Sony is playing a dangerous game to continue its dominance of Microsoft
In July, Sony reported that a whopping 78% of the $546 million it earned in quarterly profits came from the segment that encompasses PlayStation, making it the company's golden goose.
Indeed, Sony's PlayStation 4 is the dominant player in the current video game console market, with 40 million units sold as of May 2016. Analyst estimates peg the Xbox One total sales at over 20 million (Microsoft stopped reporting Xbox sales numbers). In last place is Nintendo's Wii U, with 13 million sold as of June.
But nothing lasts forever, especially not in technology. That's something Sony is intimately familiar with - the PlayStation 2 is the best-selling console of all time, but with the PlayStation 3, Sony gave up much of its ground to the Xbox 360 and had to revamp the whole business just to catch up.
Now Microsoft is making big moves to unify Windows 10 and the Xbox console as part of an ambitious master plan to reinvent itself in the post-PC era. First up is a new Project Scorpio console coming next year. A unified Microsoft presents a huge threat to the all-important PlayStation business.
And so, Sony is betting big on unproven markets - in the form of the PlayStation Vue live TV streaming service and the PlayStation VR virtual reality headset, which comes out this week - to make sure that the PlayStation stays relevant, no matter which way the winds of change blow.
It's a risky game, but a necessary one. At stake is the future of Sony itself.
Sony's conundrum
Microsoft has been slowly but steadily building key Xbox features into Windows 10, and making games like "Gears of War 4" and "Forza Horizon 3" available on both the PC and the console with saved games syncing across both. It means that if you have a Windows 10 PC, you get access to many of the best Xbox games. No matter where you play your games, Microsoft wins.
It's a great idea. But Sony's big problem is that it just doesn't have Microsoft's reach.
While Sony has some services and features that you can use on a PC or Mac, like streaming classic games with PlayStation Now, Microsoft has Windows itself.
Sony might sell Windows PCs, but it doesn't make Windows. In this regard, Microsoft holds all the cards.
If Microsoft builds Xbox features into Windows 10, and starts to sell Xbox games right from the Windows Store app market, then all PC manufacturers, including Sony, have little choice but to go along with it.
And while Sony has tried to get into portable gaming, where Nintendo has found most of its recent success, the PlayStation Vita handheld console is widely recognized as a flop. Meanwhile, many younger and more casual players are doing more of their gaming on smartphones, anyway, which has led even Nintendo to iPhone development.
Without any existing platforms on which to build the future of PlayStation, Sony is forced to look elsewhere to keep the brand strong and relevant amid pressure from smartphones on the low end and the revitalized Microsoft on the high end.
That's where PlayStation VR and Vue come in.
Vue to a kill
Sony says it's been working on PlayStation VR, originally codenamed Project Morpheus, since at least 2010. Regardless of the timeline, Sony is in the market at the exact right time: Facebook, Google, and lots more tech companies all see virtual reality as the future, and are building their own headsets to get in the market.
What Sony has, that those other companies don't, are deep and decades-long relationships with video game developers. Anticipated games like "Batman: Arkham VR" and the forthcoming "Resident Evil 7" were built with the PlayStation VR in mind.
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But if you want PlayStation VR, you need a PlayStation 4. It'll work with any PlayStation 4 console, past or present, but you need to own one.
It's a risky bet, to be sure: Virtual reality is still a very young, and very unproven market. Sony could be pouring millions into developing and marketing PlayStation VR, only to find consumer interest isn't there. The payoff, though, would be making the PlayStation VR, and by extension the PlayStation VR, a big early mover in what could be the next big thing in computing.
Similar, but different, is the PlayStation Vue TV streaming service, which lets you buy bundles of TV channels and watch them on your PlayStation 4, iOS device, Amazon Fire Stick, and most anything else except a Windows PC or a Mac. While it works across devices, the intent is clearly to make the PlayStation 4 your media hub.
The Scorpio affair
In all cases, Sony's strategy hinges on making sure you buy a PlayStation 4. For Sony, there's no Plan B. If the PlayStation falters, which it could one day do, so too does its greatest source of revenue.
That leaves Sony in the unenviable position of primarily selling hardware, as Google, Microsoft, and even Apple all shift their business more towards subscription-based businesses. Sony is doing that, too, with Vue and the premium PlayStation Plus membership. But Sony's 40 million PlayStation 4 owners, its primary subscriber base, are a blip next to, say, the billion-plus Apple iOS devices sold.
It's not an impossible situation for Sony, by any means. It's not like the video game console market is going to implode overnight, and PlayStation is still the leading brand in that market. It's entirely possible for Sony to thrive, especially if the PlayStation VR really takes off and pushes more hardware and game sales.
But next year, Microsoft will launch the Project Scorpio next-generation Xbox console. Microsoft promises it's the "most powerful console ever." And rumors are swirling that it'll support Facebook's Oculus Rift headset out of the box, in addition to those other Windows 10 goodies.
That, combined with the continued popularity of the smartphone, has Sony facing pressures like never before. Virtual reality is a big, risky bet, but it's also the best chance Sony has to keep growing as its prospects of becoming a real platform company shrink.