POWERSELECTSTART Sony PSP Case Analysis: “Elevating Portable Entertainment Out of the Handheld Gaming Ghetto” Technological Innovation & New Product Development May 4, 2006 Gamers: Terry Go, Jason Keramidas, IK Kanu, Erik Pozo

Agenda Defining Sony’s Strategic Direction Timing of Entry Choosing Innovation Projects Standards Battle & Design Dominance STARTSELECT Types & Patterns of Innovation: Bringing Sony’s Walkman and PlayStation to a new Portable Entertainment Device Crafting a Deployment Strategy Implications & Recommendations POWER

START Defining Sony’s Strategic Direction Strategy Consumer Electronics division operates at a loss, profits driven by Game, Music, Picture divisions Mitigate loss of market in MP3 players, now dominated by Apple “Create and develop a new world of computer entertainment through the fusion of games, music, movies and broadcasting” Prepare for launch of PS3 and expand So-net through bridge product Industry Overview - Five Forces Analysis Barriers to entry  High Bargaining Power of Suppliers  Low Bargaining Power of Customers  High Threat of Substitutes  High Rivalries  High

SELECTSTART Types and Patterns of Innovation: Bringing Sony’s Walkman and PlayStation to a new Portable Entertainment Device Sony’s position in the PED Dominant player in the game console market Poor performance in other area (iPod effect) Still a big consumer electronics company The Walkman of the 21st Century Pursuit of the Next big portable thing Integrated portable entertainment system, PSP Technology Cycles “Era of incremental change” in Game Console Market “Era of Ferment” in Portable Entertainment Device

SELECTSTART Bringing Walkman and PlayStation to Portable Entertainment Device Technology S-Curve Technology Diffusion Penetrated Early Majority Group in Game Console Market Diffused to Early Adopters in Portable Entertainment Market Terry, could you please resend the S-Curve graphic? Didn’t come through the first time

Choosing Innovation Projects SELECTSTART Sustainable Competitive Advantage Key StrengthsRareValuableDurable Difficult to imitate Established brand name Miniaturization technology Distribution channel Content Product Portfolio Major revenue source for Sony is the PlayStation 2 Console, originally a breakthrough project is now an established platform Market size of handheld games and consoles is $8B, and personal media players (mp3 and vide) is $35B The PSP fits in a boundary between a derivative of the PlayStation 2 and an entirely new platform, serving a new core group of consumers demanding convergence

Standards Battle and Design Dominance: PSP & Proprietary Standards UMD Movies and games play on the Universal Media Disc format, which is a disc with 1.8GB storage capacity that is read only a special laser on the PSP. Ideal strategy for games, the PlayStation has a strong installed base of gamers and games, providing leverage to the PSP However, this proved to be a failing strategy with movies, limiting true convergence of the PSP. Major studios started pulling UMD titles from production: (1) The UMDs cannot be played on other devices, limiting viewing to only the PSP, plus there are no blank UMDs allowing users to generate their own content (2) The PSP cannot be connected to a TV or PC to view UMD videos on larger screens, allowing the PSP to double as a portable DVD player (3) Multiple personal DVD players and mpeg players, especially the Apple Video iPod, that allow more widely available formats SELECTSTART

SELECTSTART Network Externality Value: Sony PSP vs. Nintendo DS The PSP offers greater value to consumers than the Nintendo DS The installed base of Sony has a slight advantage over Nintendo. Sony has a much larger following of its home game console that could potentially lead to a larger base for the PSP Introductory PSP price was $300 for a converged device Bundling of capabilities indicates an increased technological utility over the Nintendo DS Comparing standalone devices; the Nintendo DS was $150, average 256MB mp3 player was $100, and a personal DVD/video player incorporating web browsing was $150, representing a total value of $400 The PSP offers comparable value at a 33% discount from standalone solutions, which could translate into an increase in customer utility

Another “Late Entrant” Success Story The Father of the PlayStation (Ken Kutaragi) Introduced PlayStation in 1994 ending Nintendo and Sega’s dominance in the market. Second child, PlayStation 2 platform dominates in the latest console market (70%) Sony’s Capability Strong brand reputation Monopoly status in game console market Deep pocket with Distribution power Enabling Technology Big and sharp LCD screen, Powerful CPU & GPU Reasonable battery power (5 to 6 hours game experience) Pushing the technological envelope Successful Launch The Future of PSP SELECTSTART

Crafting a Deployment Strategy SELECTSTART Timing: Late entry in both Japan and US Overcome by strengths in marketing & distribution Licensing & Compatibility: Backward compatability not an issue Reliance on proprietary standards Pricing: Premium price for launch “Early adopters will crawl over glass to get their hands on a PSP” Phased introduction of PSP packages to capture new market segments

Crafting a Deployment Strategy SELECTSTART Distribution: Sony, the 400lb Gorilla - Selling direct and utilizing intermediaries Marketing: Target audience – The world! “Expanding the portable entertainment market by using games as a catalyst” Advertising – $27.2 million US spend from March 2005 – Dec 2005 (118% more than DS) 99% of “Media Mix” in TV – Sight, Sound, Motion to the masses Promotions / Pr Vaporware & Midnight Madness Point of Purchase remains key

Implications & Recommendations POWERSELECTSTART Focus on building the network Open up PSP standard to create a universal portable entertainment device Provide more memory to a content consuming audience Replacing Memory Stick with Built-in hard drive Consider downloading & subscription model PS2  PSP  PS3: Capitalize on successes to create a Sony 360 degree experience