There is some discussion, I think by [redacted], about something to the effect that the timed exclusive for Unreal Tournament wasn't an arranged thing, but just a matter of fact that they hadn't got the chance to get the 360 version done in time. You know, your exclusive strategy seems to be one almost similar to Nintendo's, where you are focusing on first party exclusives...

[Kaz Hirai, President, Sony Computer Entertainment, Inc., enters the room.]

Jack: Yeah, you guys know Kaz I hope.

Kaz: I heard you guys were here and Jack was sending me an SOS email... [laughter]. Sorry to interrupt.

Jack: If I heard your question correctly, I think and would tend to agree with you that we felt and that you can never control or anticipate what another company is going to do. That's their business and they run it as they see fit. So the best way to ensure that you have content that differentiates your platform from the next and showcases the technology is to create it yourself. That's why we've invested so heavily in our internal development over the years. I think we kinda look at exclusive opportunities a little more organically. Most of the time the publishers approached us and said, this is what we have to offer and this is what we're looking for -- whether its some development help or some co-marketing -- but you know we would look at that the same way we would look at our strategy behind developing a first party game.

Is this something that is going to showcase the technology and is this something that is gonna differentiate our platform from the next? Because an exclusive, just because it's not on any other platforms does nothing for you. If its exclusive and its actually a game people want to buy and want to play you know that helps you. So, you know we get a lot more exclusive offers and / or games that have come out on our platform than I think we would -- you know, I don't think you can assume that every time there is an exclusive, "Oh, they must have paid for that or they must have co-marketed." Its the ones that we say yeah, we're going to help drive the message on that game because that's going to help us drive the message on our hardware.

So I hope that answered your question and wasn't too windy, but yes I think first party development is what we saw as the key. I didn't hear Mark's comment to that effect, but you know whether that's true or not I'd be disappointed to hear that. But again I guess this is a perfect example of you can't control what other people say and they run their business as they see fit. I guess that the net-net of the whole thing is that it will only be available on our platform this year and hopefully that is a good thing for PlayStation 3 consumers.

So to what would you attribute the sales figure that we're hearing now that the Wii is outselling the PS3 6 to 1 -- at least in some markets. But all markets that the Wii is out, the Wii is vastly outselling the PS3.

David Karraker: I think that at least you are referring to Japan, the 6 to 1 margin so that I might actually be a better question for Kaz.

Well, in the US the Wii is still outselling the PS3 as well.

Jack: You know, all credit to the Wii for the success they've had. I think we're talking about 8 months into a product life-cycle and we don't want to be outsold for a day, but if we're outsold in the first 8 months, its much less of a concern than to be outsold for the first 8 years. The other thing that we have going for us is the perspective that we're looking at a 10 year product life-cycle. I'm not saying that our competitors aren't, but the thing our competitors don't have is two viable product platforms in the market. So we get to add up the revenue and the sales that we've sold on the PlayStation 2 with the revenue and the sales that we've sold on the PlayStation 3, and while I'd like think that [users] buy a PlayStation 2 today and they buy a PlayStation 3 tomorrow -- we know that people we're selling PlayStation 2s to are probably not going to buy a PlayStation 3 this year -- they are probably going to migrate somewhere down the road.

But we really believe in bringing interest in the category is good for everybody and while I'd like them to buy a PS3 today, if they buy a Wii and they buy a PS2 and they buy an Xbox 360, I think in time we'll be able to convert everybody and anybody who hasn't bought a PS3 to the PS3 if we deliver on the promise of the technology and the gaming content. I don't think its a matter of when you get them, but its a question of if you get them. If we're sitting in this competitive position 10 years from now I'll be very disappointed, but quite frankly as far as the company is concerned, if we are well accepted by consumers and we deliver profit contributions, how you sold relative to the competition is somewhat irrelevant. Because what they sell and don't sell doesn't pay any bills for Sony.

Its about how your platform is doing in terms of consumer acceptance. And I think if you look at the PS3 right now is is a little bit softer than we would have ideally liked? Yes. Is that a tremendous surprise? Not really, we knew that it was a tall order to get millions consumers to pony up $599 in the first 6 to 8 months. That's a lot of money and its a lot more money then they've been used to paying for hardware. And I think in time they'll understand the technology, and if we deliver the promise on the software that we'll get where we want to be.

Do you think any of that has to do with the phenomenal success of the PS2 as a platform? Because you guys didn't go scorched-earth with Microsoft and with the Xbox, so there is less incentive for people to upgrade in some respects. And you also have the massive price difference between the two systems.

Jack: I don't think there is any question about that. We had the same question on the PlayStation 1 and the PlayStation 2. I mean, again, we're dealing from a position of strength, we're not talking about the first 6 months. I mean, if you're starting from a zero base and, you know, you said it yourself, scorched-earth, those platforms are abandoned. So now you're trying to decide your first unit with your new platform and you're in a position where the last generation you didn't fare too well competitively, so its all about year one. Maybe, we're a bit overconfident, but the PlayStation 2 remains incredibly viable -- great contributions to the bottom line and great software for the consumer -- so I think we felt like we could have a little more patience in terms of getting to where we needed to get to.

I guess that the question that I've said a bunch of times -- maybe it's a good question for Kaz -- is the decision that Sony could have made a couple of years ago is to say, you know, we've really got this PlayStation 2 thing nailed, and we've sold 118 million units. What do you think about doing a PlayStation 2.5? We'll add some bells and whistles to it, we can put it out at $199 or $249. I bet we could sell a bunch of them in the next couple of years -- and I think we clearly could. Could we sell a bunch for the next 10 years? No. So I think we'd have been looking at introducing a newer platform that didn't have the staying power that the PlayStation 3 does. We elected to do the quantum leap. The 10 year life-cycle because that's what did so well for us in PlayStation 1 and PlayStation 2, and if you have a strategy that's worked, you tend to stick with it. I don't know how you feel about...

Kaz: Just to add to what Jack said, or to add some more color. We're obviously a part of Sony and we do take a very long-term perspective on the business as a whole, and I'd always say, well instead of focusing on the first 6 months, I think the better perspective and great example to really see where things stand is really with the PS2. Where you look back, you know 7 or 8 years into the life-cycle and to say, ok, how much have we accomplished in terms of business volume for Sony for publishers and for the retailers on this platform that is 7 or 8 years old (depending on which territory you're talking about), and after 118 million units worldwide, then you look back and say how does that compare with the business volume of, say, Sega, which was able to generate the Dreamcast (because were talking about the same generation), and how much business and volume Microsoft was able to deliver with the Xbox, and how much business volume were we able to deliver on the PS2.

I don't think the same kind of comparison is really viable had we had this same conversation back in the Spring of 2000 or even in 2001, because again we were only a year in a half or two years into the life-cycle of that product. The hand really hasn't really played itself out to the extent that we have the perspective now of looking back where we are with the PlayStation 2. So I know we all get focused on the here and now, and I have a tendency of doing that as does everybody else, but I think we need to make sure that we look at here and now, but also understand that there is a wider business implication that we need to look at from the Sony perspective over the 10 year life-cycle that Jack was talking about as well.

So Kaz, specifically for you, how do you feel that the business has changed within Sony within the games division with the departure of Kurtagi-san?

Kaz: I think that you know, many subtle changes have already come about, in that I kind of bring a different perspective in that I was in Jack's position for 11 to 12 years on the regional headquarters side, where you know, we got a lot of different strategic input from Japan on a lot of issues that would pertain to the North American market. So I was on the receiving end and Japan was on the transmission end. There were times where I said, you know what, perhaps that's a great idea for the Japanese market or the European market, doesn't know if that really works here in the US. Snd other times I think the Europeans felt great about strategies for North America, but it doesn't really work in Europe, et cetera.

So one of the things that I've tried to start changing is giving more autonomy, more decision-making power and therefore more responsibility, if you will -- as well as more credit, if everything works out -- to the RHQs (regional headquarters). We're starting out with small things, like, for example, this time around Jack was talking about the PSP. We've got the black obviously, we've got the silver and the white, and as opposed to Tokyo saying you do this color or that color, or here are the five colors we can choose from -- none of them really work for the US but which one would you like? The process was more like, Jack, tell me which colors you need and I'll make it happen. Small things like that I'm really starting to implement, but bigger issues down the road as well. Again more autonomy for regional headquarters.

When it comes to basic fundamental strategies where the hardware needs to go or worldwide implications such as where a phone needs to go, those kinds of things -- that's obviously something that needs to be decided at the Tokyo level, but in conjunction or in concert with a lot of discussions we would have with the RHQ heads to make sure their issues and their points of view are taken into consideration when we come to decisions at the Tokyo level (that have these global implications). Having said all that, its not like it was a one-way street before, but perhaps it was 6 lanes coming this way [from Japan to US] and 2 lanes [from US] going to Tokyo, we're making sure that the freeway now has 3 ways either side in terms of information flow and exchange of opinion, and also making sure that those kinds of opinions actually get reflected in decisions that I need to make in Tokyo.

I thought that one of the most interesting parts of the keynote was when Phil pulled out a Sony Ericsson phone that had some integration with PlayStation Home. Historically Sony has had a lot of trouble integrating, they've been a very vertically integrated company and I know that one of the things that Howard was brought in to do was to try and make the company more horizontal. I'm just wondering going forward what things are we going to see in terms of the company being more horizontally integrated and being more cross platform in respects to things like mobile devices. We've been hearing hints of a Sony Ericsson mobile phone with PSP capabilities and things like that...

Kaz: Sure, you know this is one of these things where there's always room for improvement and quite honestly it's something Sony can do a lot better job at doing just as a group, but having said that I'll try to respond to your specific point before I do that I do want to point out to basically the PS3 where if we were completely siloed and only vertically integrated we probably wouldn't have a PS3 because we wouldn't be able to design it we wouldn't be able to source key parts for it like the CELL chip, because that's coming from Sony; we wouldn't be able to manufacture it because it's being manufactured, portions anyway at Sony EMS, and so, Howard talks about Sony, and I was actually at a management conference where I did a presentation on business at Sony united, and I said if you want Sony united look at the PS3. where necessary and especially at the real operation level of the organization, there's a lot of back and forth that happens, with or without Howard saying Sony united or not.

Now, as I said before there's always room for improvement and I think the smaller territories where there are smaller numbers of people within SCE and within Sony there's a lot more integration that happens, and a prime example of that is the relationship that Sony Computer Entertainment Canada has with Sony Electronics Canada because they're actually very close and they work together on a variety of different promotional activities and what have you. When it comes to Japan it's the hardest because there are so many people and so many different businesses involved. But I think just overall, with Howard making a call for Sony united just at every level of the organization, you know for example I engage with Howard literally on a weekly basis, you know he'll call me, I'll call him... I spend some time with Dr. Chubachi who is the President and Electronics CEO over at Sony. I also speak to Mr. Nakagawa and Ihara, who are right below Dr. Chubachi, and we just talk about technology trends, we talk about marketing issues, we talk about the possibility of what can we do ... for example, what can Sony Ericsson and Sony Computer Entertainment do, what can we do in conjunction with Sony Pictures in Japan or in the US, so there's a lot more, again, talking about the two lane versus six lane highway, there's a lot more information flow that happens at the management level as well, and I think that going forward, whether it's in products or in marketing activities, or in sales activities in certain instances, you're going to see a lot more collaboration between the Sony organizations.

But I think the most important thing though is - we'll do that, if it makes sense, not for the sake of doing it, and that's a trap that we don't want to fall into, we meaning not just us, but everybody in the Sony group. I think some of the things that made sense, that manifested itself would be, for example the Talladega Nights pack-in, and you know, people look at it and say, well that's just a pack-in of product. Yes, but you also need to realize we got it, what was it, a week or ten days before the launch. And you know, Sony Pictures pulled some strings, and they made it happen for us. You know, that kind of stuff you can only do when you have a video game company as well as a motion picture company within the same group, and that's a prime example of the kind of things that you can expect to see going forward and even more, given the kind of dialogue, improved dialogue that we are having with the Sony companies at the senior management level.

Can you talk just a bit about the integration with Sony Ericsson going forward, and the stuff on the...

Kaz: I can definitely tell you we are having some conversations.

Are you thinking more on the device level or just on the software integration level?

Kaz: I can tell you that we're having some conversations. [laughter]

Let me ask this then, why was the Home integration announced on the Sony Ericsson mobile devices, and not within the PSP? The Home demo was on a Sony Ericsson phone, but not on a PSP.

Kaz: I think you know was just a, I don't want to belittle the Sony Ericsson guys, because it's not meant to be that way, but you know, basically Phil wanted to demonstrate a technology where you could take a picture on your cellphone and then, you know, have it come back on Home, and it just happened to be that, obviously if we're going to demonstrate something on a cell phone, that we would much rather use a Sony Ericsson phone, than a Motorola phone, so it was a technology demonstration, and you know I don't think that we want to read too much into that at this point in time.

David: Yeah and that was actually, he sent it via a phone network.

Via MMS?

David: Yeah.

Okay, I was just surprised that it was on a Sony Ericsson phone and it wasn't also shown on a PSP in addition to the phone. So speaking about working horizontally and the Talladega Nights example, I think a lot of people were disappointed that we didn't find out more about any kind of video on demand service, or an IPTV service, for the PlayStation 3. That seems to be one of the areas where there was a lot of opportunity for corporate synergy, to use a corporate term, and we still haven't seen it. There had been promises of things like that on PlayStation 2, and here we have the PlayStation 3 -- which seems kind of ideally suited to provide that service -- and we still haven't heard much about it.

Kaz: A couple perspectives. One, is, and we've said this before and it still holds true, is that we are looking at a variety of ways of bringing a video download service and a music download service to the PlayStation 3, as well as the PSP (obviously), and it's something that we're actively looking at doing and actively working on as well. Having said that, whether we like it or not there are some other companies that have that as their core competency in that music download space. One of the things that we have to look at this point in time is, okay, if for example, I think had we done something like a straightforward music download service for the PlayStation Network Store, your quesion would have been, "What differentiates your store from downloading music from the iTunes store?" And I want to make sure that we are able to put a unique, PlayStation-esque way of presenting the music content, for example, to the PlayStation 3 users .Otherwise, we're just one of them.

We have the assets obviously, but it's not like Sony Pictures or Sony BMG for music download doesn't license the music to anybody else -- obviously they license to everybody, which is the way they should be doing their business, so they have access to the content as well as we would so what differentiates their service? So one of the things as an example of what im trying to get at is Phil demoed Singstar and obviously there's a music download component there's also a video download component there primarily for promotional videos, obviously because its a music application, but you can see that the music download is an integral part of and is in addition to just downloading music listening to it -- and okay you're happy.

But its a part of the overall Singstar experience that you're downloading the music that so that is a kind of different experience than you would have for downloading music that's specific to the PS3 experience that you can't get anywhere else. That's the kind of thing i'm talking about, and therefore, in conjunction with Singstar, there is going to be music download obviously because we find something that's very PlayStation-esque. So I want to try to come up with something that has the same kind of different PlayStation experience for music downloads, if we're going to expand it to the PlayStation Network Store≤ and also for video downloads as well -- so that you won't be asking me, "What separates your service from everybody else's?"

Well I think there's still a general demand for digitally distributed things like TV shows or movies regardless of how unique the experience is. I think people like the experience of being able to rent a movie at home directly. Right now you have the Xbox 360 maybe at some point in the future Apple will enable it in the Apple TV, but Sony seems peculiarly able to do this, not only because you guys own movies, but also in terms of the hardware you have available...

Kaz: Not only that, we also have the infrastructure in place as well. So the technology [road]blocks if you will, and the client side -- its all there, but you know again, we may ultimately decide a straight solo store is the best way to go, because, you know, we may have a lot of internal discussions on this between your recording -- maybe there is still a lot of demand for just a straightforward download service and we may end up doing that ultimately. So again, it's not something that we decide we're just not gonna do, it's something we want to do, but we want to do it right, and if the right answer means we just do a straightforward download [service] that may be the solution, so that's kind of where we're at. Are we planning something? Absolutely. When I say, "I'm planning something" and you say, "When's that gonna launch?", well it's up for discussion.

It seems pretty obvious that this should have happened a very long time ago. Now thinking a few steps ahead it just seems like there's just too much of a reliance on physical media -- what's the point of having downloadable 1080p movies for PS3 if you have Blu-ray discs, what's the point of having downloadable movies for PSP if there's UMD? So it seems like you keep on saying, "It's happening, it's happening," but to me it just seems like, "No, get it on one of our physical medias."

Kaz: As I said before, exactly your point, that's exactly the kind of discussions we're having internally, we may ultimately decide that that's the right answer and in which case the ingredients are in place, but you need to come to the determination that we're embarking on the right strategy, so that as I said before jokingly, that Jack is not asked next year, "What is so unique [about your service]? Everybody can download to 1080p."

Thanks for your time!