In the latest report from DFC Intelligence, the analyst group returns to an earlier report on whether the PS3 could find itself running last in the console race, answering their own question in light of the past year with "a hedging 'probably not.'" The full text of the report, released on the analyst firm's website, follows below: "This time last year DFC Intelligence asked the question: "Could Sony go from First to Worst?" At the time we were just raising the issue of whether both the Microsoft Xbox 360 and the Nintendo Wii could possibly beat the PlayStation 3 (PS3) in this new generation of systems. This was a period when Sony seemed to have a stranglehold grip on the console market and thus merely raising the possibility of a third place PS3 finish attracted attention. A year later, the PS3 is in third place and now all kinds of people are questioning Sony's strategy. However, from the perspective of DFC Intelligence, we would now answer the question "could Sony go from first to worst" with a hedging "probably not." It should be admitted that at DFC we don't have a true crystal ball into the future. We build forecasting models based on past behavior and anticipated future products. DFC doesn't develop the software, determine the pricing, run the marketing campaigns, or try and influence the latest consumer fads. What DFC does do is try and build forecasting models that say if Company A delivers hardware system X, at price Y, with product line and marketing campaigns of Z, what is sales likely to be. How will that sales change if the price is lowered, a hit new product mix is introduced, etc? How will sales change if Company B introduces a competing product line at similar or different price points? How are sales likely to change based on various combinations of these factors? What is the likelihood of each of these factors occurring based on what we now know? So as we said last year, when it comes to forecasting video game hardware performance the specific forecasting factors include: 1. Brand, Current Market Position and Past Consumer Behavior relative to all players in the marketplace. 2. Current Software including Software Diversity, Third Party Support, Exclusives and Big Hits. 3. Current Software for the Competition looking at all the above factors. 4. Expected Upcoming Software looking at all the above factors. 5. Expected Upcoming Software for the Competition looking at all the above factors. 6. Current Price 7. Current Price for the Competition. 8. Expected Future Price. 9. Expected Future Price for the Competition. 10. Hardware, Extra Features, the "Wow Factor," Intangibles and the Ability to Pull a Rabbit Out of a Hat. The problem the PlayStation 3 faced at launch was a $600 price tag and very limited software library. In contrast the competition was exciting new products at half the price and a more compelling software library. The Wii had buzz, brand, price and representation by most of the major Nintendo franchises in the first six months. Using the above forecasting model matrix the Wii was almost destined to win the first few months by default. However, the matrix is always changing. Clearly right now Nintendo is very hot. In terms of market valuation, Nintendo is not simply competing with Sony Consumer Electronics, but the consumer electronics/media giant that is Sony Corporation. This is the Sony that has its hands in not just about every major consumer electronics product, but also owns a massive library of movies, music, television shows and other entertainment products. However, in today's hype driven market, having the hit consumer product of the moment, be it a game system, music player, phone, is everything. In today's media and investment environment, long-term strategy becomes meaningless if a product isn't 1) selling like hotcakes right now or 2) has not yet been released so the buzz hasn't yet met with reality. With the DS and Wii, Nintendo has two hit consumer products and in the minds of the investment community that can make the company as valuable as all of Sony Corporation. In an interview with DFC Intelligence this week, Sony Computer Entertainment America president Jack Tretton said trying to compare Sony to Nintendo is like trying to compare Sony to Nike. In other words, these are two very different companies, with very different products and very different strategies. With the video game market, the analogy to racing and running shoes may be an enlightening comparison. Sony's strategy has been slow and steady wins the race, much like the tortoise from the legendary fable. Sony has always talked about a decade long vision for its hardware platforms. With the first two PlayStation systems, Sony pretty much put their money where their mouth was. That track record is a very important factor in any analysis of a new Sony system like the PlayStation 3. It is when looking at the concept of a decade long vision that we concluded our analysis in June 2006 with the statement "a $600 price point is okay for launch but it will not fly in holiday 2007." In other words, we didn't think it would flying out the door at that price point and we felt price cuts would be needed toward the end of 2007 if the PS3 was going to pick up momentum. So far there has not been a price drop, but it is only the middle of 2007 so that doesn't tell us much. As Jack Tretton put it, it is hard to evaluate a product designed to last a decade or more based on the first 18 months. Sony has historically been slow out of the gates with their video game hardware systems, but their slow and steady pace has served them well in the long term. The challenge Sony faces is that competition in the video game market is not sitting still and for this generation Microsoft and Nintendo have clearly turned up the heat. There is no winning by default in this market. The Nintendo Wii took advantage of every opportunity to try and build a starting base for long-term success. However, the good news for Sony is that the same can not be said for the other major competitor, Microsoft and the Xbox 360. In terms of long-term strategy it is worth comparing Microsoft and Sony. Microsoft has shown an even greater willingness to lose money to try and build long-term market share. The Xbox 360 was the system that could benefit most from the PS3's slow, late start. One of the biggest events (or non-event) over the past year is that the Xbox 360 did little to solidify its lead. In terms of numbers, Microsoft met its goal of 10 million Xbox 360s shipped by the end of 2006. However, walking into a retail store in January 2007 and seeing piles of Xbox 360 inventory on the floor, it was immediately clear that many of those systems shipped did not end up in consumer hands. Gears of War was a solid hit, but it was the type of title that appealed mainly to the existing Xbox base waiting for Halo 3. In the first half of 2007, Microsoft introduced the Xbox 360 Elite which essentially raised the price of the system into a range that makes the PS3 start to look like more of a value by comparison. In reality the new generation of game systems is just getting started. If all hardware manufacturers make their stated shipment goals over the next year, no system will have more than 40% market share when we revisit this issue next summer. Furthermore, by that time we will only be about 20% into the new generation. The one thing we do continue to argue is that no system is likely to have the market share dominance of the first two PlayStation systems. The video game market is simply becoming diversified in multiple respects. Consumers are increasingly willing to buy multiple systems for multiple purposes. This means arguing who will be first or second is becoming increasingly irrelevant. Publishers and developers need to learn how to properly leverage content across multiple platforms. Unfortunately, this is something most video game companies have not historically excelled at. Platform strategy comes down to both timing and individual products. For example, if you have a big first-person shooter (FPS) you definitely want to be on the Xbox 360, even if sales are currently lagging. The PS3 may not be flying off store shelves, but a major price cut and build up of the software library could change that a year from now. On the other hand, for many big ticket franchises the Wii may not be appropriate. The Wii is a great system, but it has its limits and a fairly unique appeal. This could present a problem for all the slow moving third-party publishers that are now scrambling to up their Wii output. By the time third-party developers start flooding the Wii market with product, the excitement may have cooled. It is these types of execution issues that are likely to keep executives in the video game market up at night. This is an industry that sometimes seems to get as much coverage as Paris Hilton. However, when push comes to shove, finding a profitable niche is more challenging than ever. Trying to jump on the hype bandwagon and make rash conclusions based on the latest sales numbers is always dangerous. There is still a lot to be unveiled. With E3 pushed back two months new announcements have been delayed, so we enter the second half of the year armed with very little new information. We will follow price cuts, new software introductions and the buzz of the holiday season. It will be interesting to revisit this issue in summer 2008 and see what, if anything, we have learned."