The main problem was and is Sony's lack of effort. Sony sort of went, "if we make a superior product, people will come." But that's not how it works. You have to do more than put a great machine on the market, you have to actually convince people that (1) they need to buy your product and (2) that they can afford to buy your product.
Sony didn't do a whole lot to push the PS3. Sony knew people didn't like the price, but acted like they didn't care. Then, they made a price cut but not a big enough one. Sony didn't really try to point out to people that what you actually got in the PS3 box was in reality a better value than what you actually got in the box from the other two companies. So Sony failed to convince people that they could afford PS3s.
And for a company was relying so heavily on people to transfer their loyalty to the PS2 over to the PS3, it is incomprehensible to me why Sony chose to remove the PS3's ties to the PS2 (backward capability). The loss of BC meant that a lot of people who might have stuck with PS brand due to owning PS games already, didn't have a reason to stick with Sony and felt free to move to the other companies.
Sony also failed to convince people that they needed a PS3. Sony tried pushing Blu-Ray, but apparently most people didn't see that as a necessity. (Maybe now that there are more HDTvs out there this will change.) Sony also went on and on about Home. But so far I don't see a lot of people caring about it. (This too may change as Home is finally up and running). Sony also let its exclusives slip through its hands. Basically, Sony dropped the PR ball.
The situation right now is
Nintendo's hook = motion controls/kid friendly/cheap.
Microsoft's hook = live/exclusive mature games which appeal to the "cool" crowd at school/cheaper than PS3
Sony's hook = home/blu-ray/high-end product.
If Sony wants to be #1 it seems clear that Sonyneeds a much more aggressive campaign to convince people that they need home and blu-ray or it needs to focus on a different hook. I doubt that more kiddy games is the new hook that is needed in this situation. The new hook would have to be something that appealed more to high end product users since Sony doesn't seem to want to drop its price too much. I don't think kiddy games fits that bill.
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