SCEA chief executive Jack Tretton.

JUNE 1 , 2011 • In early April, before PlayStation Network security was breached and the personal data of more than 100 million user accounts was compromised, Sony Computer Entertainment of America held an analyst-only event at its Foster City, Calif. campus. The event was headed by SCEA chief executive Jack Tretton with an upbeat outlook for the PlayStation business in North America.

The division believes it has a story to tell this year, and wanted to align industry expectations to what SCEA believes will be a solid 2011. Tretton is one of the more artful executives in the console business – well capable of presenting a wealth of information without providing a concomitant wealth of specifics.

For example, analysts were able to hold a late prototype Next Generation Portable (NGP) in their hands, and confirm that the unit was running a unique version of Uncharted. Yet no details on price, weight, or the NGP’s launch were disclosed.  Neither were analysts allowed to manipulate the controls to advance the game.

“We won’t repeat the $599 PS3 mistake,” was about all Tretton would admit under cross-examination. “The NGP will launch with an introductory, not mass market price point.”

That said, the prototype NGP was well-constructed and surprisingly light handheld given such hefty dimensions of 17-inches wide by 3.28-inches tall and 0.73-inches thick. The 5-inch touch screen was huge as well, delivering clear images with highly saturated colors.

The Move added $610 million to SCEA revenue in 2010.

The main NGP take-away is that SCEA understands the preponderance of direct ports from the PS2 that flooded the original PlayStation Portable (PSP) software catalog did not boost the fortunes of the system, or UMD disc sales. For the NGP SCEA is advising third-party publishers against ports in favor of NGP-specific titles that take advantage of the unit’s features. Primary amongst the latter is the touch screen. SCEA staffers demonstrated how to direct game characters to climb within the environment by drawing a path on the screen by finger movement.  Control input could also be tied to how the NGP is tilted or turned.

Bowing to criticism that the PSP was too able to support the use of pirated software, Sony claims the NGP will ship with enhanced security features that will thwart piracy and encourage the purchase of physical media, or PSN content downloads.

In our view the NGP is an attractive unit with trend-setting hardware features. In other words, there is a lot in the case for the money. Regardless, the launch price will still likely be on the high side for most consumers. Success for the NGP will come, or not, based on the uniqueness and quality of the games that ship for the system. If a Monster Hunter-style phenomenon can set in around the NGP worldwide, then prospects for the system are good. We haven’t seen that title yet, however.

Tretton also sought to manage expectations for the PlayStation Move motion input technology introduced last year. Comparisons to the Xbox 360 Kinect have been constant since Fall 2010, especially since Kinect sales have topped 10 million units sold. Tretton now describes Move as an “additive” product that has appeal to PS3 owners on a case by case basis. Once again, no apples-to-apples sales data was disclosed. What Tretton did say was that the Move had a $610 million positive impact on U.S. retail revenue – boosting total revenue by about 10% more than it would have been during the calendar year. Tretton pegged U.S. 2010 calender year revenue at $6.5 billion.

For us, gauging the success of the Move lies along another track. Compared to Nintendo’s and Microsoft’s motion sensing technology, the Move is the most precise of the three at tracking movement. So while the Kinect is excelling most with dance and exercise titles, the Move should have a leg up in action genres. And that’s exactly what Sony is seeing with a 40% attach rate between the $39.99 Sharp Shooter assault gun peripheral and Killzone 3. That’s a very robust attach rate, and could have been higher had the peripheral not sold out repeatedly.

To us, this means the Move is a hit with the shooter crowd. Watching gamers using the Sharp Shooter proves the Move set-up encourages a more immersive gameplay. Players are off the couch and standing, leaning and dodging in concert with the in-game engagement. Much depends on how game developers advance motion sensing implementation amongst the various platforms, but for those titles where the Move taps into a more enthusiast gamer demographic, we can see a scenario where the Move might promote a longer tail on individual games than they might have experienced otherwise. Careful vetting of how well the $150 SOCOM 4: U.S. Navy Seals Full Deployment with Sharp Shooter bundle performs will tell us much.

Tretton continues to proselytize passionately in favor of 3D gaming using the growth in 3D TV adoption as justification. The penetration numbers he cites were estimates released earlier this year by the NPD Group’s DisplaySearch research division.

Frankly, we believe reading too much into 3D television adoption is wishful thinking. A preponderance of TV sets available for sale in the years to come will include 3D support whether the consumer is shopping for 3D or not. The same source estimates that 123 million connected TVs will be sold in 2014. It is safe to assume that all of the 3D televisions sold that year will be Internet capable, so the estimates Tretton is citing illustrate how pervasive 3D features will be in the available pool of hardware on sale. Call us conservative, but we wager far viewer consumers will actively don 3D glasses for their home entertainment than many in the consumer electronics industry are expecting, regardless of native 3D hardware support.

All of that said, the demonstrations of 3D-enabled versions of Uncharted 3 and SOCOM 4 were intriguing. It is obvious that Sony is putting a lot of thought and effort into applying 3D to its premier franchises. Both titles exhibited a serious attempt to use 3D to advance the level of suspense provided by in-game environments and mechanics – all with a minimum of the cheese factor so easy to embrace with 3D. All very promising, but for now, the PlayStation Move Sharp Shooter seemed a lot more enjoyable, and desirable, draw.

Last fall, SCEA launched its first region-wide, mass-market advertising campaign in Latin America. In return, Tretton said revenue of $600 million was generated during the calendar year from 19 nations in Latin America. This revenue total did not include Brazil. Tretton explained that Sony Corp. is in the process of seeking substantial changes in Brazilian duties and tariffs, and has mandated that Sony divisions are to refrain from selling to the traders who normally import game consoles and other consumer electronics devices into the country while negotiations continue. Whenever SCEA is able to sell into Brazil, Tretton estimates another $300 million in yearly revenue can be added to the Latin American total.

During the presentation on PlayStation Network (PSN) data Tretton claimed a total of 75 million registered accounts worldwide, half of them in the U.S. By the first week in May when the full extent of the hacking of PSN became better known, the total number of vulnerable accounts was numbered at 77 million. The following is a country by country breakdown released by Sony Corp. at a press conference in Japan on April 30.

To fill out the picture on PSN pre-hack, Tretton and team disclosed that half the registered users were between the ages of 18 and 34, 55% were Caucasian and 19% Hispanic, 62% had attended college, the percentage of males were in the high 80s, 70% play an online game weekly, and 71% of users have made at least one online purchase from the 1,074 downloadable games available.

It is difficult to gage what effect the recent security breach will have on future PSN operations and the relationship between Sony and PlayStation owners. Our estimate is that consumers will be forgiving as long as Sony is forthcoming with information, and makes a good faith effort to assist PSN users who encounter fraud on their financial accounts. The PlayStation Network truly hit its stride during 2010, and that momentum should not be impaired much as long as users can enjoy online access without further service interruptions.

Despite the growth in revenue being captured by free-to-play online games worldwide, Tretton exhibited a cautious attitude toward the business model, and how it fits into PSN’s future. His position is that there is room for several F2P franchises on the network. That position strikes us as a tad conservative given the way games as a service model is taking off. So while Tretton openly acknowledges that SCEA is benefiting from many more revenue streams than 15 years ago, there probably is a great deal more potential revenue to be tapped in the years ahead.