Will PlayStation 3 be the new Betamax?

Sony's Blu-ray technology is hot stuff. But, as it found out back in the 1980s, technical superiority doesn't always guarantee success

It is the most eagerly awaited gadget of recent years. Sony's futuristic PlayStation 3 games console is already selling by the planeload in the US and Japan, following its launch earlier this month, and is expected to do well in the UK when it appears in Europe this spring.

But while retailers and consumers can't get enough of the sleek $500 (£260) black machines, Sony is suffering a huge financial loss. Analysts believe the company will lose £1.7bn on its PS3 business over the next two years.

The launch in the US and Japan will barely make a dent in these losses. Analysts predict that, partly because of manufacturing difficulties, only 750,000 consoles will have been sold in the US by the end of the year, despite Sony chartering planes to airlift new orders in from Asia. To rub it in, its arch-rival Nintendo launched its own console this month in the US, the Wii. Analysts at Lazard Capital Markets estimate that Nintendo could ship up to 200,000 of these consoles every week until the end of the year, the most important period for retailers.

Sony is taking a gamble that its investment in PS3 and the step change in technology that it represents will pay off. In particular, it hopes that by incorporating Blu-ray technology - which allows the console to double up and play high-definition DVDs - it has backed a winner.

Research by Thomson Scientific for The Independent on Sunday shows that developing, assembling and transporting the console to the shops has been a huge global undertaking, involving dozens of component suppliers and partners, mainly in Japan and the US.

Some say that the scale of its ambition could prove to be Sony's downfall. As analysts like to point out, the video battle of the Eighties - VHS vs Betamax (championed by none other than Sony) - shows that picking a winner is not always straightforward. Betamax was technically superior, yet lost out to VHS and so became obsolete. So has Sony bitten off more than it can chew?

As the name suggests, the PS3 is the third in the PlayStation series and competes against Microsoft's Xbox 360 and Nintendo's new Wii. The top-of-the-range PS3 model, which comes with a 60GB hard drive, is 40 times more powerful than the PS2, allowing it to play ever more data-intensive games. Its Blu-ray technology offers higher resolution than any other technology, including the rival HD television platform promoted by Microsoft and Toshiba. For owners of high-definition televisions, this enhances the picture for games, as well as for movies, because the console - like the Xbox 360 and Wii - also doubles up as a DVD player. But DVDs made for HD TV are not compatible with Blu-ray, and vice versa. At the moment, most film studios produce two versions of DVD, which are compatible with the competing technologies. But this is unlikely to continue indefinitely and Sony hopes that - unlike Betamax - it is Blu-ray that emerges as the triumphant format.

Sony is taking a different approach to Microsoft, whose Xbox 360 does not come with a built-in high-definition disc-playing capability (an external add-on HD DVD drive has just been introduced). Because high definition television has yet to take off, in the short term most buyers of PS3 will not see the full benefits of Blu-ray. But Sony is taking the long-term gamble that incorporating Blu-ray into PS3 will give the technology a head start. As Paul Jackson, of Forrester Research, says: "Sony is playing a long-term game for consumers' living rooms and future entertainment beyond gaming."

The incorporation of Blu-ray has held back the roll-out of PS3. For example, problems with the Blu-ray laser diodes have restricted production. Mr Jackson adds: "Sony is pushing the envelope of innovation here. In terms of production it has made a rod for its own back. The newness of the technology makes the console expensive to assemble and means that components are in short supply."

In comparison, the components in the less innovative Xbox 360 are much simpler to find, even though Sony has been trying to reduce the amount of component suppliers used and centralise operations.

Some critics have questioned whether Blu-ray is necessary. They say that having a dual role for the PS3 is holding Sony back.

But Phil Harrison, president of Worldwide Studios at Sony Computer Entertainment Europe, defends its inclusion: "Including Blu-ray is an indication of our determination to make PS3 future proof. We need Blu-ray as game designers to feed the hunger of PS3's powerful Cell and RSX processors [the graphic chip of the PS3]. Adding support for Blu-ray movie discs makes it even more attractive to consumers."

If initial sales are anything to go by, the PS3 is a big hit. Demand has been so high that more than one in 10 consoles have been resold on the auction website eBay for three times as much as the price in the shops. In Japan, some intrepid gamers queued for days to make sure they got their hands on the prized console. When it launched in the US, one man was shot by robbers as he queued up outside a Wal-Mart store in Connecticut at 3am.

The biggest headache for Sony is meeting this demand. "There are going to be some frustrated consumers and we are very sorry about that," Mr Harrison says. Keen not to raise expectations, he is reluctant to be drawn on when production will meet this demand. "We are confident of being able to more closely align supply with demand for the European launch next year."

Colin Sebastian, an analyst at Lazard Capital Markets, says the delayed launch of PS3 puts Sony further behind the Xbox 360, but the battle will not be won or lost in one year. "It's important to remember this is a cyclical business with a five- to 10-year product cycle," he says.

Mr Harrison is bullish about PS3's prospects, despite all the problems. "If we can continue the trend we saw with PS1 and PS2, where both systems sold in excess of 100 million machines and expanded the market for games, I can't see why we can't get an installed base of over 100 million PS3s."

But with shareholders jittery about the financial impact on Sony of PS3, and with previous targets not met, he adds quickly: "But that's not a forecast."

Patents: Battle of the tech-heads as Microsoft takes on Asia

Not only is Europe last in line when it comes to the launch of the PlayStation 3 (PS3), but it lags behind the US and Japan in terms of developing new technologies that go into such complex gadgets.

Data compiled for The Independent on Sunday by Thomson Scientific shows that the console's new components were mostly patented in Japan and the US. The UK patented under 1 per cent of the 1,138 components that go into the PS3.

Where a technology is patented is a good indication of where it was developed. Stephen Trotter, senior patent analyst at Thomson Scientific, explains that one reason Japan and the US dominate is because they represent the world's largest consumer electronics markets. Patenting and producing components close to the target market makes sense.

The US has played an ever more important role in driving new video games in the past five years, mainly because Microsoft, under its chief executive Steve Ballmer, has moved into this market. Some 600 new games-related inventions were filed in the US in 2005, up by more than 200 per cent since 2000. The US is thus closing the gap on Asia, where 900 inventions in this field were patented in 2005. Both are streets ahead of Europe, with just 86 patents filed in 2005.

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