It’s no secret that the U.S. auto industry is nearing the end of its once-dominant position. The Big Three’s strategy now seems to be a renewed emphasis on profitability rather than blindly going after market share. The strategy might eventually pay off, not only for the auto industry but also for other big companies with big problems. Or not.

There are signs that troubled automakers are re-vamping their business models by not slashing prices or overcrowding the market with product, according to a recent piece in USA Today. In a show of renewed emphasis on profitability, according to the new strategy, the Big Three are not blindly going after market share, said Jesse Toprak, director of pricing and market analysis for Edmunds.com.

It’s a strategy that might eventually pay dividends, not only for the auto industry but also for other big companies with big problems. On the other hand, it might set these mega-manufacturers back even more.

The following excerpt from USA Today ably sums up this auto industry “sea change” quite nicely:

Instead of inflating their market shares by offering non-stop fire-sale prices and pumping massive numbers of vehicles into unprofitable rental fleets, the domestic automakers are scaling back and focusing on making a profit. That strategy produced a domestic market share of 50.2% in June, down from a high of 81% in April 1984 and 56.1% last June, according to research firm Autodata. Industry analysts predict it will only get worse, settling somewhere in the mid-40% range, perhaps within months.

The automakers have realized that “market share is nice, but profits are absolutely essential,” David Cole, chairman of the Center for Automotive Research, told the national newspaper. Cole predicts the automakers will eventually control about 40 percent of the market: “Until they get their costs in line with the competition, you will continue to see their market share shrink,” he said.

Perhaps taking a page from the automaker-turnaround play book, Sony is holding out on lowering prices for its costly Playstation 3 console, a move that analysts do not necessarily agree with, according to Reuters.

In a nutshell, here’s the PS3 quandary as put by Reuters (via ZDNet News):

Sony has packed cutting-edge technology such as a Blu-ray high-definition optical disc player into the PS3, driving up production costs and making its retail price more than twice as expensive as the [Nintendo] Wii. The higher price tag and lack of attractive software titles have been cited as main reasons the PS3 has been trailing the Wii in sales, and analysts have been widely expecting Sony to soon slash the price to spur demand.

Last Friday, Sony’s president said the company wasn’t planning to cut the price of its PS3 to pep up demand or counter surging sales of Nintendo rival Wii. In a Reuters survey of four game analysts last week, three responded they expect Sony to cut PS3 prices by $100 by the end of the year, while one analyst said a cut of $150 is more likely. The PS3, which has a 60GB hard drive, carries a price tag of $599 in the United States, while the Wii sells for about $250. While Sony was able to overcome similar obstacles with its Playstation 2 console years ago, investors are singing a different tune this time around:

In a sign of lack of confidence on the side of investors, however, Sony, which has sales eight times as big as Nintendo, was overtaken by the Kyoto-based company last week in market capitalization and bumped off the list of Japan’s 10 most valuable companies.

Then, true to last week’s predictions and despite the Sony president’s claim, today Sony did announce it planned to lower the price of its console in the U.S. by $100, to $500, effective Thursday. Cutting the price by 17 percent may boost the video game console’s lackluster sales. “Our initial expectation is that sales should double at a minimum,” Jack Tretton, chief executive of Sony Computer Entertainment America, told Reuters.

“We’ve gotten our production issues behind us on the PlayStation 3, reaching a position to pass on the savings to consumers, and our attitude is the sooner the better.”

The PS3 still costs twice that of the Wii console, whose $250 price and motion-sensing controller have made it a bestseller despite its lack of cutting-edge graphics and hard disk. Is it possible Sony’s PS3 is too leading-edge? Maybe high-def needs a stronger footprint here in the U.S. for casual gamers to be fully convinced to pick up this pricey piece of techno wizardry.

Speaking of techno wizardy, or lack thereof, another big company that is trying to make a profit in the fickle video game-making business is Microsoft. Its Xbox 360 console enjoys a wide user base; unfortunately, manufacturing glitches are preventing the machine from becoming a true next-gen leader. In response, Microsoft has pledged to invest $1 billion to repair these problems, according to The Associated Press.

Here’s why:

The glitches, and the bad publicity, could weigh the company down as it claws for market share in the highly competitive console market. In May, the Xbox 360 ranked No. 2 in unit sales behind Nintendo’s Wii, but still beat out Sony’s PlayStation 3, according to data from NPD Group.

“We don’t think we’ve been getting the job done,” said Robbie Bach, president of Microsoft”s entertainment and devices division (which also makes the Zune digital music player).

I’d say investing $1 billion to repair one of your division’s core products constitutes much more than “not getting the job done.” In truth, it only adds fuel to an incredibly long misfire at the Microsoft camp, according to statistics like these:

Matt Rosoff, an analyst at the independent research group Directions on Microsoft, estimates that Microsoft’s entertainment and devices division has lost more than $6 billion since 2002. Microsoft has written down larger amounts in the past — more than $10 billion in the late 1990s related to investments in telecommunications companies, and more than $5 billion related to antitrust issues — but a $1 billion write-down for one division in one quarter is significant. “It suggests the problem is pretty widespread,” Rosoff said.

Where should big companies draw the line when it comes to making a profit or retaining market share?

Sources

USA Today

Reuters 1, 2

AP