PS3 settling in as #3 gaming console

One pundit famously told me this summer that 2008 would be "the year of the PlayStation 3," presuming that must-have new games and the rise of Blu-ray would turn the PS3 into, if not the top console on the market, then at least a strong #2.

Alas, things haven't turned out so well for Sony's flagship PS3: Sales of the console are down 19 percent vs. last year, and analysts are now warning that Sony may not hit its goal of selling 10 million consoles this fiscal year (which ends in March 2009).

Why the hefty decline? You can try to blame the economy at large, but that's looking in the wrong direction: Gaming has been experiencing a booming market in 2008 -- even during the recession-stricken holiday season. Sales of the Wii console this November were twice what they were in 2007, and the Xbox 360 saw sales increase 8 percent, as well (driven largely by a well-timed price cut). And those trends are likely to continue when December numbers are in.

Most analysts are looking at the hefty PS3 price tag as the reason for its misery. At a bare minimum price of $399, the PS3 is wildly more expensive than anything else on the market (and double the entry-level Xbox), and that's after some price cuts already. Yet the PS3 is said to be so expensive to make that cutting the price would further erode Sony's plummeting profitability (it's already laying off thousands of workers and shutting down factories). And Sony's old selling point -- that at $399 the PS3 is a relatively cheap way to get a Blu-ray player -- doesn't really work in an era of sub-$199 standalone Blu-ray units. The Wall Street Journal (linked above) now notes that you can get a Blu-ray player and an Xbox 360 for less than the price of a PS3.

The fatal blow could come in the form of game developers, which have limited resources and have to choose which platforms they want to develop for. It's already rare for a title to be released on all three consoles, with exclusives becoming more popular: Again, as the WSJ notes, four of the top five selling games in November were exclusive to either the Wii or the 360. And even when a PS3 version is available, that doesn't mean much, with WSJ noting, "Sony's best-selling game during the month was an action shooter game, Call of Duty: World at War. But twice as many people bought the Xbox 360 version."

With a terrible economic outlook for 2009 and the holiday season now behind us, what is Sony's next move? A huge price cut might save the PS3 from outright failure... but at what cost to the company?

(Photo of PS3 grill from Make magazine.)