Hobbled by Disappointing Sales and a Loss at the Game Unit, Sonyâs Profit Drops 5% Article Tools Sponsored By By MARTIN FACKLER THE NEW YORK TIMES Published: January 31, 2007 TOKYO, Jan. 30 â The dip in Sonyâs quarterly earnings released early Tuesday underscores what many analysts call the biggest single challenge now facing the recovering Japanese electronics conglomerate: the shaky start of its long-awaited PlayStation 3 game console. On Tuesday, Sony said net profit slipped 5.3 percent, to 159.9 billion yen ($1.31 billion), in the quarter ended Dec. 31. The company, based in Tokyo, blamed a large loss in its games division, despite rebounding sales in its bread-and-better consumer electronics. The games division posted a quarterly operating loss of 54.2 billion yen ($446 million), in contrast to a profit of 67.8 billion yen in the quarter a year earlier. Sony said the decline was a result of a decision to set the price of the PlayStation 3 below the cost of production as a way to bolster market share. It also pointed to one-time start-up costs for PlayStation 3, which was released in Japan and the United States in November. Analysts, however, said the weak results reflected more fundamental problems with the new console â a high price tag and a complexity that is scaring away all but die-hard game fans. They added that Sony still had plenty of time to turn PlayStation 3âs fortunes around, but only if it cut prices further and made the console more appealing by adding games. âPlayStation 3âs performance so far? In a word, bad,â said Yuta Sakurai, an analyst at Nomura Securities. âIt is clearly not good for Sony that a strategic product is off to a weak start. But itâs still early. This race is a marathon, not a sprint.â Sony and its chief executive, Howard Stringer, had hoped that PlayStation 3 would become the companyâs latest âchampion product,â much like its predecessor, the PlayStation 2, which became a worldwide blockbuster with more than 106 million units sold since 2000. Faced with rising Chinese and other Asian competition, Sony badly needs PlayStation 3 to be a hit of the same magnitude, analysts say. This need is compounded, analysts said, by the reality that Sony has no other potential megahits now visible in its product pipeline. But as Tuesdayâs earnings showed, consumer response has so far been disappointing at best, the analysts continued. This has added to recent woes of Sony that include an embarrassing recall late last year of laptop batteries, some of which caught fire. The poor performance of the games division stood in contrast to other parts of the companyâs sprawling lineup of products. Sony said Tuesday that it was increasing its profit forecast for the year after strong sales of core consumer products like television sets and digital cameras and movies like the newest James Bond film, âCasino Royale.â Consumer electronics, the biggest division, posted an operating profit of 177.4 billion yen ($1.46 billion), up 102.8 percent, helped by the popularity of Bravia flat-panel TVs, Vaio computers and Cyber-shot digital cameras. Analysts agree that the strong sales in the once-ailing electronics division, the worldâs second largest behind the Matsushita Electric Industrial Company, the parent of Panasonic, have been a success story for Sony and Mr. Stringer. Another has been improving sales by Sonyâs movie studio, which has produced a string of hits including the Bond film and âThe Da Vinci Codeâ â one of Mr. Stringerâs pet projects. Sony is also hoping to continue mining the success of its Spider-Man films with the release of âSpider-Man 3â in May. The movie division had an operating profit of 26.2 billion yen ($215.4 million), reversing a loss of 400 million yen a year earlier. The improved results helped Sony do better than analystsâ predictions that its net profit would fall by half in the most recent quarter. They also helped Sony raise its projected net profit for the fiscal year ending March 31 to 110 billion yen, from an October forecast of 80 billion yen. But analysts said that before Sony could pull out of its long slump once and for all, it has to deal with the problems in its game division. One reason, they said, is that so many other new products are riding on PlayStation 3âs success. Sony hopes that the console will showcase two of the most recent technologies, the Blu-ray next-generation DVD drive and the high-speed Cell microprocessor. âSony needs to raise demand for its semiconductors to recoup its huge capital investments in chip factories,â said Yoshiharu Izumi, an analyst at JPMorgan Securities, who said those investments run in the billions of dollars. âFixing its chip business goes together with improving the games division.â Tuesdayâs results provided the latest glimpse at the weaker-than-expected demand for PlayStation 3, analysts said. Sony said it shipped 1.84 million PlayStation 3s in the quarter, and sold 5.2 million copies of game software for the console. Nintendo, by contrast, recently announced that it shipped 3.2 million units of its new game console, Wii, and sold 17.5 million copies of software in the period. As recently as the Las Vegas electronics show early this month, Sony proclaimed that it had met its targets of shipping a million PlayStation 3s in the United States and Japan. But independent research groups say that Wii has outsold PlayStation 3 by 2 to 1 in Japan and by a smaller margin in America. The Microsoft Xbox 360 has also outsold PlayStation 3 in the United States, as has the Sony PlayStation 2. Some of PlayStation 3âs problems can be attributed to manufacturing delays that pushed back its release by months, and then slowed production. The delays pushed PlayStation 3âs release in Europe back to March. But analysts and consumers also point to a more basic problem: appealing to consumers. While PlayStation 3 surpasses both Wii and Xbox 360 in performance and graphics, the critics say it suffers from the same problem as many other Sony products: it is overengineered, scaring away average shoppers. Many consumers have also favored the Wii and Xbox 360 because of their lower prices. At $249 in the United States, Wii is half the price of the cheapest PlayStation 3, while Xbox starts at $299. âFor many consumers, itâs still just too much,â Mr. Sakurai of Nomura said, âtoo much machine for too much money.â Settlement Over Software WASHINGTON, Jan. 30 (Reuters) â The Federal Trade Commission said on Tuesday that Sony BMG had agreed to settle charges that it secretly embedded potentially damaging antipiracy software in some CDs. The settlement requires Sony BMG, a joint venture of Sony and Bertelsmann, to make further disclosures, allow consumers to exchange the CDs, and reimburse consumers up to $150 to repair any damage to their computers. The F.T.C. said Sony BMG violated the law by embedding some music CDs with software that installed itself on consumersâ computers without their consent and restricted the number of times the audio files could be copied. It was also used to help send them marketing messages, the agency said. The software at issue was included on millions of Sony BMG compact discs sold in 2005, the F.T.C. said.