Panasonic wants to join Microsoft (NASDAQ: MSFT), Sony (NYSE: SNE), and Nintendo as a large provider of video game consoles. It will launch a product into that market called “Jungle.”
The Wall Street Journal points out some of the obvious challenges Samsung will face. For one thing, the market is already crowded. Gamers have begun to turn away from expensive consoles like the Xbox 360 and PS3 to new online game products which can run on more flexible hardware like PCs and smartphones.
A review of the financial statements of Sony and Microsoft reveals that it is not entirely clear if the companies make any money on their consoles. The development costs of hardware and console upgrades are expensive. Competitive pressure has forced the major console-makers to bring down retail prices and it is not entirely clear that hardware component costs have come down as much. The margins on theses products, therefore, may have dropped quickly.
These challenges in the video game console business leave analysts to wonder why Panasonic would want to have a horse in what is already a three horse race. The chances that the “Jungle” will be successful seem very remote.
Panasonic’s reason may be that it will take risks to diversify beyond a number of low-margin and highly competitive markets. The TV and flat screen market is filled with firms that use low-cost labor in developing nations to build products which are sold at ever-falling prices. Panasonic is also in the digital camera market which has become increasingly crowded.
Panasonic also makes household appliance and home phone handsets, which are being increasingly replaced by cellphones. Panasonic’s industrial and enterprise electronics businesses may be successful, but its consumer operations make high-volume, low-margin products.
Panasonic is an example of a company which has gotten caught in a number of businesses that were probably very successful and profitable just a few years ago. They are not now, which seems to have forced the firm to turn to another high-volume, low-cost business to improve its prospects.
Douglas A. McIntyre
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