Sony (SNE), Nintendo (NTDOY) and Microsoft (MSFT) each spent the better part of eight years and hundreds of millions of dollars developing hardware for the next generation of gaming consoles. Individuals at each of the companies have spent significant portions of their lives eating, drinking and breathing chips, pixels, ergonomics, resolution and God only knows what else, trying to divine where the game market would be at the end of this year. Remember, when they started these projects the iPad hadn't been invented and "mobile gaming" was largely conceptual.
Perversely, the person who's going to make the most money off all that work is apt to be Dan Loeb, an American hedge fund manager with a huge position in the company that's going to finish in last place. Loeb has a 6.5% interest in Sony. Last week he hand-delivered a letter to Sony CEO Kazuo Hirai suggesting that the company separate its lucrative entertainment interests from its moribund electronics division.
Normally when American investors try to exert influence over Japanese companies they are met with stony silence. That was the initial response to Loeb as well. Then yesterday Microsoft demoed its Xbox One and everything changed.
The cool kids at Microsoft work in the Xbox division. Unlike virtually everything else out of Redmond, Xbox products are invariably slick, ambitious and at least somewhat customer friendly. It's hard to believe the people who created the Halo franchise have ever even met the guys behind Windows 8. The Xbox One is a realistic stab at creating the long-dreamed-of central "hub" in the living room.
Microsoft has deals with EA and ESPN to create original content that tracks your fantasy teams even as you play against your friends. It works by motion and vocal command, and it executed flawlessly during Tuesday's demo. The PS4 looks neat for games and has a new controller. Steven Spielberg is producing a television series built around Microsoft's Halo franchise. Sony already has fantastic content that they've somehow managed to keep away from its hardware for decades. Unless Sony is being coy, the company has produced another internet-connected piece of hardware that sits in your living room.
For Sony investors, a humiliating defeat at the hands of Microsoft might be the best thing to happen since the Walkman. During yesterday's Xbox demo, about midnight Tokyo time, Sony's stock spiked almost 10%. Today Sony decided to publicly consider Loeb's break-up plan. Those events are related. Dan Loeb won a seat at Sony's table when Microsoft established itself as the team to beat in consoles.
Sony has to pay attention to Loeb's strategy because what they've been doing for the last 20 years simply doesn't work. For investors in SNE the worse the PS4 loses the better it is for their shares.