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									The console war lecture series: Revolutionaries at Sony

Some of the people you need to know about:

Ken Kutaragi father of playstation, who is now vice president of Sony Computer
Entertainment int (SCEI)
Akira Sato, CBS record producer, producer for Sony records and PSX marketing guru
Teiyu Gotoh, Console and controller designer
Shigeo Maruyama - Kuturag's mentor
Akio Oba - System G designer

Kuturagi 'I wanted to prove that even regular company employees could build a venture
of this scale with superb technology, superb concepts and superb colleagues.'

The playstation is Sony's best selling product, earning $7 billion in four years and selling
40 million units by September 1998 (this excludes the sales of the PSX1 re-package)

Playstation sales account for 23% of Sony's overall profits.

Genesis of Playstation

In 1984, Nippon TV demonstrated the System G, a realtime rendering engine using
texture mapping to generate a person's face, linked to controller input. Used as a
broadcast animation tool, System G is used by Nippon TV for animations and
commercials. Over 20,000 discrete IC's where utilised in it's construction and it was
state of the art and at the cutting edge of video technology in 1984. It was also large
and very expensive.

System G was developed by Sony's Information Processing Centre DSP unit, so the
expertise was already there at Sony.

Our protagonist, Ken Kutaragi, saw the System G and was profoundly impressed. Like
many other visionaries we've encountered, he made the synaptic bridge from state of
the art studio system to home entertainment system, a vision that would ultimately
become the Playstation. Ken's only contact with video games to date is his Son's
famicom.

Kutaragi first joined Sony in 1975 and began work on the development of LCD display
technology, building a flat panel 100x80 display in 1976, something years ahead of its
time when today, LCD technology is only now being perfected and is still some way
from being a commodity product. The technology was mothballed in favour of the
trinitron CRT technology pioneered by Sony and Ken went on to develop digital VU
metres so beloved of 80s stereo units.

Ken then turned his attention to storage technology, with a growing realisation that
digital technology was frowned upon and regarded with disdain by the Sony corporation.
Nonetheless, it was Ken's principal obssession and he developed a 2inch disk platform
for magnetic media storage. Ken developed the error detection algorithms for a disk
where the surface moves at over 3,600rpm.

The prevailing attitude at Sony for things microprocessor controlled was voiced by one
executive who remarked to Ken;

'I hear you want to develop digital technology, but you must never say that at Sony,
you'll be transferred immediately.'

The hierarchy within Sony reflected this hostility, with analog circuit engineers at the top,
followed by mechanical, structural and lastly - digital engineers.

As research into disk technology wound down, so Ken looked for opportunities to
continue his research into DSP within Sony, He was directed to a man called Hirobumi
Yoshida, who is directo of Sony's information processing centre in Atsugi.

This leads on to a joint venture in May 1991 between Nintendo and Sony, working on a
CD add on for the super famicom to provide mass storage and a convergence
appliance. Nintendo's own add on unit back in 1986 was heavily criticised for its poor
performance, taking 8 seconds to perform a read and 24 seconds to perform a write.
Sony wanted a piece of the console action, courted very much out on a limb, with PCM
sound technology for Nintendo and high performance CD adapter. The risk involved
was not lost on the more conservative elements of the Sony leadership when the Sony
Nintendo collaboration collapsed. In return for access to Sony's own CD technology,
Sony would get the rights to make a Sony badged super famicom with integral CD unit.

A development contract was signed with Nintendo on January 1st 1989.

In May 1991, Nintendo turned Sony over in very public fashion at the US CES show.
The deal was effectively torn up as Sony jumped into bed with Phillips, who although
they had a working partnership themselves with Sony, teamed up with Nintendo against
what was seen ultimately as a common rival. Nintendo would invest in CDI technology
and leave Sony with a lame duck deal and a stack of super famicoms.

Kutaragi commented at the time 'The industry is at a watermark, Nintendo's superiority
is crumbling. It has become obvious that Nintendo no longer deserves to be Sony's
partner. Sony should go there own way.'

In June 1992, the newly formed crisis management group at Sony discusses options:

Market the 16 bit machines already built, in the face of strict software licensing
limitations from Nintendo
Pull out and cut all losses
Develop a new and independent games product
It's at this point in the meeting that Ken discloses work is already under way to develop
the 3D technology needed to bring a revolutionary new kind of console to market and
that the kind of specifiction needed would be achievable in the time scale called for: the
7 years that bridged 8 and 16 bit technology, minus time for improvements in IC
fabrication and graphics hardware design.

Ken indicated that LSI technology with 1 million gates would be needed, with current
Sony output coming in at 100,000 gate mark - this represents quite a leap forward!
Nonetheless, Ken is confident that it can be done.

Ken brough engineers from the Sony broadcast group and the NEWS workstation team
to begin work on processor selection and the development of PSX 'graphics
synthesiser'. The spec demanded consisted of:

1. 2D to 3D mapping for sprite functions
2. A realtime 3D engine
3. Real time texture mapping

It is at this time that Ken's interest in graphics had also prompted him to consult with
Japan's manga and anime authors on the likely impact of 3D gaming in the home and
he became convinced this would indeed constitute a paradigm shift, stealing a march on
Sega and Nintendo.

To begin work in earnest on the project, desks had to cleared and opponents of DSP
research circumvented. The many top exec's who looked upon consoles as toys needed
to be kept away from the PSX 'startup within Sony'. The music offices of Sony Epic are
cleared to make way for the PSX team and management from the music division is
brought in to handle distribution and marketing, in recognition of the parallels between
the two industries in these areas.

All this was made possible by the personal interest of President Norio Ohga, who even
went as far as to bankroll personally, the playstation's semiconductor RAM order for the
1st production run. He was doubtless motivated by a desire to get back at Nintendo for
the CES humiliation and was impressed by Ken's own drive and belief in the project.

A former Sony music exec', a chap called Tokunga, sets about putting together a
distribution strategy for PSX, and starts finding ways to get around Shoshinkai - the 50
wholesales with close ties to Nintendo who represent a cartel when it comes to
distributing games in Japan.

The importance of getting developers on-side

This was crucial to Sony and the following factors where considered to entice
developers:
1. Produce a format creators find attractive, make it a format that motivates them.
2. Propose a business structure that motivates business managers in the form of
licensing and royalty incentives
3. If software developers show an interest in our proposal, develop a distribution
structure based on that.

At a meeting on July 20th, 1993, three outcome scenarios are drawn up for Playstation:
1. PSX becomes an established format, with a strong business environment
2. PSX is initially successful, long term success is however uncertain.
3. PSX is initially successful, but product withdrawal is forced.

The launch date was scheduled for Dec. 3rd 1994, with 100,000 units estimated to be
sold. As it turns out, 300,000 units would ship before christmas that year.

Being the latecome to the console business can have its advantages - namely the ability
to innovate. Maruyama somes up this mentality with the quote, 'let's do what we can do
as latecomers - and what only latecomers can do.'.
This involved examing Nintendo's business practices and finding weaknesses to exploit
in the following areas:
1. Developers
2. Distributors
3. Users

Unlike Sega, Sony had no developers of its own, so getting them on side was
imperative. This involved a two pronged strategy. The first prong involved pitching
hard from technological angles direct to designers - to get them excited enough to get
prong two in - to get the desigers to pressure the management that Sony and PSX was
the way forward. However, Sony found that reaching designers in practice was quite
difficult and early contacts with indifferent sales and management representatives was
largely negative, with comments such as 'Sony shouldn't get involved with video games.
We're telling you this for your own good'
and
'3D graphics won't happen for another ten years. Only people who have no idea of the
realities of software development would talk about programming in C {in reference to
the PSX development environment}'

The barrier to entry for Sony, was invariably a 3 million unit worldwide sales figure, with
a unit cost below $300. Software developers typically only committed to projects where
sales projections reached 1 million units.

In addition, Japan was conformist and homogenuous market, which didn't tolerate
diversity. In the words of Namco's president at the time, 'you need to have a cultural
anthropological perspective' when you're considering a new product for the Japanese
market. Namco also had doubts about the feesibility of the PSX project, 'The playstation
represents extremely advanced technology. We doubt it can be applied to consumer
equipment.'.

Undeterred, Sony conducted wide ranging research and consultation exercises with
industry figures, mining for information on problems with Nintendo, who to this day, lived
up to a reputation for ill treatment of partners, developers and abuse of the wholesale
system. Kazumi Kitagama of Konami chaired a signifcant meeting, where the following
issues of concern where raised:

1. Difficulty in handling product returns
2. High royalties
3. Inability to supply repeat orders

The killer app - but not from Sony!

One company who is nameless said pre-killer app :-
'Our is a 2D culture, we have no interest in 3D images. Worldwide sales of 3
million units would be a pre-requisite for us to join forces with you.'
to post killer app:-
'it's awesome - we were amazed - computer graphics really move in 3D'
The killer app - virtua fighter from Sega, launched on 26/08/93!

On October 27th, 1993, Sony anounces its intention to create SCEI and on November
16th, with a prototype being prepared to demonstrate PSX.

They'd also found their key developer, Namco. Namco wanted in on the console action,
but couldn't afford to re-design its system 22 hardware to fit in a console. It also wanted
to compete with it's biggest rival, Sega, by backing Sony and therefore finding a way to
port its successful arcade titles to the home. Hurting the Saturn in the process, also
helped Namco. The killer app Namco delivered in return, was Ridge Racer.

The hardware

At the time it was estimated you'd need 800 mips of CPU to achieve natural 3D
graphics, with current CPUs managing only 30 mips.
Virtua fighter using Sega system 1 hardware for example, a venerable boardset, utilised
ten rows of processors each outputting 20 mips, in a graphics pipeline but there was a
definite problem with handover times (latency) between processors amounting to
160ms. This made for a discernable lag between controller input and on screen
rendering. The PSX also uses a graphics pipeline, but utilises parallel processing to
reduce handover times and lag.

Designed for 3D from the outset, there was none of the design fudges that beset the
Saturn and a clean deisgn means subsequent revisions can drop the parts count using
VLSI technology. In 1994, a PSX used 750 separate parts. By 1997 this had dropped to
450.

Distribution technology

CD is used as CD ROM in PSX, not a playback device. This breaks the 300KB/s barrier
that hampered the Sega Mega CD and 3DO and leaves lots of room on the CD for other
cool stuff. Ridge Racer for example used only 0.3% of the disk capacity, leaving plenty
of room for a selection of in game music.

The developer library

Sony was keen to help small as well as large developers and treated them well. A chap
called Shiniki Okamato headed an 18 man library development team whose aims where
:

1. Give developers more creative time
2. Isolate software from hardware, using a protected kernel and libraries controlled by
Sony

This act of generosity was not appreciated by many developers who wanted to see
source code and write their own routines. However, Sony listened carefully to developer
concerns and worked hard to extend and refine the libraries, growing from 350 to 1800
supported routines.

The effectiveness of the libraries can best be appreciated when you realise it took less
than a year to port Ridge Race from arcade to playstation cold.

3rd party developers could use libraries and development kits to build games more
easily, building up the developer base and supporting a broad range of titles.

The distribution revolution

'As intruders we could operate freely without being restricted by industry conventions.'

The number of corrupt practices employed by the Shoshinkai where legion, and not
limited to:

1. Dummy rental - re-selling old stock at a lower price continuously
2. Selling old as new
3. Falsifying returns

Wholesales want to dump unpopular stock fast but hang onto good stock in the belief
that holding it will drive up costs as supply cannot fill demand. Unpopular titles sold
cheaply while popular titles wound up being more expensive. The inflexibiliy of the
ROM format in the supply chain lay behind this. The inability to meet repeat orders
quickly encourages dummy rental - the re-sale of returned product and its continued
circulation. A 3 month lead time is needed to mask a ROM and fabrication facilities want
money up front. Order too many and you're bust. Order to few and the inability to repeat
the order quickly means dummy rental will kill demand by the time your next production
run does come around.
ROMs are also expensive to buy with an OEM cost of $30 per unit being passed to the
developer.

In Nintendo land, a typical price breakdown would be:

$98 cartridge

OEM manufacturing costs of $30, including $15 for the hardware
Developer profit $10
Advertising $6
Risk insurance $5
Cost to wholesaler $61
Wholesale cut $12
Retailer cut $25

The average price of a second hand cart would be around $70.

Coupled with Nintendo's practice of hiking prices on a seasonal basis and charging
progressively more from one generation of console to the next, the way was clear for
CDROM to cut a swathe through this at a cost of $60.

'we can defeat the established manufacturers if we create a situation in which
consumers can buy hit titles new, and whenever they want, at a price lower than that of
used cartridges'

OEM manufacturing cost including production fee to Sony $9
Developer costs $10
Developer profit $10
Advertising $6
Risk insurance N/A
Cost to wholesale $35
Wholesale profit $6
Retail profit $17

Total $58

CDROM is ideal for repeat production because:
1. no more excess inventory needs to be carried
2. game improvements can be incorporated
3. SCEI handle distribution
4. Just in time ordering

Selling direct

Sony operated a scheme that principally helped smaller developers by taking over the
distribution effort known as purchase for re-sale. In this, SCEI was the customer, buying
titles to re-distribute through its own retail channels who had point of sale data to gather
accurate sales figures. Sega tried to move CDROM through the Shoshinkai wholesale
channels, completely failing to capitalise on the benefits of the new medium. Larger
developers still had the freedom to market and distribute their own product after some
negotiation.

Promotion and marketing

PR guru Akiro Sato speaks of PSX advertising:

'Video games are almost like movies as a business. It is essential to consider how to
generate attention prior to the launch date and how to achieve your initial target on the
launch day. it is defintiely a promotion business in that everything depends on how you
appeal to your end user.'

He also observed that, 'occasional users are strongly influenced by core users.'

Sony's first ad campaign appealed to core users, who would be the shock troops and
evangelists in getting the PSX out into the wider world. The campaign emphasised the
launch date:

'Wait for December 3rd. The playstation will change the world of games like one, two,
three.' (1-2-3 = 12/03)

In order to succeed any marketing campaign must know this about the product:

1. That the product category must be widely known
2. The product must be a good one
3. Product delivery must be guaranteed

A format Ad' strategy, post launch

The emphasis was clear from an early stage that the PSX was a games machine with
the slogan 'all gamers gather here'.

Another slogan ' we'll hit a million units' in the spring of 1996 was matched by a price cut
to $299 and a bundle of 8 top selling titles as the platform moved into the mainstream
from the earler adopters market.

The 'no compromise' ad campaign of 96 played up Sony's customer relations element
with changes made to the cable length of the controller following consumer comments
and feedback.

The 97 ad campaign featuring lifestyle slogans 'a playstation is your reward', 'get a
charge out of life' and 'playstation is a daily necessity' marked the successful transition
to consumer product subject to lifestyle advertising.
Square's defection of the final fantasy series to PSX marked a rise in console sales from
2 million units to 12 million units by the end of 1997.

								
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