Though Sony has kept details of the PlayStation 2's development secret, work on the console began around the time that the original PlayStation was released (in late 1994). Insiders stated that it was developed in the U.S. West Coast by former members of Argonaut Software. By 1997 word had leaked to the press that the console would have backwards compatibility with the original PlayStation, a built-in DVD player, and Internet connectivity. Sony announced the PlayStation 2 (PS2) on March 1, 1999. The video game console was positioned as a competitor to Sega's Dreamcast, the first sixth-generation console to be released, although ultimately the main rivals of the PS2 were Nintendo's GameCube and Microsoft's Xbox. The Dreamcast itself launched very successfully in North America later that year, selling over 500,000 units within two weeks.
Soon after the Dreamcast's North American launch, Sony unveiled the PlayStation 2 at the Tokyo Game Show on September 20, 1999. Sony showed fully playable demos of upcoming PlayStation 2 games including Gran Turismo 2000 (later released as Gran Turismo 3: A-Spec) and Tekken Tag Tournament – which showed the console's graphic abilities and power.
The PS2 was launched in March 2000 in Japan, October in North America, and November in Europe. Sales of the console, games and accessories pulled in $250 million on the first day, beating the $97 million made on the first day of the Dreamcast. Directly after its release, it was difficult to find PS2 units on retailer shelves due to manufacturing delays. Another option was purchasing the console online through auction websites such as eBay, where people paid over a thousand dollars for the console. The PS2 initially sold well partly on the basis of the strength of the PlayStation brand and the console's backward compatibility, selling over 980,000 units in Japan by March 5, 2000, one day after launch. This allowed the PS2 to tap the large install base established by the PlayStation – another major selling point over the competition. Later, Sony added new development kits for game developers and more PS2 units for consumers. The PS2's built-in functionality also expanded its audience beyond the gamer, as its debut pricing was the same or less than a standalone DVD player. This made the console a low cost entry into the home theater market.
The success of the PS2 at the end of 2000 caused Sega problems both financially and competitively, and Sega announced the discontinuation of the Dreamcast in March 2001, just 18 months after its successful launch. The PS2 remained as the only active sixth generation console for over 6 months, before it would face competition from newer rivals; Nintendo's GameCube and Microsoft's Xbox, which were then released. Many analysts predicted a close three-way matchup among the three consoles; the Xbox having the most powerful hardware, while the GameCube was the least expensive console, and Nintendo changed its policy to encourage third-party developers. While the PlayStation 2 theoretically had the weakest specification of the three, it had a head start due to its installed base plus strong developer commitment, as well as a built-in DVD player (the Xbox required an adapter, while the GameCube lacked support entirely). While the PlayStation 2's initial games lineup was considered mediocre, this changed during the 2001 holiday season with the release of several blockbuster games that maintained the PS2's sales momentum and held off its newer rivals. Sony also countered the Xbox by temporarily securing PlayStation 2 exclusives for highly anticipated games such as the Grand Theft Auto series and Metal Gear Solid 2: Sons of Liberty.
Sony cut the price of the console in May 2002 from US$299 to $199 in North America, making it the same price as the GameCube and $100 less than the Xbox. It also planned to cut the price in Japan around that time. It cut the price twice in Japan in 2003. In 2006, Sony cut the cost of the console in anticipation of the release of the PlayStation 3.
Sony, unlike Sega with its Dreamcast, originally placed little emphasis on online gaming during its first few years, although that changed upon the launch of the online-capable Xbox. Coinciding with the release of Xbox Live, Sony released the PlayStation Network Adapter in late 2002, with several online first–party titles released alongside it, such as SOCOM: U.S. Navy SEALs to demonstrate its active support for Internet play. Sony also advertised heavily, and its online model had the support of Electronic Arts (EA); EA did not offer online Xbox titles until 2004. Although Sony and Nintendo both started out late, and although both followed a decentralized model of online gaming where the responsibility is up to the developer to provide the servers, Sony's moves made online gaming a major selling point of the PS2.
In September 2004, in time for the launch of Grand Theft Auto: San Andreas, Sony revealed a newer, slimmer PS2. In preparation for the launch of the new models (SCPH-700xx-9000x), Sony stopped making the older models (SCPH-3000x-500xx) to let the distribution channel empty its stock of the units. After an apparent manufacturing issue – Sony reportedly underestimated demand – caused some initial slowdown in producing the new unit caused in part by shortages between the time the old units were cleared out and the new units were ready. The issue was compounded in Britain when a Russian oil tanker became stuck in the Suez Canal, blocking a ship from China carrying PS2s bound for the UK. During one week in November, British sales totalled 6,000 units – compared to 70,000 units a few weeks prior. There were shortages in more than 1,700 stores in North America on the day before Christmas.