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Sony's entire future now rests on PlayStation

As Kaz Hirai's painful restructuring comes to a close, a new Sony emerges - one whose growth is almost entirely centered on the success of PlayStation

Sony is over the hump. That's the message that the company wanted investors and market watchers to understand from its presentations earlier this week. Though it expressed it in rather more finessed terms, the core of what Sony wanted to say was that the really hard part is over. Four years after Kaz Hirai took over the corporation, the transition - a grinding, grating process that involved thousands of job losses, the sale or shuttering of entire business units and protracted battles with the firm's old guard - is over. The restructuring is done. Now it's time for each business unit to knuckle down and focus on profitability.

It's not all sunshine and rainbows, of course; even as Hirai was essentially declaring "Mission Complete" on Sony's seemingly never-ending restructuring, the company noted that it's expecting sales in its devices division (largely focused on selling Xperia smartphones) to decline this year, and there are concerns over soft demand for products from the imaging department, which provides the camera components for Apple's iPhones among others. Overall, though, Sony is in a healthier condition than it's been in for a long time - and it owes much of that robust health to PlayStation, with the games and network services division's revenue targets rising by enough to make up for any weakness in other divisions.

"PlayStation customers are being treated as the ultimate early adopter market for Sony's new services and products"

When Hirai took over Sony, becoming the first person to complete the leap from running PlayStation to running Sony itself (Ken Kutaragi had long been expected to do so, but dropped the ball badly with PS3 and missed his opportunity as a consequence), it was widely expected that he'd make PlayStation into the core supporting pillar of a restructured Sony. That's precisely what's happened - but even Hirai, surely, couldn't have anticipated the success of the PS4, which has shaved years off the firm's financial recovery and given it an enviable hit platform exactly when it needed one most.

Looking into the detail of this week's announcements, there was little that we didn't already know in terms of actual product, but a lot to be read between the lines in terms of broad strategy. For a start, the extent of PlayStation's role as the company's "pillar" is becoming ever clearer. Aside from its importance in financial terms, Sony clearly sees PS4 as being a launchpad for other devices and services. PlayStation VR is the most obvious of those; it will start its lifespan as an added extra being sold to the PS4's 40 million-odd customer base, and eventually, Sony hopes, will become a driver for additional PS4 sales in its own right. The same virtuous circle effect is hoped for PlayStation Vue, the TV service aimed at PlayStation-owning "cable cutters", which has surpassed 100,000 subscribers and is said to be rapidly growing since its full-scale launch back in March.

Essentially, this means that two major Sony launches - its first major foray into VR and its first major foray into subscriber TV - are being treated as "PlayStation-first" launches. The company is also talking up non-gaming applications for PSVR, which it sees as a major factor from quite early on in the life cycle of the device, and is rolling out PlayStation Vue clients for other platforms - but it's still very notable that PlayStation customers are being treated as the ultimate early adopter market for Sony's new services and products.

"Sony has so much of its corporate strategy riding on PS4, while Microsoft, bluntly, has so little riding on Xbox One"

To some degree, that explains the company's desire to get PS4 Neo onto the market - though I maintain that a cross-department effort to boost sales of 4K TVs is also a key driving force there. In a wider sense, though, Neo is designed to make sure that the platform upon which so much of Sony's future - games, network services, television, VR - is being based doesn't risk all of those initiatives by falling behind the technology curve. Neo is, of course, a far less dramatic upgrade than Microsoft's Scorpio; but that's precisely because Sony has so much of its corporate strategy riding on PS4, while Microsoft, bluntly, has so little riding on Xbox One. Sony needs to keep its installed base happy while encouraging newcomers to buy into the platform in the knowledge that it's reasonably up-to-date and future proof. Microsoft can afford to be rather more experimental and even reckless in its efforts to leapfrog the competition.

Perhaps the most impressive aspect of Sony's manoeuvring thus far is that the company has managed to position the PlayStation as the foundation of such grand plans without making the mistake Microsoft made with the original Xbox One unveiling - ignoring games to the extent that the core audience questioned whether they were still the focus. PSVR is clearly designed for far more than just games, but the early focus on games has brought gamers along for every step of the journey. PlayStation Vue, though a major initiative for Sony as a whole, is a nice extra for PlayStation owners, not something that seems to dilute the brand and its focus. On the whole, there's no sign that PlayStation's new role at the heart of Sony is making its core, gaming audience love it any less.

"The whole idea of using PlayStation as a launchpad for Sony's other businesses remains an unproven model with a shaky track record"

On the contrary; if PlayStation Plus subscriptions are any measure, PlayStation owners seem a pretty happy bunch. Subscriptions topped 20 million recently, according to the firm's presentation this week, which means that over 50% of PS4's installed base are now paying a recurring subscription fee to Sony. PlayStation Plus is relatively cheap, but that's still a pretty big chunk of cash once you add it up - it equates to an additional three or four games in the console's attach ratio over its lifetime, which is nothing to be sniffed at, and will likely increase the profitability of the console by quite a few percentage points. In Andrew House's segment of this week's presentation, he noted that the division is shifting from a packaged model towards a recurring payments model; PlayStation Plus is only one step on that journey and it's extremely unlikely that the packaged model (be it digital or a physical package) will go away any time soon, but it does suggest a future vision in which a bundle of subscriptions - for games, TV, VR content and perhaps others - makes up the core of many customers' transactions with Sony.

That the truly painful part of Sony's transition is over is to be celebrated - a healthy Sony is a very good thing for the games business, and we should all be hoping Nintendo gets back on its feet soon too. The task of the company, however, isn't necessarily about to get any easier. PS4's extraordinary success needs to be sustained and grown, and while early signs are good, the whole idea of using PlayStation as a launchpad for Sony's other businesses remains an unproven model with a shaky track record (anyone remember the ill-fated PSX, a chunky white PVR with a PS2 built into it that was supposed to usher in an era of PlayStation-powered Sony consumer electronics?). But with supportive leadership, strong signs of cooperation from other parts of the company (the first-party Spiderman game unveiled at E3 is exactly the kind of thing the relationship between PlayStation and Sony Pictures should have been yielding for decades) and a pipeline of games that should keep fans delighted along the way, PlayStation is in the strongest place it's been for over a decade.

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Latest comments (5)

Christopher Goodno Studying Computer Sciences, University of MarylandA year ago
Profits from camera devices and insurance still vastly outpace that of the SIE division. While it's great PlayStation is growing, it's really been the long-standing and continued profits of those lesser discussed divisions that keep Sony going and allowed PS to grow.

So, to say the entire future rests on it, is pretty ignorant, IMHO. Unless all you want to do is focus on JUST technology that gets discussed online and gets clicks. Because no one talks about the boring divisions.
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Rafa Ferrer Localisation Manager, Red Comet MediaA year ago
Would you have any data to back that up? The article doesn't provide much sources, but any other source I've read out there underlines that their financial recovery is due to their PS4 business, while their profit from consumer electronics has been bleeding to Samsung for years now. The article does mention that their devices business is expected to keep losing money.
However, it's very good news that Sony is back on track so they can keep pushing the industry instead of just surviving. Now we just need the same from Nintendo so we can have them back in the top league too.
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Christopher Goodno Studying Computer Sciences, University of MarylandA year ago
Not an issue to provide at all.

https://www.sony.net/SonyInfo/IR/library/fr/20160524_sony.pdf

While SEI has done a lot of good for the company, it is not just because of that are that they have been able to recover. In fact, I would say the mass majority of their recovery was from selling off losing elements of their business (VAIO) or reducing other elements (TVs).

From the FY report, you will find:

Gaming & Networks division has an operating income of 88.7b yen and is expected to grow to 135b yen over the next year. Typical for later hardware cycles. But they have an operating revenue of 1,551.9b yen. That's not a ton of profit to go with the sales.

Imaging & Products has an operating income of 69.3b yen and half of the operating revenue of the Gaming & Networks division (read: more profit per sale). They are expected to see a great amount of decline over the next year, though. This is true. But, the large profit from low operating expense in this department in the last decade has been one of the best divisions for Sony.

Financial Services, primarily insurance out of Japan, has an operating income of 156.5b yen and only 2/3 the operating revenue of Gaming & Networks division. Again, way more profit here. They are expecting to see only a very slight decline in this over the next year.

Edited 1 times. Last edit by Christopher Goodno on 6th July 2016 5:50pm

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Rafa Ferrer Localisation Manager, Red Comet MediaA year ago
Nice, thanks for the insight, Christopher!
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Great information Christopher, thanks for sharing. However, I think you may be missing the point of the article. For Kaz Hiral, the PS4 isn't just about the profitability of the Gaming and Network Services division, but rather the potential for Sony to leverage the console's market penetration to expand their other profitable divisions. Every active PS4 owner is a potential customer of Sony's music and motion pictures.
Sony clearly sees PS4 as being a launchpad for other devices and services....The same virtuous circle effect is hoped for PlayStation Vue, the TV service aimed at PlayStation-owning "cable cutters", which has surpassed 100,000 subscribers and is said to be rapidly growing since its full-scale launch back in March.
Combined, Music (617.6b Sales / 87.3b NOI), Movies (938.1b sales / 38.5 NOI) and Games (1,551.9b sales / 88.7b NOI) far outpaces Sony's other divisions at 3,107.6b yen in Sales and Operating Revenue and 214.5b yen in Net Operating Income.
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