $599. But if you look at it as just a gaming machine, it's a very expensive gaming machine.

One of your main competitors, Microsoft has a number of the same features, but not all, in the Xbox 360. You don't think that the messaging that they put out would have primed the hardcore gamer to understand the PS3's potential value? At this point, I'm not sure what the total is for North America, but I believe that for this year, according to NPD, you guys have sold around 667,000 units, in addition to what was sold last year following the launch. So presumably, you're still talking to the early adopter and the hardcore gamer, who I think has the ability to understand this stuff. Then you've got Microsoft, which was already on the market with a lot of the same messaging. They didn't have a next-gen DVD drive built in, but they have downloads; the 360 SKUs that are really selling are the ones that have hard drives in them; it does video; it does pictures, etc. So I'm still not sure about how much of the reluctance from consumers stems from complexity of the message versus the price.

What we've heard in a lot of the consumer feedback--and you read all the blogs and the postings--when you're talking about future technology and really putting everything in the box that people need for the next ten years, you've got a significant percentage of the population that doesn't realize they need it. In the Microsoft play, when you realize it, you need to spend more and more money and you ultimately look back and go "My god, I spent all this money, I've got all these disparate parts that I have to piece together," and you end up cobbling together a next generation machine over time. We're trying to tell consumers, "This is the ultimate device. This is what you're going to need not only today, but in the future." Getting people to appreciate that and agree with that in large numbers is a challenge, given the price point. The degree of satisfaction among the consumers who have purchased the machine is through the roof. I don't think we could be happier. But there's no question that pricing has been probably our main obstacle since the introduction of the machine.

What is the split going to be between the 60 gigabyte and the 80 gigabyte models--

In terms of sales or supply?

Supply.

In terms of supply, I think we'll have aggressive supplies of both. We made a much more calculated bet as to what consumer demand would be when we initially came out with the Playstation 3, between the 20 gig and the 60 gig, because we had gotten a lot of retailer feedback. In this instance, we're going to kind of going to go in with a pretty robust supply of both and let the consumer decide, and then we'll adapt supplies accordingly. So I would say it's probably from a supply standpoint equal, initially, and then we'll adjust based on consumer demand, and we'll adjust production beyond that.

Now getting to the specifics of the new price point, and looking at this versus 360. Microsoft still has the price advantage. Microsoft currently appear to have the technical advantage, in that multiplatform games either look better or are more fully featured on Xbox 360. They've taken the third-party advantage away from Sony by getting games Grand Theft Auto IV day-and-date with exclusive content; they've got BioShock; Splinter Cell; it's gotten to the point now where a Japanese company like Namco has far more 360 exclusives announced than PS3 exclusives. And for this holiday, at least, Microsoft appears to have the first-party advantage, with Halo 3 and new IP Mass Effect. So as I see it, the only advantages Playstation seems to have right now are its brand name and Blu-Ray, but that's still offset by the high launch prices and the slow adoption of HD media formats. So given all of these factors, how can a mere $100 price cut from $599 to $499—the same price as the discontinued 20 gig model—be enough to get the PS3 back on track?

The simple answer for us is that we feel that the technology is clearly the long-term winner and that consumers will ultimately agree with us. We've always looked at our products in ten-year product life cycles, and I think that consumers that have purchased competitive products have come away disappointed when the machine's no longer existed after five years. We've got a lot of history behind us. Anybody that's familiar with the technology would have to agree that the Playstation 3 is clearly the device with the most horsepower under the hood.

In terms of software, we feel extremely good about the fact we've got the largest development studios in the world--bigger than Microsoft and Nintendo combined--with our internal group. We've got 15 exclusive titles this year alone coming to Playstation 3. And I think you'll see at E3 a host of exclusives coming from the third parties as well. The other thing we've got to be clear on is that we're in the first year of our product life cycle. If you look at the first year of any platform out there, it takes a bit of time for the software library to build up, for the third party support to get where you want it, and with 100 titles coming for Playstation 3 between now and the end of the year, between first and third party, we feel that we'll be in great shape in year one of our product launch, and we'll stack up our software library, the quality of our machine and the price of our machine against anybody's. I don't think you can be oblivious to competition, but looking at how our competition is doing and what challenges they have as compared to what assets we have, going forth we feel extremely good about our competitive position.

You're busy enough minding your own knitting, but you obviously do competitive analysis. From the research you've been gathering, at what point did it become clear to the folks at SCEA that there were some design or manufacturing problems with the 360?

With the 360?

Yeah.

Well, anybody that spends time talking to retailers or keeping an eye on the consumer pulse starts to get word that there's a bit of smoke out there, and then ultimately there's a fire. We've been aware of it for the better part of this year. Coming out of the holidays is when we first started to hear about it in a fairly high degree of detail, and it's gotten to a loud shout right now.

Can I get you to tempt Murphy's Law and talk about the PS3? Of all of the criticisms that you've gotten on the PS3--price, software selection and things like that--there haven't been any substantial complaints about the hardware itself.

That's the thing that we're extremely proud of. The hardware is a tremendous device. It was a little late to market; we had production issues going into it, but I think consumers are seeing now that that time and those challenges we faced led to a very reliable product. We've always had a high degree of quality on Sony brands and on Playstation products, and Playstation 3 is actually at the absolute peak. We have the lowest deficiency rate, or defective rate on the Playstation 3 of any of the devices we've ever released. So while it might have been frustrating with the timing and the manufacturing process, the end result is a great, great product. There's certainly indications that if products get rushed to market, you might end up paying for it down the road.

How much do you see the Wii having impacted the slow ramp of PS3 to date?

Every generation of hardware is different. If we had no competition, it would still be a different situation for us, because the PlayStation 2 is so viable. For the first time in industry history, you have two viable portable formats that are competing for consumer dollars. PlayStation Portable has obviously generated millions of dollars that are coming out of consumers' wallets at some expense. The PlayStation 2 is as relevant as it's ever been; we'll sell 10 million of PlayStation 2s worldwide this year, and those are obviously going to consumers that are considering it their new gaming device at the expense of one of other three machines. So in addition to having competition at various price points and technical configurations from outside companies, we've got two of our own devices that are competing for consumer dollars. That's a very different scenario that you had in previous generations, where you had two or three consoles, one portable machine--end of story. There's a lot more competing for consumer dollars in this space, but the overall dollars are bigger. The overall industry is better off for it, but it's difficult for one machine alone to be as dominant as machines like PlayStation and PlayStation 2 have been in the past.

On the PS2 front, since it's the closest in price to the Wii, and, except for the motion controller, its specs are not that dissimilar--are there any plans that you have to make the PS2 even more of a competitor to the Wii, or do you feel that you're already locked and loaded on your PS2 strategy for the rest of the year?

Well, I certainly wouldn't rule out innovation. We've seen some attempts--not necessarily from Sony, but from third party publishers--to come up with devices that enhance the PlayStation 2 playability. But I think our biggest asset has carried us for the last seven years and that's the software library. The most amazing thing about the PlayStation 2, beyond the fact that that technology is available for $129 is that there's over 160 new games coming out for PlayStation 2 this year, in the seventh year of the product's life cycle. The fact that you have games like God of War II, which shipped in March and has already sold over 2 million units, is really a testament to the technology. That's probably our biggest asset, and we're of the mind that if it isn't broken, don't fix it. What has carried you for the last seven years should carry you going forward as well.

Jack, thanks very much for your time. I appreciate it.

Pleasure, N'Gai. I always look forward to talking to you, and hopefully I'll see you next week in L.A.

Absolutely. Best of luck with the show.

All right. Thanks again.