In his latest research note, analyst PJ McNealy of American Technology Research voiced some concern over Sony's PlayStation 3 hardware figures. Sony announced earlier this week at CES that the company had shipped one million units of the console in North America. With the NPD having reported 200K units sold for November, McNealy believes that the December data will come in around 500K to 600K units, which would mean total units sold during 2006 would fall in the range of 700K to 800K. McNealy said that this discrepancy is "likely to cause investor confusion."

"We believe that SNE's shipment number refers to a channel unit number, and our research indicates that a channel range of 20-30% for the PS3 is not unreasonable at this time," he added. "This implies 200k to 300k units in the channel (in transit, in warehouses, and in retail shelves). Please note: 200k units in the overall life cycle of the consoles is not material, but we believe there is headline risk here."

McNealy went on to note that the PS3 has been readily in stock in early January, with many retailers offering both the 20GB and 60GB versions. Nintendo's Wii, on the other hand continues to sell out quickly when shipments come in. "It is our position that while the PS3 launch is seven+ weeks old, we find it a little troubling to find the console in stock," he said. "There will likely be much time spent by investors and analysts trying to read the sales data from seven weeks and extrapolate for the rest of CY07. Our current assumption has been that the PS3 cross-over point between supply and demand would happen in the June quarter, when the PS3 would be widely available everywhere. We are surprised to see the PS3 in stock in some stores at this point, and are reviewing why this could be the case and what factors could change this over the next 12 months."

There are a number of factors that could be contributing to the PS3's current situation. Here are McNealy's main points:

  • Lack of new games at this point: This may seem over-critical to some investors given that the PS3 launched less than two months ago, but software titles can help spur on new hardware buyers. We have seen few killer new titles this month to help spur new hardware sales.
  • It's still $600: The price point of $600 in North America is still expensive and not an impulse purchase. The obvious answer is always "Sony should cut the price," but price cuts are a complex corporate decision that must be considered with respect to unit costs as well as a holistic view of SNE as a corporation and whether or not other parts of the company could help offset losing additional dollars on hardware sales. We would be surprised if SNE cut the price of the PS3 in CY07, but one big corporate variable for the year could be its next blockbuster movie, Spiderman, due out this summer. We believe this merits close watching.
  • No help from the Blu-Ray group yet on value proposition: In our opinion, the value proposition for the PS3 as a movie platform for the Blu-Ray camp--in addition to being a next-gen HD console--has not been fully marketed and pitched to consumers, and is a key driver, in our opinion, for helping aide hardware purchasing this year.
  • Slow road map for exclusive titles on the PS3 this calendar year? Sony launched the PS3 with its big first-party exclusive, Resistance: Fall of Man, and is expected to have other exclusives such as Lair, Warhawk, and MotorStorm soon, likely close to the launch of the PS3 in Europe. Key third-party exclusive titles for the PS3 for later this year could include Final Fantasy and Metal Gear Solid, as well as SNE's quasi-internal title Gran Turismo. Our concern here is, quite frankly, that if two or all three of those third-party titles aren't finished for Holiday 2007 and are pushed in 2008, this could crimp hardware sales this year as well.
    If PS3 sales lag behind expectations, McNealy said that publishers like Electronic Arts and Take-Two face the greatest exposure. THQ and Activision, on the other hand, may be able to offset any possible PS3 weakness with Nintendo Wii exposure or big name movie-based titles set for multiple platforms during the summer.

    McNealy also noted that his previous estimate for the Xbox 360 of 21 million units sold worldwide by the end of 2007 is "a little high." McNealy is cutting back those numbers to 19 million units. He also explained that a price cut on the system is less likely now.

    "With a strong number of Xbox 360s already shipped and widely in-stock everywhere, we believe that MSFT will likely be at the lower end of its FY forecast, and as a result, we are trimming our second half of CY07 assumptions. Furthermore, we have previously assumed that an Xbox 360 hardware price cut was likely in the second half of CY07, but we are now less certain of that and believe it could be pushed out to the first half of CY08," he said.

    McNealy further explained, "We have maintained that one of the key unit milestones for an Xbox 360 price cut could be 15MM or 20MM units, and with our expectations of MSFT reaching 20MM units now pushed into 2008, the price cut assumption may also get pushed out. Keep in mind that MSFT could have a tremendous 1-2-3 punch this holiday, behind two big titles (Halo 3 and Grand Theft Auto with exclusive episodic content for the Xbox 360) and a possible $100 hardware price cut should they still cut the price this year. However, other factors behind an Xbox 360 hardware price cut should be considered, including one scenario where SNE is forced to cut pricing on the PS3 in CY07 to help generate sales momentum. Our research indicates that MSFT would like to maintain its $200 price differential between the Xbox 360 and PS3."

    [UPDATE] Following up on today's report from PJ McNealy, Dave Karraker, Sr. Director, Corporate Communications for Sony Computer Entertainment America, responded with the following statement.

    "While we have yet to see this research, it appears Mr. McNealy's assumptions and conclusions are flawed. This research apparently fails to account for Canada, which, as an industry standard is 8 to 10 percent of North American sales. In addition, NPD does not report all of the Sony customers in North America. Based on the shipped figures we announced on Monday, we were bringing upwards of 170,000 units per week into the territory up until December 31. If this quantity of product sold to retailers was in transit or yet to be put on store shelves, that is no smoking gun. That is the reality of doing business on a massive scale, supplying more than 20,000 retail outlets across the country. To give this perspective, for the PS2, a fourth quarter 'in-stock' position would be considered to be 800,000 units."