Sony plunged $10 billion after its PS5 sales cut. But a bigger issue is its near decade low games margin

Yikes!! ;o

So how long before Phony goes 3rd party?

Or will they completely exit the gaming biz soon and who would you like to see replace them?

Thoughts SW?

lolol :P

The Story.

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Sony plunged $10 billion after its PS5 sales cut. But a bigger issue is its near decade low games margin

• Around $10 billion of value was wiped off Sony's stock this week after it cut its sales forecast for its flagship PlayStation 5 console for the fiscal year.
• But analysts, who already thought Sony's PS5 target was too lofty, told CNBC a bigger issue for the Japanese tech giant is the company's declining margins in its key gaming business.
• Analysts are questioning why Sony's gaming margin is not higher despite higher-margin products like digital sales of games and its PS Plus subscription service.

Around $10 billion of value was wiped off Sony's stock last week, after the Japanese tech giant cut its sales forecast for its flagship PlayStation 5 console for the fiscal year.

Analysts, who already thought Sony's PS5 target was too lofty, told CNBC a bigger issue for the company are its declining margins in its key gaming business.

Sony this week announced it now expects to sell 21 million units of the PS5 in the fiscal year ending in March, compared with a previous forecast of 25 million units.

The company's shares fell after the announcement, with around $10 billion of value wiped off the stock since the forecast cut, according to a CNBC calculation using FactSet data.

But analysts were watching another key metric — the operating margin in the gaming business — which came in just under 6% for the December quarter, according to a CNBC calculation. By contrast, Sony's operating margin was more than 9% in the December quarter of 2022.

"The shipment forecast cut for PS5 ... is not what is disappointing ... What is disappointing is the low level" of operating margin, Atul Goyal, equity analyst at Jefferies, said in a note to clients on Wednesday.

He added that prior to the January-to-March quarter of 2022, margins at the gaming unit were around 12% to 13% in the previous four years.

The latest quarter's single-digit margin for Sony is present "despite various tailwinds that should have driven up the margins towards 20%," Goyal said, adding that the situation is "extremely disappointing."

These tailwinds include sales of its first-party games, which are increasingly in the form of digital downloads, in addition to its high-margin PS Plus subscription service, which commands around 50% margin, according to Goyal.

"Their rev (revenue) on digital sales, add-on-content, digital-downloads are at all time highs… And yet their margins are at decade-lows. This is just not acceptable," Goyal said in an email to CNBC.

Goyal qualified that the current margin for Sony's gaming business is "almost near decade lows."

The analyst questioned how, with all of these higher-margin products, the gaming division's operating margin has remained so depressed.

Serkan Toto, CEO and founder of Tokyo-based games consultancy Kantan Games, said he believed hardware production costs have actually come down, since the PlayStation 5 is more than three years old and Sony would have better economies of scale by this time.

Toto said that part of the reason why margins are being squeezed more recently is that software production costs have been rising.

"Spiderman 2," which came out last year and is produced by Sony-owned Insomniac Games, cost around $300 million to make, according to gaming website Kotaku, citing an internal presentation that was leaked after a ransomware group hacked the company.

"So these budgets seemed to have a significant impact on their gaming margin over time," Toto said.

Sony and Insomniac Group did not immediately respond to CNBC's requests for comment.

I mean, I knew things were dire for PS, but not THIS dire. No games, no profit, and now this :(

We all know SONY is for the gamers. This makes sense and shows another reason why SONY and PS5 is the current gen leader.

Xbox spent $80 billion to get the most popular games, they're releasing their games now on Playstation and Switch to make up for low sales, and now Phil is whining that they don't have Helldivers 2 🤣

The bovine brigade is on suicide watch. lol :P

i wonder if we'll see the same level of "concern" from are usual suspects.. 😏

Damn. There’s got to be a mountain of concern out there somewhere for this right? 🤔

Sony needs to go third party or else they run the risk of exiting the gaming business altogether. 😱

If Sony is in trouble then where does that leave Microsoft and Nintendo.

Sony has been busy with third party releases like Helldivers 2, Foamstars, FF7 Rebirth, Rise of the Ronin, Stellar Blade...they just need to hurry up and show off their first party releases that are coming in 2025 and beyond already.

Development costs are significantly lower for Nintendo’s tent pole titles compared to Sony. They also have published games that have sold in some cases 2-3 times higher than the best selling PlayStation 4 and 5 games

Not shocked about this. Sony is not the only company in the video game industry dealing with this issue. The PS5 selling even 100 million isn’t as big of a deal compared to the past because most people are playing F2P games, the annual sports titles and in some cases big budget AAA exclusives on their consoles. So software sales may be decent but not amazing as a result because most people are only playing certain types of games every year. Companies as a result are going to take less risks because the most profitable games in the end are the big budget AAA game and F2P games. At the same development costs of the latter are starting to balloon out of control so companies like Sony are going to have to figure out something to cap or decrease the development costs of these games.

Comment 4, "bu buh but Xbox"🤭

Never known a console maker develop one game in two years. Ever. No wonder they’re in trouble.

You know that this plunge doesn't matter because...😎

I'm surprised a cow didn't post this....Ahh its not Xbox

300 million to produce Spiderman 2!? I thought 300 million would be more the budget for GTA6 (well I was thinking more 500 million). How!? What!? Where!? .....WHAT!? That can't be right.

Why are Sony and MS even suggesting anything about next gen hardware? They can't afford to drive current gen hardware. 3rd parties can't afford it either except R*.

No that can't be right. If the cost of that was 300 million then the AAA sector is essentially already dead. It's a zombie. That's bonkers. Certifiably bonkers. I'm not having a go at the game here...i'm sure it's a fine game. But 300 Million bucks!?

Ohh look! I was right AGAIN!

Moving games to PC and focusing on live service will destroy their brand. It seems like they may double down on that strategy and it will only get worse from here. They invested hundreds of millions in canceled projects by forcing devs to make shit they didn't want to and here we are.

Cutscenes are expensive. Maybe PlayStation should start making video games again…

Sony is a stupid company. Can't wait for them to go full third party like Sega.

Xbox doesnt mean much for MS overall results, Nintendo makes killer profits

Business economics disagrees with you.

Sony investing in PC will only improve their margins. You argue that it will destroy their brand, but that only applies to fanboys who are accustomed to using content as a weapon. They are a business, a business that has had the luxury of being the market leader and has poured hundreds of millions into EACH first party title. That model is unsustainable.

Live service? I actually agree with you there. Sony has little to no experience with live service. If there was 1 thing that should be outsourced or funded third party.........its definitely these games. But, again, they are the market leader so they tried to develop 12 games internally because they thought they were untouchable.

Sony's problem is what I've said for years (going back to PS4): They are producing high budget games that score well, but have razor thin margins. Its not about just breaking even or making a small profit. The example I give clients is this: Do you want to work 3yrs on a project, spend hours and energy and break even or make a small profit? If you invest 100m and make 110m back........was the 3yrs worth it? The answer is no. Sony invests 200+ million into every game not including marketing. They need to recoup that somehow right?

Sony fans have been trained to celebrate the win over the competition, but not to consider the cost. I get it, that's not important to the consumer, but it is a concern for their ability to continue meeting the high mark of AAA releases. Now they are investing in 3rd party titles, which offer even slimmer margins because you don't own the IP or developer so revenue is split even further. They look good on paper but wont help the books much.

Id argue that Sony's move to only AAA games years ago has been more harmful to their business than the investments in Live Service. They chose to ignore warnings from analysts because they were market leaders and thought they would be fine

Mismanagement.

I wonder how much of this is compared to COVID times.

We saw huge increases in game and hobby and other recreational activities and I'm wondering if they set their metric artificially high, and now that we are back to normal and all the people that dabbled with video games for a couple years and dropped them now are still being counted on as potential customers (when they aren't).

As a PC gamer, I just don't see any reason to get an xbox or ps these days.

@Heil68: Switch is the current gen leader, does lying to yourself make you feel better lol.

Sony is fucked. They can't compete with MS and their acquisitions any longer. They don't earn in the mobile arena like MS, they don't earn anywhere near the amount MS does in PC gaming. Again, Sony is fucked.

Noticed the price cuts over the weekend I thought ps5 was selling well.

So, why not lower the costs?? Do what Nintendo does, use last gen tech, and simplify things.

So with SONY being the current gen leader, do you think Nintendo will conceded and not make a Switch 2?

No it really doesn't.

Investing in PC will ultimately destroy both their margins and their revenue. The vast majority of Sony's software profits are not from first party games they are from third party software. Sony makes a 30% cut on every third party game sold on their platform. The vast majority of people that own PS5's use that as their primary platform and many games actually sell best on Playstation meaning Sony is making more money then other platforms off that third party software. That only matters if Playstation continues to be a primary platform for gamers. The move to PC will eliminate that and you are severely underestimating the amount of people that will leave the Playstation behind if they move all their games to PC. You are already seeing the effect of people moving to PC with them failing to meet sales expectations. Once people move to PC they can kiss that 30% cut goodbye because once gamers move to PC Steam will be their platform of choice.

Their margins aren't just shrinking because their games are expensive they are shrinking because the third party software isn't selling as well on their platform as people transition to PC. They will go from Market leader to being forced to launch a storefront on PC where they will be a distant 4th place at best.

Exclusives aren't the problem if they sell the way they are now. Spiderman 2 has sold 10 million in 4 months it will blow that 300 million out of the water. But the beauty of exclusives is it brings people to the platform where they will continue to invest in the ecosystem. Buy why would anyone do that if they know its going to be available somewhere else? Selling an extra 1 to 3 million copies of a game isn't worth losing millions of people off your platform every year.

They chose to invest billions into a live service bubble that's about to burst and the PC isn't going to save them. Their best bet is to keep 80% of their games single player exclusives and the other 20% multiplatform live service titles. The only internal studio that should work on live service is Bungie and I would outsource everything else much like they did with Helldivers 2. Unfortunately they have invested billions into things that are guaranteed to fail including two cancelled projects in " The Last of Us Factions" and an untitled " FPS game from Deviation games". They also bought " Bungie " which was a waste of 3.5 billion dollars. Then they purchased a brand new studio by a bunch of Ex Ubisoft devs which looks it has flop written all over it.

plaaystation is doomed..

@silentchief: do you honestly beleive the solution for Sony is to continue pumping $300+ million into "one and done" singleplayer games and then limiting them to a single plastic box (with a smaller install base than the previous plastic box)?..

if you truly believe that, i have some lake front property to sell you..

back in the real world, there's tons of gamers on PC they can target in order to recoup those costs,, yet, in your fanboy mind, reaching more costomers with their content is a "bad thing"... 🙄

That's what happens when you cancel more games than you release... nobody wants more remasters. Take Helldivers 2 as a blueprint moving forward and trash the vr. Take around half the budget to release AA games and use that money to prop up the AAA games to decrease dev times and supplement the industry. That is what made the PS2 so successful. Unsustainable multi hundred million games that take 8 years to produce isn't going to cut it if you don't have games releasing inbetween.

It has a smaller userbase because people are already leaving the platform as I said they would. They haven't announced a AAA singleplayer exclusive in nearly 3 years and are releasing games on PC. Selling an extra 1 to 3 million copies of a game as you bleed millions from your ecosystem isn't worth it and your only defense Is " CoNSoLeS aRe a diFfereNt MaRket".

Yea, keep saying that as they bleed users and I told you EXACTLY what would happen.

With no exclusives announced and their games coming to PC they can kiss that 30% cut they get from third party revenue goodbye as "Steam" will cannibalize it.

The Microsoft strategy will tank them because unlike MS they can't buy up every 3rd party publisher in the industry and make the games available on their platform not to mention they have no relevance in the PC market so people will never support a " Playstation " storefront.

I think everyone is waiting for Jim Ryan to leave Sony next month before Sony themselves can say what they'll do after he leaves the company. I'm hoping someone does a hell of a better job cause Sony needs so announce more games.

But truth be told, Sony needs to start investing more on the PC side by offering more games on the exclusives if they truly are aiming to make more money, than PC is the way to go by releasing exclusives day one side by side with PS5.

Yeah true. Nintendo games don't require much story writing, mocap, voice work, etc. their games are produced much cheaper. Nintendo is probably one of the most profitable publishers in modern times based on what it costs them to develop versus what the games actually sell.

People were heading to PC prior to Sony starting to put more titles there, and a certain percentage of people will continue to do that, a lot of that is the convergence of the PC/console experience and exclusives are immaterial to that trend.

"People will never support a PS storefront" based on what? if Sony had a proper storefront that was essentially a shared library IE you buy a game through PS store that's it you've got a license to play that game now on PS and PC you don't think people would be glad of the convenience of being able to play say in a living room type setup on one machine and at a home office type setup on a different machine utilising the same library?

Fundamentally in an increasingly digital world are exclusive IP's helped or hampered by exclusivity?

Less than 6% margin...What the actual f**k! How the hell is it even possible, are the using bills to wipe their a$$ or some strange financial shenanigans for some reason?

AT this point in time, PS and Xbox are better off putting their money in a bank than waste it on their platforms.

Yes but they were Xbox users and new gamers. Playstation was growing their userbase until they made this move. The PS4 outsold the PS3 by 31 million units. Their strategy was working and they were growing their ecosystem. The amount of people that take advantage of both a gaming PC and a PS/Xbox is extremely limited and the majority that do , did it because of the exclusives. They will gladly drop the console if those games come to PC.

Bases on data from PC gamers. Despite Microsofts and Epic's attempt to challenge " Steam" neither were able to put a dent in their marketshare and Sony isn't in a better position than either of them. You are talking about an extremely limited demographic probably less then 20% of the market that would use that.

You are asking that question as if Sony was just a " game publisher ". They are not. They are in charge of one of the most Successful gaming platforms in the world.

This will destroy their brand. See my other post. You are a perfect example. When is the last time you bought a 3rd party game on console and if Sony releases all exclusives on PC will you buy their next console?

If your answer is never and no that's exactly why they shouldn't do it.

@Heil68: I guess lying to yourself does help you to cope 🤣

Pro tip, go out and buy a second PS5 in the hope they can surpass Nintendo's Switch and win this gen awwww yeahhhhh 👍

Damn, and last week the cows were mooing about how Xbox was going 3rd party. This week, all the cows are silent, and Benjamin butt hurt is nowhere to be found. Where did daredevils go 🤣.

Not that I think there's anything wrong with going 3rd party. I think Xbox should release way more Xbox games on Playstation, especially 1 or 2 years after releasing on Xbox. That just means that MS has the funding and the means to continue making quality games, then I'm all for it. These games are expensive af, and the money needs to come from somewhere.

We still see gamers aren't interested in gaming PC, so therefore Sony's consoles will still be around for that reason and I don't see doing so will hurt Sony's brand.

Sony fannies shooketh over the idea of Sony becoming third party via PC.

Sony's only going to invest more in PC moving forward, much to the ire of hardcore PS fanboys. Sorry, but the console wars that everyone has gotten comfortable with is dead. Times have changed, Sony needs more money from game sales, and PC ports are the current answer. Now is the time for acceptance of the inevitable.

https://www.gamespot.com/articles/sony-expects-to-earn-450-million-from-pc-games-in-next-10-months/1100-6514491/#:~:text=For%20the%20current%20fiscal%20year,and%20%2435%20million%20before%20that.

Pfft. Far as I'm concerned, Sony already won the console war against Xbox ages ago. That was great fun. If PC has to be the new frontier, so be it. Profits have to be made now and Sony's already kicking ass with Helldivers II.

That is some weak damage control.😂

dude, you can't be serious..

the PS5 has a smaller install base than the PS4 because the PS5 has been on store shelves for a much shorter amount of time..

"next-gen" games released only for the PS5 will inherently have a smaller install base than the previous gen (yet the costs of making games is steadily increasing).. by the time the PS5 has an install base comparable to the PS4, the PS6 will be ready to launch and the cycle repeats..

this is basic math.. take off the fanboy goggles..

making AAA singleplayer games (with no live service MTX) that cost over $300 million to make and then limiting the sales to a relatively small install base of PS5 owners is simply not sustainable.. Sony is making the proper change in strategy before things get even worse..

My thoughts? People always freak out when stock prices drop but you don't hear a peep when they rise. Remember when Sony lost $20 billion in valuation when the Activision merger was announced?

Keep fighting that war you lost ages ago. It doesn't exist anymore, Pedro. 🤣🤣🤣 All those accounts you made here for fighting on behalf of Xbox didn't really amount to anything

I'm talking about during the same time frame obviously. The PS5 is no longer set to surpass the PS4 as was once predicted.

That doesn't matter once your install base becomes big enough. To give you an idea " The last of Us 2" sold 10 million copes in 2 years on an install base of 100 million. Spiderman 2 sold 10 million copies in 4 months on an Install base of 50 million.

Also let me explain this to you so you understand.

Sony does not make most it's software revenue off first party content. I'm not sure how many times you need to hear that. Once their platform becomes irrelevant they will lose that 30% cut they make on all third party software.

It's not worth selling more 1st party titles at the expense of your entire platform.