Game Over for Father Of The PlayStation

Ken Kutaragi, the father of the PlayStation, stepped down as head of Sony Computer Entertainment on Thursday, falling victim to the disappointing sales of the PlayStation 3 and rising tensions between the executive and Sony Corp.’s top brass.

In an upbeat statement, the company announced that Kutaragi would stay on as an honorary chairman and senior technology adviser, while Kazuo Hirai, the current president of the key unit, would take his place as CEO and chairman.

“I am happy to graduate from Sony Computer Entertainment Inc.” said Kutaragi. “It has been an exciting experience to change the world of computer entertainment by marrying cutting-edge technologies with creative minds from all over the world. I’m looking forward to building on this vision in my next endeavors.”

Sony Corp.’s CEO, Howard Stringer, called Kutaragi a “rare combination of a powerful visionary and entrepreneur in one figure.”

But behind the bright harmony of the press release, there was reportedly a protracted tug-of-war between the high-profile executives.

Many believe that Kutaragi is another casualty in Stringer’s campaign to transform Sony (nyse: SNE - news - people ) into a leaner, more profitable and software-centric company.

The clash between Kutaragi and Stringer, which is said to have simmered since Stringer became CEO in June 2005, was typical of the collision between the old style of business at Sony and the new ethos Stringer is trying to foster.

In one corner stood Kutaragi, a 32-year Sony veteran who epitomized the independent and innovative spirit that was key to the company’s rise. As the father of three generations of the PlayStation console and the handheld version, he also represented the company’s longtime hardware and engineering focus.

In the other corner was Stringer, the new CEO eager to reduce each business line’s independence and bring about integration. Since his arrival, Stringer has “made it clear that software — and inter-unit cooperation — is a priority for his historically siloed and hardware-centric company,” Prudential Equity Group said in a March research note.

The ideological chasm that separated Kutaragi and Stringer may have been immaterial, if it wasn’t for Sony’s major financial setbacks, which likely pressured Stringer to act.

The PS3, with its high overhead costs, production shortage problems and low penetration rate, has stumbled against the attractively priced Nintendo (other-otc: NTDOY - news - people ) Wii and Microsoft (nasdaq: MSFT - news - people ) Xbox 360, falling to No. 3 in sales. While Sony sold 1.8 million consoles through the end of 2006, Nintendo sold almost double that: 3.2 million units.

The dissapointing console is expected to drag on Sony’s earnings for the remainder of the year: “it will be difficult for the Games division to achieve break-even status in fiscal 2007, as our analysis indicates that Sony is currently losing close to $300 per PlayStation 3 unit sold,” John McPeake, a Prudential Equity Group analyst, said in a research note last month.

In a harbinger of things to come, Stringer removed Kutaragi from the post of president of Sony Computer Entertainment last November, effectively cutting him off from day-to-day operations. (See: " Sony Shuffles Gaming Team")

Kutaragi, known for his outspoken and independent management style, (See: " Exec Slams Sony Mangement for Failure to Exploit Content") may have been perceived as a hurdle in reining in the embattled games division.

The lack of communication between the computer entertainment arm and the rest of Sony made Kutaragi a volatile element. According to an interview with Stringer in the Wall Street Journal, Kutaragi surprised his boss by exceeding production budgets. In one particularly illustrative moment, Kutaragi startled management with an impromptu 20% price cut for the Japanese 20GB PlayStation 3 model. “It wasn’t financially one of my best moments,” Stringer told the paper. “The budget implications were self evident. I agreed because I wanted the launch to be successful.”

Wrangles aside, Prudential analyst John McPeake said Kutaragi’s departure and Hirai’s ascension is a logical and positive step for the beleaguered company. “This management change is expected," he said in an interview on Thursday. "Kutaragi was almost 60 years old and Kazuo Hirai has a good relationship with the game industry and game publishers."