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PlayStation punctured: Sony's games business deflates again

PlayStation punctured: Sony's games business deflates again

Fri 03 Aug 2012 6:40am GMT / 2:40am EDT / 11:40pm PDT
BusinessPublishing

As Vita posts another awful quarter and PlayStation slips into loss, how does the games business hang on?

Sony Computer Entertainment

Sony Computer Entertainment is a Japanese videogame company specialising in a variety of areas in the...

playstation.com

Rumours have abounded, in recent weeks, of an imminent redesign for the PS3 - a third physical iteration of the hardware which would boast an even slimmer profile and an even lower price point. At this stage its existence is such a poorly-kept secret (or such a spectacularly executed hoax) that it seems a complete certainty that it'll appear at Gamescom later this month.

That certainty, by the way, is an illustration of the importance of keeping secrets in this business. Sony's desire would have been to unveil a new super-slim PS3 model to a surprised audience, creating a buzz around the platform which would be conveyed to consumers in subsequent media reports - Sony blows away Gamescom with new PS3 redesign and price point! Now, we've all seen the machine laid bare all over the Internet prior to the announcement, and there's been endless speculation over how low the price can go.

"Vita, PS3 and PSP this year don't match the sales of PSP and PS3 alone last year, and that's a miserable situation to be in"

If Sony doesn't reveal it at Gamescom, it'll be a huge disappointment; if it does reveal it, it'll earn little more than an expansive shrug, since we've already seen it all. A failure of secrecy has transformed a potentially hugely positive announcement into one which has little upside, in media terms, but a huge potential downside if it doesn't happen or doesn't match expectations. Now, secrecy is a tough thing to maintain in a high-profile consumer electronics or entertainment business - even the notoriously secretive Apple has had pretty convincing pictures of the upcoming new iPhone splashed all over the web - but Sony is particularly bad at it. As a journalist, it may seem churlish to complain about a company failing to plug its leaks, but for Sony's own sake, learning to keep its lips sealed and its prototypes in a locked cupboard would do no harm at all.

It's not just from a media perspective that Sony needs new hardware at Gamescom, though. In fact, even if there hadn't been any leaks, we'd all be looking to Gamescom for something pretty dramatic - because after the shockingly awful quarter the PlayStation business just had, Sony needs to show us that it's still in the game.

In the three months to June 30th, Sony's PlayStation business posted an operating loss - 3.5 billion, or 28 million - reversing the fortunes of the same quarter last year, in which it posted a similarly sized operating profit of 4.1 billion (33.5 million). That's a perturbing development for a division which has generally been seen as a bright spot in Sony's gloomy catalogue of ailing businesses - but it's less worrying, in terms of the overall picture, than the decline in revenue which created that operating loss. Compared with the same quarter last year (in which, let's not forget, PlayStation Vita had yet to hit the shelves, so there should theoretically have been depressed demand as consumers waited for a new product), revenue from PlayStation products was down 14.5 per cent. Granted, the still strengthening Yen hasn't helped that figure - in real terms, once you account for currency fluctuations, the decline in sales is more like 10 per cent.

That's still rather awful. The June quarter isn't exactly peak season, of course, but year to year comparisons are reasonable to make, and losing 10 per cent of your sales in a single year is a painful thing to do. It's even more painful when you consider that the year in question saw the launch of a successor to your actually rather successful handheld console. Sony somewhat optimistically notes that sales of Vita have made up for some of the revenue lost through declining PSP and PS3 sales; the reality is that Vita, PS3 and PSP this year don't match the sales of PSP and PS3 alone last year, and that's a miserable situation to be in.

"Despite Sony's attempt to claim that the Vita's sales are making up for falling sales elsewhere, the absolute root of the problem clearly lies with the firm's newest launch"

There are a few factors to be borne in mind before we all pile in to criticise Sony's performance. Firstly, although the company itself posits the 10 per cent figure as a constant currency estimate for its declining sales, such figures can't reflect the real impact of currency fluctuations on the PlayStation business. What the strong Yen has done, more than anything else, is seriously restrict Sony's ability to manoeuvre in the console space. The Yen's strength is far beyond anything that would have been predicted in Sony's most pessimistic financial models a few years ago - it long ago soared through the valuation at which the Bank of Japan might have been expected to step in decisively, revealing the BoJ to be practically powerless in the face of global financial conditions - meaning that Sony is sailing much, much closer to the wind than it anticipated in terms of profit margins. Planned price cuts or other such alterations to the PlayStation strategy have no doubt been shelved or pushed back as a consequence.

What has been the ultimate impact of that? Impossible to estimate - but worth bearing in mind as we observe Sony's problems. Equally, we should recall a second factor, namely that no one year is really directly comparable to another in the games business. The business operates on a cyclical basis - an annual cycle which favours the December quarter, a five- or six-year console replacement cycle (whose prolonging is arguably causing some of the pain for the console business right now), a 12 to 24 month refresh cycle on major franchises. Those cycles interlock to influence business results, but are also uneven, with peaks and troughs created by quiet periods or major title releases. Sony's decline may in part be a trough rather than a trend - but note the "in part". It might not be as bad as it looks. It's still bad.

As usual, there's some odd mucking around with numbers going on within Sony's financial report. The company has combined sales numbers for the PS3 and the ageing PS2, as well as numbers for the PSP and the Vita, in a cack-handed effort at obfuscating actual sales. Some halfwit in Tokyo presumably thinks this is an ingenious way of distracting people from the reality of the figures; to him, and his bosses, I suggest a crash course in "how the Internet works" may be required, since the fact is that such a blatant attempt to hide your figures only focuses vastly more unwanted attention on them. Even so, it's not hard to see that the figures are bad - the combined sales of Vita and PSP, in particular, don't even add up to the individual sales registered by the PSP in last year's quarter.

Overall, despite Sony's attempt to claim that the Vita's sales are making up for falling sales elsewhere, the absolute root of the problem clearly lies with the firm's newest launch. PS3 has been a solid performer in the past few years; it's late in its lifespan, meaning there is plenty of scope to drive it forward through price cutting or redesigned hardware. Besides, it's got a huge installed base already, meaning that it's well-established as a platform for developers. Vita, however, is an utter flop - a label I didn't want to apply hastily, but can it really be denied at this stage, even by the console's most dedicated fans? It's clear that if Sony wants to reverse that situation, it's going to have to accept deeper losses through a steep price cut, as well as significantly ramping up its software efforts.

Mobile gaming and smartphone advocates will nod sagely and a little triumphantly at that, but the fact is that Vita's failure wasn't written in the stars. The 3DS XL is off to a good start and the 3DS platform overall has now managed almost 20 million sales; the market for dedicated handheld hardware is not dead. Smartphones and tablets have made it harder to sell people handheld devices, but by no means impossible. Vita's problems are not with the basic concept of a dedicated games machine, but with the execution - the pricing, the marketing, the functionality, the software, perhaps even the hardware itself. Some of those things can be fixed, but it'll be painful and expensive to do so. Whether Sony has the wherewithal to do so, and to do so quickly, will be an important pointer for what kind of future this embattled company has in the console business as a whole.

19 Comments

Bruce Everiss
Marketing Consultant

1,716 598 0.3
Kazuo Hirai has been handed a poisoned chalice. Sony was/is dysfunctional in that different divisions were singing off different hymn sheets and did not work together for maximum mutual advantage.

For instance they could have made a very smart TV with lots of game integration a few years ago and they didn't. Their movie business could co-operate closely with their game division on IP and it doesn't. And they really should have been at the vanguard of mobile phone gaming, but an upstart with no previous mass gaming or mobile phone experience called Apple came and showed Sony how it should be done.

Then there were the very expensive technology blind alleys, most notably bluray and cell, both of which were unnecessary diversions of vast amounts of Sony's resources. The PS3 is a pretty silly design, in many ways, for a mass market gaming console. Building a PS2 into every PS3 for backwards compatibility must take the cake.

Obviously Sony have learned very expensive lessons and have shifted over to off the shelf componentry and have even sold off much of their interest in cell. But the cost has been enormous.

The Vita is actually a very nice piece of kit. But as an ownership proposition it makes little sense because technology and the market have left it behind. A Nexus 7, for instance, is such a superior ownership proposition that the Vita has no chance. Ironically Sony could easily have brought us a device like the Nexus 7, they have all the resources to do so. But they didn't.

The ray of sunshine is their purchase of Gaikai. It shows that they have moved on. What remains to be proven is whether they have the mindset to optimise the opportunities this presents for them. Or not.

Posted:A year ago

#1

Peter Dwyer
Games Designer/Developer

458 254 0.6
Actually with the release of the Vita we saw that Sony had in fact learned nothing at all. Oh don't get me wrong, they did take away lessons like not creating a machine based on proprietary internal hardware when off the shelf will do.

They then dropped the ball by having the games media and even the charging units proprietary and the price too high. They based the price on the fact that quality must equal high retail price. Nintendo then came along and showed them why that's not true. Google have now come along and shown then why that's not true too.

It's almost as if they start with great intentions and then panic and fall back on their old ways. At this rate Sony will be owned by Samsung before long.

Posted:A year ago

#2

Klaus Preisinger
Freelance Writing

953 804 0.8
Nintendo is not releasing XL versions because of eyesight problems of the elderly. Tiny screen syndromes is a huge issue of the Vita. The sexy devices these days are large and thin, not small and thick.

Posted:A year ago

#3

Dan Howdle
Head of Content

272 761 2.8
I agree with Bruce. Again.

Posted:A year ago

#4

Terence Gage
Freelance writer

1,288 120 0.1
The question is, how to turn things around for Sony? The Vita's not had a bad line-up so far IMO, but its coming schedule is looking a little bare for decent exclusive software. I really think it needs some more original content like Gravity Rush in order to stand out, and it definitely needs some exclusive Japan-centric software too. It's not like Sony doesn't have a trove of IPs it can plunder - how about Legend of Dragoon or Free Realms or Tourist Trophy on Vita? Demon's Souls Vita, perhaps? That would certainly seriously make me consider getting one. While I do agree with Bruce that handhelds and the Vita in particular have some very serious competition, it's clear from spending time with my Google Nexus that in terms of great games tablets cannot match the experience offered by a dedicated handheld.

I mean, there's obviously still a significant market for dedicated handhelds, so what has the Vita done wrong so far? Aside from what I think has been very weak marketing (but then that's been one of the PS3's biggest problems too IMO), it needs some more original content which will hopefully strike a cord with core or casual gamers. I can't see that many are really going to buy the handheld to buy an Uncharted instalment (as good as that game may be); it's going to be the Gravity Rushes and Soul Survivors who drive the platform forward.

Posted:A year ago

#5

Patrick Frost
QA Project Monitor

383 175 0.5
Can someone explain something to me. For the best part of the last 10 years, the Sony group have generally speaking posted losses right? How has the company managed to survive? Have they got a ridiculous amount of credit or do they have a mammoth warchest of cash from back in the Walkman days?

@ Terence: I think there's a lot more wrong than that. My opinion on the Vita is that it has very little USPs in terms of software library and system design. The console experience in your pocket didn't work for the PSP either. On top of this there are some big barriers to entry, most importantly the price. Surely the 3DS should have illustrated this perfectly?

Posted:A year ago

#6

Nicholas Pantazis
Senior Editor

968 1,162 1.2
@ Patrick They have both a lot of credit and a lot of cash, but both of those are draining very fast, to the point that, at the current rate of loss, I doubt Sony as they are now will exist in 5 years. They'll either be bought out by someone like Samsung or sell off almost all of their company and shrink down to a more focused corporation. They could possibly turn this around, but that's my prediction at their current path.

The thing that I always find both a little hopeful and worrying for Sony at the same time is the comparison to Samsung. Samsung is, for all intents and purposes, the same company as Sony. They make the same products in the same markets and have a similar strategy for expansion. Despite this, Samsung is ALWAYS profitable, and Sony never is, which to me says there's nothing inherently bad about the business strategy or markets Sony plays in, but rather that Sony themselves, every part of their infrastructure, is dysfunctional.

Posted:A year ago

#7

Daniel Hinkles
Management/Design

18 0 0.0
Seems to me like "LEAKS" are the natural order of business. Apple's phone gets leaked every year, it's never stopped it making an impact. Every major piece of hardware that's supposed to be kept top secret gets leaked.

Edited 1 times. Last edit by Daniel Hinkles on 3rd August 2012 4:07pm

Posted:A year ago

#8

Terence Gage
Freelance writer

1,288 120 0.1
Good point about Samsung & Sony, Nicholas - the two companies are very similar, with the exception of Sony Computer Entertainment, which has overall been one of Sony's better money-making divisions in the last 20-odd years.

Maybe some of it is a change in public perception, and Sony's own opinion of themselves. Once it was a strong brand which stood for high-quality products but nowadays there are so many cheaper alternatives which are just as reliable - like Samsung or LG - that maybe Sony need to shift their own focus from making slick, high-end devices to cheaper, perhaps slightly lower-quality products that might actually compete against their cheaper Korean rivals. Certainly in the mobile phone arena Sony have struggled ever since smartphones came to the fore, while Samsung along with HTC (also Korean, I think?) are pretty much the only hardware manufacturers who've remained healthy despite the onset of Apple in the market.

Posted:A year ago

#9

Andrew Goodchild
Studying development

1,199 317 0.3
Even if they shift their focus to cheaper products, can they compete running in Japan, with a South Korean rival? The operating costs are just so much higher.

Posted:A year ago

#10

Nicholas Pantazis
Senior Editor

968 1,162 1.2
@ Andrew They aren't really that much higher. Costs of operating in South Korea are higher than you think (it's a very high-income economy, actually), and both Korean and Japanese companies do all their production in China anyway. The advantages Samsung and LG experience are in management and corporate structure, not location.

Posted:A year ago

#11

Andrew Goodchild
Studying development

1,199 317 0.3
Accepted. I have, working for large corporations, seen some terrible
e waste due to separate departments acting as if they are in bitter competition and need to get one over on each other, and interviews with second party devs indicate this was rife. Like for the original Wipeout, where all Sony artists on the soundtrack wishlist had to be dropped as Sony music was asking SCE more than other record labels. Or Sony UK games struggling with US cert. Or Sony Eriksen not being allowed to use the full PS brand.

Posted:A year ago

#12

Greg Wilcox
Creator, Destroy All Fanboys!

1,993 902 0.5
Had Sony merged all its entertainment divisions years ago, unified its PC and consoles to possibly play PS games back in the last century, come up with a phone that could play mobile versions of some of those games and done a whole lot less cash burning on certain kooky items that make not too much sense, things would be a bit different.

Eh, we'll see what happens soon enough. I don't think they're leaving the games market anytime soon, but I do wish they'd talk to people outside their offices before cooking up a new product. I like my Vita quite a lot, but it does need a jolt of something in the software department (not to mention cheaper games and storage media)...

Posted:A year ago

#13
Before everyone gets too carried away praising Samsung's amazing management and structure, it's also worth bearing in mind the extent to which the South Korean state has supported Samsung - both openly and otherwise - in the past couple of decades. The international success of companies like Samsung is a key (if not always stated) objective of the South Korean state, and such companies are deeply interwoven into the state itself right up to a high level of government. The creation of an environment in which they can undercut or otherwise impair competitors like Sony has been a key business objective of the state for years.

Of course, Japan did exactly the same thing for its car manufacturers, consumer electronics companies and various other industries back in the 70s and 80s, but Sony no longer enjoys that kind of state support. I've heard very senior executives at Sony complain off the record that it doesn't feel like they're competing with Samsung, it feels like they're competing with the entire state of South Korea. What goes around comes around; no doubt Samsung will feel the same about the next state-supported emerging competitor (likely to be from SE Asia, perhaps Thailand or Vietnam) down the line. It is what it is and complaining about fairness is meaningless - but let's not pretend that Samsung, amazing company though it may be, doesn't enjoy various structural advantages in this battle.

Posted:A year ago

#14

Nicholas Pantazis
Senior Editor

968 1,162 1.2
@ Rob Great insight, thanks. I knew that the government gave a lot of support to Samsung, but that's good information. Regardless, Samsung, help and all, has become a very efficient profit machine, which Sony used to be as well, and could potentially be again, but it would take a major shakeup in the organization.

Posted:A year ago

#15
Viewed as a civilisation sim city management game, Sony probably is at the crux whereby the upkeep of existing services, R&D, performance are on par/ at a loss vs profits from consumers and a good look around at various gains made in other tech companies can be had to resurrect itself. The plans to improve, look to be in place, and it just remains to be seen on how to pull it off seamlessly without hiccups

Hardware: off shelf components within a unique Sony frame/architecture
R&D : acquisitions of patents and technology eg gaikai
Manufacture: alliances and pooled resources eg. Nokia
Branding and styling: Sony always had a good strength in iconic development.
Quality: Sony tend to be renown for great quality components and ergonomics. However, the user interface to these devices might be slightly lacking eg vita
Desirability: somehow apple have been able to foster a culture of desirability that keeps reinforcing its brand with each iterative product release, coupled within accessible tiered ownership of iconic products. Sony can retake the initiative of the Walkman legend via the Playstation brand.

As such, accessible desirable tiered ownership is key. Imagine the legion of future customer to be had if all Sony games were 10 cheaper, and a steam like set of sales to be had under a easy to access digital store or intuitive user interface

Because, digital store fronts are the future face of resil business now, and if the consumer cannot figure how to get into the store or browse its back catalog...frustration and lost sales are unfortunate

Edited 1 times. Last edit by Dr. Chee Ming Wong on 4th August 2012 10:26am

Posted:A year ago

#16

Tony Johns

520 12 0.0
this is perhaps the reason why SONY and Microsoft are stuck, they have spent so much on this current generation that they have been afraid of trying to risk so much in making the next gen console that could lead them both into massive losses.

it is sad, but I just don't like how so much emphasis has been on graphics in games when in reality sometimes the Wii has succeeded where the two other consoles had failed.

Still, if the Wii U can succeeed next year in the market, maybe all is not lost in console games.

Posted:A year ago

#17

Curt Sampson
Sofware Developer

564 278 0.5
While the Wii has sometimes succeeded with worse graphics, that doesn't mean that there isn't a market, and possibly a large one, for systems with better graphics. Would "core" gamers have been just as happy if the PS3 and Xbox 360 had graphics at about the same level as the Wii, PS2 or Xbox? Would it have sold as well?

It's indisputable that the Wii had relatively poor graphics and did well. But I would argue that it opened up a new market, rather than doing well with what had been traditional console buyers at the time it was released.

Edited 1 times. Last edit by Curt Sampson on 6th August 2012 12:36am

Posted:A year ago

#18

Nicholas Lovell
Founder

179 120 0.7
One thought: new CEOs often tell all their divisions to announce terrible losses. That enables to clear out old products, write down experiments, bank some "surprise wins" for later. They can then blame all of these on the old management, giving themselves easy comparables for their performance in 12 months time.

It happens pretty well every time a new CEO comes on board. So much so it has its own name: "kitchen sinking". (See the John Riccitiello example at EA:

Posted:A year ago

#19

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