Sony’s Direct Sell PSN Strategy In Tatters

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Sony’s long term plan to be a network provider of content is in tatters today, with the company now facing legal action from disgruntled customers whose private credit card data was exposed to hackers who appear to have easily broken into the company’s Playstation network due to “poor” security procedures.

Now labelled the “Pretty Stupid Network,” Sony’s PSN operation is under attack right round the world after it was revealed that the credit card details of up to 77 Million people could have been stolen.

In Japan this morning shares in Sony slide 6% after an 8% fall earlier in the week. (See seperate story).

In Australia senior Sony management including Carl Rose the CEO of Sony, and Michael Ephraim the CEO of Sony Computer Entertainment Australia have made no comment on the hack attack to either their customers or the media, despite up to a million Australian users of the network being affected by the breach, which is now being described as one of the world’s largest privacy attacks on a network.

For the last 18 months Rose and Ephraim have pushed the Sony Playstation Network as a key point of difference between what is offered by Sony and arch rivals Samsung, LG and Panasonic.

While Rose was pushing  the IPTV capabilities of his Bravia TVs and Blu ray players using deals with the ABC, SBS, and Yahoo, Ephraim used the Playstation Network to promote music and gaming to PSP and PS2 console users. Last year, Sony relied heavily on the PlayStation network to launch its Qriocity online platform to offer streaming video and music services.

Now the lack of good security and poor communication after an ”illegal and unauthorised person” stole personal details including addresses and potentially credit card details belonging to 77 million people who have accounts on the PlayStation Network has suddenly bought the long term strategy of the company unstuck.

Ever since his appointment, the former CBS executive, Sony chief executive, Howard Stringer, has pushed the company toward a “network” strategy that envisions its electronic products as gateways to an online network of content rather than standalone devices. It also allowed him to sell direct to consumers bypassing retailers on the way.

Desperate to compete with Apple, Microsoft with their Xbox Live network and content offerings from the likes of Amazon who already had their content networks up and running, the cash strapped Sony pushed boundaries in an effort to get their network operational.

 

In Australia Sony started pushing more and more towards a direct sell model. They set up their own Sony branded stores, they sold products direct to consumers online and the Playstation network was the perfect vehicle to get money out of consumers without having to give margin away to retailers. 

In the ongoing competition Sony thought they had an advantage on their competitors by allowing Sony customers to play games against one another, chat online and download movies, games, music and TV shows without having to go near a third party retail store, who were losing millions in revenue terms to the Sony network.

The network was a cash cow, Sony had overcome a major hurdle by letting retailers sell their unprofitable hardware while they took most of the profitable revenue selling content direct every day of the week.
  
Late in 2009, Sony said it aimed to have a user base of 350 million network-connected devices while generating revenue of $3.65 billion from their network  business. In the past, most of this revenue had passed through retailers like JB Hi Fi, EB Games and Harvey Norman who sold millions of DVDs and packaged games.

Sony chairman Sir Howard Stringer has said coupling Sony products with online services is essential to creating brand loyalty and differentiation to break free from the crippling price competition plaguing the consumer electronics industry.

“In an environment where it’s difficult to turn a profit on hardware, Sony has pushed for the integration of hardware, software and the network to make money. To have this happen now is really unfavourable,” said Nobuo Kurahashi, corporate research analyst at Mizuho Investors Securities in Tokyo.

 

Now experts are claiming that the security problems with the Sony network could unnerve new and existing customers about entrusting personal data with the Japanese company

Last night Sony said it will stick with the direct sell Playstation strategy. “This incident doesn’t change Sony’s fundamental strategy of networking products and providing services to our customers,” said spokesman Shiro Kambe.

Sony customers are furious with many taking to Twitter and Facebook to vent their anger. Many are asking why the personal data wasn’t encrypted. The company has not disclosed whether it has determined that credit-card information had in fact been stolen, or how many people might be affected by such theft.

Despite the hack attack Sony says that they are determined to use the network to market products directly to consumers.

At the start of 2011 the company that is tipped to report another round of losses on May 26th said that it plans to launch by year-end a new handheld game machine codenamed Next-Generation Portable that will access the PlayStation Network. Stringer has also said it aims to have smartphones from its mobile phone joint venture, Sony Ericsson, connect to the Qriocity platform for streaming video and music in the future.

On Tuesday, Sony said it will enter the fast-growing tablet computer segment with two products later this year. The tablets will also connect to Qriocity as well as Sony’s electronic bookstore. 

Kunimasa Suzuki, a Sony executive overseeing the development of new network-connected mobile products, said he sees the new tablets being the “hero” of the company’s strategy to integrate services and hardware.

Both Harvey Norman and JB Hi Fi executives have said that they are watching the development of the Playstation network. “We don’t like it as it is stripping a lot of revenue away from our stores but there is not much we can do about it. This is the future of consumer electronics retailing” said Scott Browning, marketing director at JB Hi Fi.

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