Jakanden
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 Posted: 05/20/04 - 20:49 Post subject: Pricey Parts Threaten Profits of New Game Machines
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Pricey Parts Threaten Profits of New Game Machines
By Daisuke Wakabayashi
May 20, 8:44 PM (EDT)TOKYO
(Reuters) - Videogame giants Sony and Nintendo, gearing up to launch hotly anticipated handheld gaming devices, face a shortage of key parts, which could crimp profits and sales of the rival products when they hit stores later this year.
Nintendo Co Ltd's dual-screen handheld, DS, and Sony Corp's PlayStation Portable (PSP) come armed with all the bells and whistles of a modern game machine, which is good news for gamers but potentially bad for the two companies.
Surging demand for mobile phones and digital cameras has created a shortage of small liquid crystal displays (LCDs). That spells trouble for Nintendo and Sony since the DS offers two, three-inch (7.6 cm) screens and the PSP promises a 4.3-inch monitor.
"When we started thinking about a product with two screens, we didn't expect LCD supply to be so tight. In that respect, this isn't going according to plan," Nintendo President Satoru Iwata told Reuters last week at E3, the industry's annual trade show.
Sharp Corp, Nintendo's main LCD supplier for the Game Boy Advance, has said it plans to boost output of small and mid-sized panels -- defined as screens less than 10 inches. However, that capacity is not expected to come online until sometime in the next business year starting on April 1, 2005.
"Supply is fairly tight at the moment," said Damian Thong, technology analyst at Dresdner Kleinwort Wasserstein in Tokyo. "It's due to the sheer proliferation of products that are using these small-sized, high-resolution LCDs today."
Mobile phone makers are shifting to color screens in droves. Sharp forecasts that global shipments of mobile phones with color screens will increase by 140 million units in the current business year ending March 31.
Compounding the problem are commodity prices near two-decade highs, lifting the cost of metals used in electronics, such as tantalum for capacitors and copper for wiring. High oil prices are also boosting production and distribution costs.
Sony said it planned to manufacture the PSP in-house, while Nintendo expects to outsource DS assembly to Japanese companies with factories in China.
NO MONEY
Kaz Hirai, the head of Sony's U.S. game unit, said Sony would not make money on the PSP at the outset, but that the new handheld would ultimately generate a profit.
"If you just add up the components, day one there's probably not too much margin on the hardware," Hirai said of the PSP, which also comes equipped with Wi-Fi wireless networking.
"But when all is said and done, we are in the business to make money on the hardware and we have proven that with the PlayStation and the PS2."
Manufacturers often rebound from initial losses with sales of in-house software titles as well as improving manufacturing efficiency. Sony has always insisted that it makes money from just the hardware and strong software sales are an added bonus.
But analysts say Sony and Nintendo must strike a balance between the loss level they can live with for every handheld sold and a price tag its target audience would be willing to pay.
Nintendo did not say how much the DS -- which boasts dual processors and wireless networking -- would cost, but it has promised it would be "affordable" when the device goes on sale in the United States and Japan later this year.
Industry watchers speculate that the DS will sell for under $199, while the PSP -- due out in Japan by year-end and the United States and Europe by March 31 -- could cost between $50 and $100 more.
Sony has promised to ship three million PSPs in the business year to March 31, but with supply being so tight, analysts said hitting that target might be difficult.
"There's a high likelihood that Sony won't be able to do it," said Hiroshi Kamide at KBC Securities in Tokyo.
Even if it wanted to scale back the DS launch and wait for components prices to cool, Nintendo's Iwata said the Kyoto-based game maker would not do it, because it is important to get a game machine off to a good start.
"In the entertainment products business, it is very difficult to recover from a failed launch," Iwata said. "Once people think your product is bad, the situation becomes very painful." (Additional reporting by Ben Berkowitz in Los Angeles)
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