Reason for Optimism?

As the launch date approached, Stringer recognized that the holiday season of 2006 would be critical to PS3's success. He hoped that the enormous popularity of the PS2 would help the PS3 in its early days. 

Some industry analysts believed the PS3 would put Sony on top of the video game market for the foreseeable future. In-Stat, a communications services research and analyst firm, predicted that through 2010, the Sony PS3 would account for just over 50% of the installed base of next-generation consoles, while the Microsoft Xbox 360 would have 28.6%, and the Nintendo Wii, 21.2%. 

But getting there would not necessarily be easy. As one industry analyst opined, "Microsoft has driven a stake in the ground. They will have 10 million units by the time Sony ships the PS3. Sony is going to have to respond in a big way". 

In October, just one month before the public unveiling of the PS3, 235,000 PS2s were sold in the United States compared to 217,000 Xbox 360s.

Exhibit 1a Sony Corporation Operating Performance by Business Segment 2005-2006
  USD in millions  

Sales and operating revenue

 2005 2006

Percent change

Electronics

43,306

44,021

1.7%

Game

6,238

8,193

31.4%

Pictures

6,271

6,375

1.7%

Financial Services

4,791

6,352

32.6%

All other

3,931

3,495

-11.1%
Elimination

(3,343)

(4,544)

  

Consolidated

61,194

63,893

4.4%

Operating income (loss)

     

Electronics

(293)

(264)

  

Game

369

74

-79.7%

Pictures

546

234

-57.1%

Financial Services

474

1,609

239.4%

All other

36

138

286.4%

Sub-Total

1,132

1,792

58.3%

Elimination and unallocated
corporate expenses

(159)

(158)

  

Consolidated

974

1,634

67.9%

Exhibit 1b Sony Corporation Operating Revenue by Business Segment



Exhibit 1c Sony Corporation Game Business Operating Performance 2004-2006

USD in millions

2004

2005  

 2006

Sales

$6,668.4 

$6,237.6

 $8,193.2

Operating Income

$577.8

$369.2

  $74.4

Operating Margin

$74.4

$50.4

 $7.7

Assets

$5,847.9

$4,119.7

 $4,447.9 


Exhibit 2 Nintendo Income Statement, 2001-2006 (in US$ millions)
 

2006

2005

2004

2003

2002

2001

Net Sales

$4,349 

$4,813 

$4,899 

$4,798 

$4,169 

$3,475 

Cost of Sales

$2,511 

$2,781 

$2,923 

$2,935 

$2,513 

$2,091 

Gross Margin

$1,834 

$2,031 

$1,977 

$1,863 

$1,656 

$1,384 

SG&A

$1,058 

$971 

$927 

$908 

$757 

$746 

Operating Income

$780 

$1,060 

$1,050 

$955 

$899 

$638 

Other income

$643 

$299 

($546)

$124 

$477 

$630 

Income before tax and minority interests

$1,423 

$1,359 

$504 

$1,079 

$1,376 

$1,268 

Total income taxes

$582 

$542 

$188 

$438 

$577 

$544 

Minority interests

($0)

$0 

$1 

$1 

($2)

($2)

Net income

$841 

$817 

$316 

$640 

$800 

$726 

Cash dividends per share

$3 

$3 

$1 

$1 

$1 

$1 

Exhibit 3a     Microsoft Home and Entertainment Division
                Revenues and Operating Losses, 2002-2006 (includes Xbox division)

(In millions)

2006

2005

2004

2003

2002

Revenues

$4,256 

$3,140 

$2,737 

$2,748 

$2,453 

Operating Losses

($1,262)

($485)

($1,337)

($1,191)

($1,135)

Exhibit 3b     Microsoft Revenue and Income Statement by Business Division, FY 2006
 

For the quarter ended

  

For the quarter ended

(In millions)

Fiscal
Year
2006

June
30,
2006

March
31,
2006

Dec.
31,
2005

Sept.
30,
2005

 

Fiscal
Year
2005

June
30,
2005

March
31,
2005

Dec.
31,
2004

Sept.
30,
2004

Segments

                      

Client

$13,209

$3,376

$3,187

$3,459

$3,187

 

$12,151

$3,014

$2,964

$3,193

$2,980

Server and Tools

9,653

2,690

2,398

2,438

2,127

 

8,370

2,245

2,058

2,161

1,906

Online Services
Business

2,299

580

561

594

564

 

2,344

598

581

606

559

Microsoft Business
Division

14,488

3,908

3,608

3,689

3,283

 

13,520

3,637

3,384

3,413

3,086

Entertainment and Devices

4,633

1,250

1,146

1,657

580

 

3,403

667

633

1,445

658

Total revenue

$44,282

$11,804

$10,900

$11,837

$9,741

 

$39,788

$10,161

$9,620 

 $10,818

$9,189

 

 

For the quarter ended

  

For the quarter ended

(In millions)

Fiscal
Year
2006

June
30,
2006

March
31,
2006

Dec.
31,
2005

Sept.
30,
2005

 

Fiscal
Year
2005

June
30,
2005

March
31,
2005

Dec.
31,
2004

Sept.
30,
2004

Segments

                      

Client

$10,182

$2,504

$2,471

$2,638

$2,569

 

$9,403

$2,172

$2,331

$2,513

$2,387

Server and Tools

3,017

903

746

762

606

 

2,109

479

515

660

455

Online Services
Business

-77

-190

-26

58

81

 

411

101

101

130

79

Microsoft Business
Division

9,675

2,544

2,414

2,466

2,251

 

9,116

2,285

2,316

2,355

2,160

Entertainment and
Devices

-1,337

-437

-422

-296

-182

 

-607

-235

-198

28

-202

Corporate-Level
Activity

-4,988

-1,443

-1,295

-971

-1,279

 

-5,871

-1,813

-1,736

-937

-1,385

Total operating

income

$16,472

$3,881

$3,888

$4,657

$4,046

 

$14,561

$2,989

$3,329

$4,749

$3,494


Exhibit 4a Developer Acquisitions (1991 - 2003)

DATE

COMPANY

PRODUCTS

ACQUIRER

TERMS

1991

Distinctive

4D Boxing, Hardball, Test Drive

Electronic Arts

$11 million ($785K in cash)*

1992

Origin

Wing Commander, Ultima

Electronic Arts

$35 million stock (estimate)*

1992

Westwood

Kyrandia

Virgin

$5 million value (estimate)*

1994

SONY PLAYSTATION LAUNCHES

1995

Iguana

Turok

Acclaim

$5 million cash + undisclosed stock

Oct-95

Sculptured Software

Star Wars, Mortal Kombat, Jack Nicklaus Golf

Acclaim

$30 million in stock

Oct-95

Probe

Die Hard, Back to the  Future, X Men

Acclaim

$30 million in stock (estimate)*

1995

Papyrus

NASCAR

Sierra

$40 million stock (approx.)*

1995

Impressions

Caesar II, Lords of the Realm

Sierra

$8 million stock (approx.)*

1995

Bullfrog

Populous, Syndicate, Magic Carpet

Electronic Arts

$25 million (estimate)*

1996

NINTENDO N64 LAUNCHES

Apr-96

Headgate

PGA Championship Golf

Sierra

$8-10 million stock*

Sep-96

Mission Studios

Jet Fighter

Take Two

$1,674,478 cash, 182,923 stock (value $440,000). Promissory note value

Jun-96

Formgen

Duke Nukem

GT Interactive

1,030,000 shares GT stock

Jul-96

Humongous

Freddie Fish, Putt Putt

GT Interactive

3,458,000 shares GT stock

Dec-96

DMA

Lemmings

Gremlin

£4.2 million

Apr-97

Berkley Systems

You Don't Know Jack

Sierra

$25 million stock (approx.)

Jul-97

Maxis

Sim City

Electronic Arts

$125 million value stock

Sep-97

Raven

Soldier of Fortune

Activision

Value $13 million, 1,040,000 shares

Sep-97

Odd World

Abe's Oddysee

GT Interactive

$7 million (TCI portion) (estimate)

Oct-97

SingleTrac

JetMoto, Twisted Metal, Twisted Metal II, and WarHawk

GT Interactive

$5.4 million in cash and 700,000 shares of stock valued at $7.2 million, (total value of $12.6M)

Aug-98

Westwood

Command and Conquer, Lands of Lore

Electronic Arts

$122.6 million (majority to Westwood)

Sep-98

Crystal Dynamics

Gex, Soul Reaver

Eidos

$47.5 million US (£28.4)

Dec-98

Talonsoft

Battleground, Art of War

Take Two

1,033,336 shares (accounted as a pooling of interest

Dec-98

Reflections

Driver, Destruction Derby

GT Interactive

2.28 million shares of common stock

Dec-98

FASA

MechWarrior

Microsoft

Undisclosed

1999

SEGA DREAMCAST LAUNCHES 

Jan-99

Legend

Mission Critical, Death Gate

GT Interactive

$13.5 million stock

Mar-99

Gremlin

Grand Theft Auto, Realms of the Haunting, Loaded

Infogames

$36.8 million cash

Sep-99

DMA (Owned by Infogames)

Grand Theft Auto, Realms of the Haunting, Loaded

Take Two

$11 million cash (assumed DMA debt)

Apr-99

Access Software

Links

Microsoft

Undisclosed

May-99

Pacific Coast & Power

Activision

THQ

$10M in stock (estimate)

Oct-99

Neversoft

AMDK, Tony Hawk Pro Skater

Activision

700,000 shares stock (est. value 10M)

Nov-99

Bungie

Myth

Take Two

$5 million cash for 19%

2000

SONY PS2 LAUNCHES

Jun-00

Bungie

Oni, Myth, Halo

Microsoft

Est. value $20-$40 million (based on Take Two sale of 19% @ 5M cash, 5.8 sale of Bungie assets)*

Jul-00

Pop Top

Railroad Tycoon II, Tropico

Take Two

559,100 shares (est. value $5.8M)

Jul-00

LTStudios

Startup with multiplayer concepts

Argonaut

£300K for 30%, 9.5% bond, remaining 70% purchased 9-2001 for a nominal sum

Aug-00

Volition

Freespace, Red Faction

THQ

890,100 shares common stock + 109,900 shares common (options)+500K debt assumed (est value 500K debt assumed (est value $21.25M)

Oct-00

Just Add Monsters

Kung Fu Chaos

Argonaut

£200,000 cash and 400,000 stock plus a deferred £210,000 in Loan Notes

Dec-00

Digital Anvil

Freelancer

Microsoft

Undisclosed

2001

MICROSOFT XBOX LAUNCHES

Jan-01

Red Zone

NFL Gameday

Sony

Undisclosed

Jan-01

Naughty Dog

Crash Bandicoot, Jak, and Daxter

Sony

Undisclosed

Feb-01

Blue Byte

The Settlers

Ubi Soft

Value 13 million Euros ($8.2 M US)

May-01

Ensemble Studios

Age of Empires

Microsoft

926,077 shares common stock (est. value $83M)

Jul-01

Red Storm

Rainbow Six

Ubi Soft

$43 million value

Jan-01

Particle Systems

Powerdrome, SubWar 2050

Argonaut

£2.4 million in total plus 3.5M in Argonaut shares

Jan-02

Gray Matter

Return to Castle Wolfenstein

Activision

$3.2 million in stock

Jan-02

Rainbow Studios

Motocross Madness, Splashdown

THQ

Total value est. $44.6M (1,287,000 shares of stock plus performance incentives)

Apr-02

42-Bit

Rally Championship 7

Warthog

Value £400,000 (in Warthog shares), father 700K shares based on performance

Mar-07

Shaba Games

Wipeout, Big Hurt Baseball, Magic: The Gathering

Activision

387,932 shares of common stock. Value $7.4 million 

Exhibit 4b Developer Acquisitions (2003 - 2005)

DATE

DEVELOPER

PRODUCTS

ACQUIRING

COMPANY

TERMS

03/01/2004

Wolfpack

Shadowbane - MMO

Ubisoft

Undisclosed

03/01/2004

Mobius

Max Payne GBA, High Heat Baseball GBA

Take Two

$4.5 million, of which $3.6 million was paid in cash, $920K due in March 2005. T2 recognized identifiable intangibles of $960K (non-competition agreements) and goodwill of 4.6 million. $2 million more based on delivery of products.

03/04/2004

IO Interactive

Freedom Fighters, Hitman

Eidos

£36 million ($68 million) in cash and stock, along with a payment of up to £5 million linked to the four-year performance of the studio.

03/09/2004

Surreal Software

 

The Suffering

Midway

All-stock transaction: 540,317 common shares with an additional 137,199 restricted shares issued to key employees.

4/29/2004

Relic

Homeworld, Warhammer: Dawn Of War

THQ

$6 million in cash and $4 million over the next two years.

08/09/2004

Criterion

Burnout, Renderware

Electronic Arts

According to a 10-Q form filed with the SEC, Electronic Arts spent somewhere in the range of $48 million to buy Criterion Studios.

08/09/2004

ARUSH

Hunting Unlimited

Hip

Interactive

871,312 common shares of which 55,607 are being held in escrow for a period of up to one year. Under the terms of the escrow agreement, the principal shareholder of ARUSH is entitled to purchase the escrowed shares from Hip at a price of $1.50 per share.

08/11/2004

Monolith

Tron 2.0, No One Lives Forever, Aliens vs. Predator 2

Warner Brothers

Undisclosed

8/26/2004

Inevitable

The Hobbit, Defender, Tribes: Aerial Assault

Midway

All-stock transaction: 218,421 common shares with an additional 152,824 restricted shares issued to key employees.

09/01/2004

Venom

Rocky Boxing

Take Two

$1.2 million in cash, recording identifiable intangibles of $750K, and goodwill of $620K

11/16/2004

Digital Illusions

Battlefield 1942

Electronic

Arts

EA now controls approximately 67.3% of DICE, and all the 2,329,102 outstanding company warrants.

12/01/2004

Paradox

Mortal Kombat, Backyard  Wrestling

Midway

All-stock transaction: 333,334 Midway common shares, with 261,906 restricted shares issued by key employees.

12/04/2005

Indie Built

Microsoft's former sports team, Top Spin, Links, Amped

Take Two

$18.5 million in cash, recording $5.8 million in identifiable intangible assets, $11.5 million of goodwill, $280K of fixed assets, and $820K of accounts receivable.

1/20/2005

Vicarious Visions

Shrek 2, Spider-Man 2 DS, PSP

Activision

Undisclosed

1/25/2005

Visual

Concepts /

Kush Games

ESPN 2K sports

Take Two

$24 million in cash with rights to all intellectual property associated with the sports titles, as wells as rights to the 2K brand.