Sony Profits Hit Hard by PlayStation 3 Launch

Just when Sony appears to have turned around its electronics business, another part of its sprawling empire — video games — is dragging down profits.

The Japanese electronics and entertainment company on Tuesday blamed the launching costs of its PlayStation 3 game console for much of the 5 percent drop in group net profit for the last three months of 2006 to 159.9 billion yen ($1.3 billion).

The PS3 launched in the United States and Japan in November, plagued with production problems that resulted in shortages and will keep the machines out of Europe entirely until March.

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The next-generation game player also faces immense competition with Nintendo Co.'s Wii and Microsoft Corp.'s (MSFT) Xbox 360.

Sony Corp. (SNE) raised its earnings forecast for the fiscal year through March by 38 percent, however, citing a recovery in its core electronics division amid booming Christmas sales in digital cameras and flat-panel TVs.

It now expects an annual net profit of 110 billion yen ($903 million), up from an earlier 80 billion yen ($657 million).

That's still below the 123 billion yen Sony earned last fiscal year — and under the 130 billion yen annual profit it had forecast earlier last year.

The gaming unit, meanwhile, posted a 54 billion yen ($443 million) operating loss during the quarter, though Sony promised business will improve by the latter half of next fiscal year.

"Startup costs are high, and the losses (in the gaming division) will continue for some time," Chief Financial Officer Nobuyuki Oneda told reporters.

For the past several years, Sony's biggest problem was its core electronics business, where it fell behind Apple Inc. (AAPL) and its iPod portable music player and Samsung Electronics Co.'s flat-panel TV business.

Sony was also dealt a blow last year when it announced a massive global recall of about 10 million lithium-ion batteries used in not only its own laptops but also those from Apple, Dell Inc. (DELL), Lenovo Group Ltd. and others.

The company has been engaged in a massive turnaround effort since 2005, when Welsh-born American Howard Stringer took the chief executive job. Sony has dropped unprofitable businesses, sold off assets, cut jobs and closed plants.

Those actions appear to be paying off, somewhat. Sony's core electronics division reported record sales for the quarter, thanks to strong demand for its flat TVs and digital cameras, helping to lift Sony's overall sales for the quarter 9.8 percent to 2.61 trillion yen ($21.4 billion).

The company's weak spot now appears to be its gaming division.

Sony blamed its own price-slashing strategy for the PS3 for cutting into profits. Game machines usually come down in price over time, but faced with competition, Sony made an unusual move in lowering the PS3 price in Japan by about 20 percent even before sales started.

Sony shipped 1.84 million PS3 machines worldwide during the quarter, the company said. The machine has already gone on sale in the United States, Japan and some other countries, but its sale has been delayed to March 23 in Europe, the Middle East, Africa and Australia.

Sony stuck to its earlier target of shipping 6 million PS3 consoles by March 31. Earlier, it said it shipped 2 million PS3 machines worldwide by mid-January, falling about two weeks behind its initial shipment targets in Japan.

Declining sales during the October-December period of Sony's predecessor console, PlayStation 2, and of the handheld PlayStation Portable, including PSP game software, also pushed down profits at its gaming unit, Sony said.

Sony also got a 40 billion yen ($328 million) boost toward quarterly profits from a weak yen, and 33.6 billion yen ($276 million) from its investment in London-based Sony Ericsson, a mobile phone joint venture with Sweden's LM Ericsson (ERIC), it said.

Separately on Tuesday, the U.S. Federal Trade Commission said Sony's joint venture with Bertelsmann AG, Sony BMG Music Entertainment, agreed to reimburse consumers up to $150 for damage to their computers from CDs with hidden anti-piracy software.

The software was designed to restrict the number of copies that could be made from a CD, but the FTC said it also "exposed consumers to significant security risks and was unreasonably difficult to uninstall."

Sales were up 47 percent at Sony's movie division, where it returned into the black from losses the same period a year earlier, on healthy DVD sales for hit movies such as "The Da Vinci Code." Among the box office hits for the quarter was "Casino Royale," it said.

Sony also has an insurance sector, where both its sales and profits slipped during the quarter.

For the first nine months of the fiscal year, Sony recorded a 193.9 billion yen ($1.6 billion) profit, up 2 percent from 190 billion yen a year earlier, on 6.2 trillion yen ($50.9 billion) sales, up 9.7 percent from 5.7 trillion yen.

Shares in Sony dropped 76 cents, or 1.6 percent, to $46.24 in midday trading Tuesday on the New York Stock Exchange.