PlayStation, Sony’s behemoth of a gaming arm, finds itself faced with an unenviable financial paradox: thriving hardware sales that exceed initial expectations but it’s not making enough money to sustain its current trajectory.
As the console manufacturer’s industry-leading flagship console, the PlayStation 5, continues to break records, its financial health is also raising eyebrows.
Despite initial ambitions to ship a record 25 million PS5 units within the fiscal year ending in March, Sony has had to adjust its forecast down by four million units. Furthermore, as per a CNBC report, the tech giant’s shares took a hit, plummeting by up to 8.4% shortly after the announcement, with around $10 billion in value being erased from Sony’s stock as a result of both the reduced console sales forecast and a stark decrease in its operating margins. From boasting margins of 12-13% in the preceding years, the gaming division’s profitability is now down to a mere 6%, a disappointing figure that, according to Jefferies equity analyst Atul Goyal, is “almost near decade lows.”
So, what’s causing this unfortunate profit crunch? The answer lies in the skyrocketing costs of game development. Blockbuster titles like Marvel’s Spider-Man 2, reported to have cost a jaw-dropping $300 million, exemplify the immense financial burden placed on developers.
With Horizon Forbidden West and The Last of Us Part 2 also setting Sony back huge amounts financially despite their critical acclaim and huge sales, the company’s astronomical budgets are devouring profits, even considering the high margins associated with digital sales and PS Plus subscriptions.
Sony is at least aware of this. In its most recent earnings call, Hiroki Totoki advocated for the company to adopt leaner development practices while releasing more of its exclusives to the PC. But as Helldivers 2 is proving with its astronomical success, an emphasis on AA titles is equally important. While its live-service nature may encourage Sony to double down on its original multi-billion plans, a focus on sustainable returns should take precedence.
Nintendo’s strategy of consistently releasing a healthy mix of first- and third-party AA titles, which demand fewer resources, serves as an alternative approach for Sony to consider going forward – coincidentally, the report came shortly before Nintendo confirmed its upcoming third-party showcase.
Ultimately, what this means is that Sony will need to explore additional avenues to address a troubling sales margin problem effectively and sustain its position as a market leader.
