Sony's PlayStation 3 in race against time

By Kiyoshi Takenaka - Analysis

TOKYO (Reuters) - After a slow start, the outlook for Sony's (6758.T) PlayStation 3 is getting brighter as growing appetite for high-definition TV fuels the game console's sales and production costs come down.

But Sony's window of opportunity is closing quickly if it hopes to catch up with rivals Microsoft Corp. (MSFT.O) and Nintendo Co. Ltd. (7974.OS) and keep the support of game developers so vital to a console's success, analysts said.

Sony Corp. and other console makers typically lose money on the hardware and generate profit from royalties on software. So the key to making money is to establish a large installed base of consoles and encourage developers to put out a lot of games.

"It's a race against time," said Hiroshi Kamide, an analyst at KBC Securities who covers the $30 billion video game industry. "They must increase their users or it won't be commercially worthwhile for software makers to support it."

The success of the PlayStation 3 is critical for Sony's fledging earnings recovery and a point of pride for the electronics conglomerate, which has already lost the lead in other key products such as portable music players.

Dogged by the belated finalization of the copy protection technology standard for a disc drive, Sony was several months behind schedule when it launched the PS3 in November 2006. That gave Microsoft's Xbox 360 a full year's head start.

Sony packed the PS3 with advanced technology including a Blu-ray disc player for high-definition movies and the powerful "Cell" microchip to drive the life-like graphics needed to satisfy hard core game fans.

At first glance, that strategy seems to have backfired.

High production costs pushed Sony's game division to a likely loss of more than 200 billion yen ($1.7 billion) in the past business year.

Nintendo, meanwhile, sold more than twice as many Wii consoles in Japan and the United States in February as Sony's PS3 by attracting a wider audience with easy-to-play games, and because it sells for half the price of the PS3.

But growing demand for high-definition TVs could give game players a good reason to choose the PS3 over the Xbox 360 and Wii, which do not come equipped with a next-generation disc player as the PS3 does.

The penetration rate of full high-definition TVs in North America jumped to 5.1 percent in the third quarter of 2006 from 0.7 percent a year ago, according to research firm DisplaySearch.

"That will give the PS3 an advantage over the Wii in the living room," Morgan Stanley analyst Masahiro Ono said. "In the United States... people are buying full high-definition TVs at a premium although TV broadcasting has not really turned full HD yet."

The United States is the world's largest video game market, accounting for 40 percent of the global demand.

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