Analyze This: Is It Time To Refresh The PSP?

They are the professional analysts who research, keep track of, advise their clients on, and opine to the news media about the video game business.

In Analyze This, we present a timely question pertaining to the business side of the industry, and then simply let a trio of analysts offer their thoughts directly to you. Each person's opinion is his own.

We asked Michael Pachter of Wedbush Morgan Securities, Doug Creutz of Cowen and Company and Nicholas Lovell of Gamesbrief on what they think of the current state of Sony's PlayStation Portable:

Sony SVP Peter Dille admitted that PSP piracy is a big problem. Yet major PSP titles can still sell (c. f. God of War, Crisis Core). Do you see that piracy is the system's Achilles' Heel?

There have been rumors of a redesign of the PSP without a UMD drive. Does the PSP need to be refreshed, and is this the right direction?

Despite piracy, the PSP is on at least an attempted upswing -- new big-name games and a possible redesign may help boost sales. So with this in mind, what do you think developers and publishers should be doing on the PSP right now?

Michael Pachter, Wedbush Morgan Securities

The PSP was a phenomenal idea that was burdened by Sony's compulsion to use it as a trojan horse to sell the concept of UMD. Sony apparently believed that if it could put games on UMD, a lot of consumers would buy PSPs. Then Sony could in turn sell these same consumers movies that were UMD-based.

The problem was that the format never quite took off, and use as a movie player was not particularly popular. At the same time (2005 - 2008), the iPod went through several iterations, with increasingly large flash memory drives and a well-stocked iTunes store that had tons of movies available for download. The iPod became the device of choice for multimedia. So the PSP was relegated to being a games-only device in practice, even though movies are still offered. Being a de facto games-only device, piracy is a serious problem.

I think that consumers are generally honest, and willing to pay a fair price for content. PSP games are fairly priced at around $20 - 40, and I don't see piracy becoming a huge problem. However, the device is evolving into a download device through the use of ever-larger (and cheaper) Memory Sticks. Those will hold a bunch of games or movies; piracy can be controlled through DRM, and games or movies can be stored on a PC so that the Memory Stick isn't overloaded.

Sony's Patapon 2

It makes sense to me that a redesign would be seriously contemplated by Sony. The device could either use a Memory Stick, or Sony could opt in favor of less expensive built-in flash (a la the iPod). In either case, a PSP without a disc drive and without UMD could be made thinner, and its battery life would be extended. Both of those features would make the device more "iPod-like," and would allow it to compete better as a multimedia player.

The real problem is that Apple figured this out five years ago, and Sony is just figuring it out (maybe) now. Apple has a huge competitive advantage, and Sony will play catch-up for a while. Sony does have pretty compelling game content on its side, and this can truly be a differentiator. But unless Sony figures out DRM and makes the PSP download store a reality right away, it is going to fight an uphill battle.

A PSP without a hard drive should be cheaper to make. So if Sony can cut the price further, it has a real chance of skewing its audience younger, and competing better with the DS as well.

Doug Creutz, Cowen and Company

I think piracy has had a moderate impact, but the bigger problem has simply been that the installed base never took off to the extent Sony hoped.

In the US, the DS installed base is about two times the PSP installed base. PSP games are largely designed for only the PSP. So you don't get any multi-platform leverage off your R&D efforts.

It's pretty clear that the UMD as a media alternative (for video) is dead. If there's a better/cheaper alternative, there's no reason for Sony not to embrace it.

If getting rid of UMD in favor of another alternative helps solve the piracy issue, it should be an obvious choice.

With the surprisingly weak launch of Grand Theft Auto: Chinatown Wars on the DS, it's pretty clear that the PSP remains the handheld system of choice for core gamers.

(However, that's a bit of a contradiction in terms since core gamers tend to favor console gaming.)

Liberty City Stories did just fine on the PSP, despite a vastly smaller hardware installed base at the time of launch, compared to the current DS installed base.

Rockstar's Grand Theft Auto: Liberty City Stories

But other than that, it's tough to make the economics work. There may be a viable niche for smaller, less expensive, creative downloadable games.

Nicholas Lovell, Gamesbrief

The challenge that the PSP faces is one of content and distribution. As handheld rivals such as the iPhone and iPod Touch start nibbling away at the edges of the PSP's market, Sony has to change its route-to-market or risk a steady erosion of players.

That's not to say that the iPhone is a better gaming platform -- far from it. I completely understand the perspective of those who believe that a dedicated gaming device like the PSP will always outperform the iPhone.

But we're not just talking about gaming performance. We're talking about the ease-of-use of getting hold of, and paying for, software.

And on this score the iPhone with its integrated AppStore and seamless purchasing process wins hands-down. The average iPhone user has downloaded 27 apps (not necessarily games); the tie ratio for the PSP is 4.2.

Obviously, many of iPhone apps are free or have very low prices, compared with $19.99 USD or more on PSP.

But that is only part of the story, since the revenue from the PSP is split between the retailer, the cost of the UMD, the physical distribution, Sony's cut and the developer/publisher royalty. On the iPhone, it's a simpler 70:30 split in favor of the developer.

So Sony needs to embrace digital distribution for the PSP (all the signs are that they are going this way), reduce barriers to entry for developers/publishers, and encourage the reduction in price of games.

The PSP remains a better gaming device than the iPhone -- the challenge is to make sure it stays a more profitable gaming device for developers, publishers and, ultimately, Sony.

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