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On its 20th anniversary, Sony soaks up its PlayStation successes

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Shuhei Yoshida, president of Sony Computer Entertainment Worldwide Studios.Photograph by Robyn Beck— AFP/Getty Images

Sony Computer Entertainment, the Japanese tech company’s video game-producing subsidiary, is in the midst of its 20th anniversary celebrations. This weekend, it will hold a PlayStation Experience event in Las Vegas to commemorate its successes.

In 1994, the company—already dominant in many consumer electronics categories—decided to take market leaders Sega and Nintendo head on. At the time, the close-knit game industry didn’t consider Sony (SNE) a legitimate rival. Then it launched the PlayStation. The gaming console, which introduced 3-D graphics to the industry, went on to sell more than 102 million units over more than a decade, an unusually long span for the industry. Its successor, the PlayStation 2, would become the most successful console in history with more than 155 million units sold.

Today, the company sells a number of PlayStation products, including the PS4 and the PS Vita. Its competition with Microsoft (which makes the Xbox) and Nintendo (which makes the Wii U) wages on as the industry has as grown to be worth an estimated $74 billion worldwide.

“PS2 benefited from a bad design from Nintendo with the toy-like GameCube and from uneven execution from Microsoft with Xbox,” says Michael Pachter, a video game analyst at Wedbush Securities. “PS4 is seeing similar behavior—but Microsoft is a lot smarter this time around and will recover with Xbox One.”

Sony and Microsoft (MSFT) in particular have been strong competitors: their PlayStation 3 and Xbox 360 consoles, respectively, each sold more than 80 million units. According to Shuhei Yoshida, president of Sony Computer Entertainment’s Worldwide Studios division, stiff competition over the years—with Sega, Nintendo, and now Microsoft—was critical to pushing Sony to excel in the market.

“Microsoft and Sega were the first companies to introduce online broadband capabilities to video games,” Yoshida said. “During the PS2 days, we were more conservative in introducing Internet capabilities because we wanted to make sure that the people who didn’t have broadband capability could still enjoy games. But Microsoft showed what could be done by focusing on broadband. That really pushed the competition. Everyone in the industry benefits by three companies competing and investing in that area.”

Yoshida is heavily involved in Morpheus, a virtual reality project for Sony’s PlayStation 4 console. He says that same competitive element is what’s helping return VR to the forefront of consumer awareness.

“If there wasn’t both Morpheus and Oculus Rift, and Facebook hadn’t invested in Oculus VR, I don’t believe we would have seen this level of coverage and excitement from people not really close to the industry,” Yoshida says. “Competition is always great and we really respect Nintendo, Sega, and Microsoft. We are very lucky to have great companies doing great things.”

Yoshida has plenty to be happy about. Through the end of September, his company sold some 10.5 million PlayStation 4 consoles while Microsoft sold about 7.4 million Xbox One units. In an effort to catch up, Microsoft recently dropped the price of its console by $50 and added new hardware-software bundles, helping the company capture more than 50% of video game sales on Black Friday. Still, Sony leads.

Microsoft may consider stealing from Sony’s own playbook, Pachter says. A year ago, Microsoft priced its Xbox One at $499 and Sony undercut its rival by $100. Microsoft introduced onerous digital rights management software; Sony made a huge deal of how its system had almost none. Pachter forecasts that Sony will ultimately sell 120 million to 130 million PS4s because it has preserved an underdog mentality.

“Microsoft has corrected most of the missteps, but they left a bad taste in many consumers’ mouths,” Pachter says. “Sony has done a great job signing up nonexclusive content like Destiny and Grand Theft Auto V for next-gen [consoles] and making them look like they were exclusives. The company has executed almost flawlessly.”

Yoshida says part of that can be attributed to Sony’s decision to rebuild its gaming system to be developer-friendly. Sony Computer Entertainment scrapped years of development code and technology to, in essence, start over with PlayStation 4.

“PS4, as a console, was a clearly intended departure from our past consoles up to the PS3,” he says. “PS1, PS2, and PS3 were amazing. [Former SCE CEO] Ken Kutaragi and his team really pushed the 3-D graphics technology and tried to introduce the latest hardware technology into the hands of game developers. But lots of game programmers struggled to get their heads around it. They had to spend lots of time learning the hardware, rather than making great games. We decided that the most important thing was to start over and create a more PC-based architecture. We clearly saw the core value of the platform gradually shifting from hardware to software and services.”

The company’s latest bid is PlayStation Now, a cloud-based streaming service build on technology from Gaikai, a U.S. software company that Sony purchased in 2012 for $380 million. The service is offered across Sony’s consumer electronics—from Bravia televisions to its PlayStation consoles—and aims to further popularize video gaming as a mainstream activity.

“We see an enormous challenge to appeal to those consumers who are not necessarily core gamers and may not be willing to spend hundreds of dollars for hardware that basically plays games,” Yoshida says. “It’s one of the things we’re discussing among management inside SCE. PlayStation Now is an interesting endeavor because people don’t have to spend a couple hundred dollars to start playing a game. We are trying to re-define PlayStation as a more service-based platform, first on non-PlayStation hardware like TVs and eventually mobile.”

There’s one catch, though: PlayStation Now is largely built on games from its PlayStation 3 console, which were built for a more hardcore audience. Yoshida concedes he’s not certain if such games will attract the casual gamers his company seeks.

“There are definitely games that are big hits like Uncharted or God of War that could attract these casual audiences—those people who might have played games a long time ago on Super NES or PlayStation that we might be able to bring back and unlock the hidden gamer inside them,” Yoshida said. “We will see.”

The company is also moving more aggressively to leverage the base of gaming customers it already has. Its PlayStation Vue service, which it is testing this year in New York, among other places, allows gamers to record and watch programs from major media companies such as CBS, Fox, NBCUniversal, Discovery, and Viacom. It’s expected to officially launch in 2015 with 75 channels.

“Playstation Vue is something a bit more aggressive compared to the other entertainment features that we used to have on PS3,” Yoshida says. “People were probably not expecting us to introduce this TV service. You can watch TV shows that you like and not have to deal with cable companies and additional hardware—just the PS4.”

And what of Morpheus? Yoshida says the project—which has no release date or price—has already attracted attention from Hollywood, which sees the technology as a new kind of immersive experience that can leverage money already spent on computer-generated imagery.

“Movie directors are really keen to be the leaders of creating stories using virtual reality tech,” Yoshida says. “That’s a fantastic prospect—instead of watching a story, you can be a part of a story. It’s experiencing a story almost like an actor.”

But there’s plenty of work to do to get there. For now, the company’s just happy to celebrate its 20th birthday. “When we launched, games were still considered like a toy and mostly for kids,” Yoshida says. “We really wanted to make games a part of people’s life.” More than a hundred million people would say they’ve succeeded.