PlayStation has profit margin of roughly 13%, as it plans to double first-party revenues by pushing live service model

Fairgame$

Live service games are an untapped opportunity aimed at boosting PlayStation’s profit margin

In the latest GameDiscoverCo newsletter, Simon Carless pointed to one specific document recently filed as part of the FTC v. Microsoft case. This is a transcript of Jim Ryan’s meeting with Fidelity managers that took place in February 2022.

Below are the key takeaways related to Sony’s gaming business and its plans to launch at least 10 live service games by March 2026:

• Ryan sees live service titles as an “untapped opportunity” for PlayStation, and if the company executes this strategy right, the “potential upside for SIE will be enormous”;
• Despite the GaaS push, Sony’s signature single-player games “will continue to be the bedrock of our first-party publishing business”;
• Sony’s $3.6 billion acquisition of Bungie was once again cited as key to executing the new strategy — Ryan believes that the studio’s expertise in multiplayer games should help PlayStation increase its ability to learn and avoid the mistakes that other companies have made in their attempts to enter the live service market;
• He later elaborated on potential new M&A deals, saying that an ideal target “has to help us deliver on our strategies in a way that we’re not capable of doing on our own”;
• According to Fidelity, the operating margins of Sony’s gaming business “have been in the low teens” (i.e. 13-15%), compared to Activision Blizzard’s 30%+ (thanks to recurring revenue from live service hits like Call of Duty and Candy Crush).
• So Sony’s goal is to “become less reliant on [third-party] games and [third-party] royalties, and to make more [first-party] games” (single-player titles + more GaaS projects);
• PlayStation wants to ideally double the share of first-party games in its revenue stream from the current 15% — as Ryan explained, “having a business model where you own elements from the top to the bottom increases your ability to be self-determinant.”

Is Sony right in betting so big on the live service model?

Although this meeting took place 18 months ago, the takes expressed by Ryan are still in line with Sony’s current business strategy. In its May 2023 keynote for investors, the company noted that it expects the share of investment in live service titles to reach 55% in the current fiscal year and 60% in FY25 (ending March 31, 2026).

• Right now, the market share of Sony’s first-party games is still pretty low. According to GameDiscoverCo’s estimates, these titles account for only 7.3% of the total daily active users (DAU) of the top 50 games on PlayStation.
• These include Marvel’s Spider-Man, Miles Morales, Ghost of Tushima, Gran Turismo 7, God of War Ragnarök, Astro’s Playroom, and Destiny 2. Although the latter is not a PS exclusive, the game is currently owned by Sony.
• Another interesting data from GameDiscoverCo: “We can’t see any game that launched in the last year on PlayStation settling into >100k DAU on that platform in the long-term.” The only exceptions are big hits like Hogwarts Legacy, sport sims like FIFA, NBA, and Madden, and God of War Ragnarök.
• Sony currently has several GaaS titles in development, including Fairgame$ from Jade Raymond’s Haven Studios, an untitled multiplayer spin-off for The Last of Us, as well as projects from Firewalk Studios and Guerrilla Games.
• All of them will be internally reviewed by Bungie, which is now working on its new PvP shooter Marathon. And it is unclear how many of these games currently in production will live up to the full launch, especially given that the TLoU title is reportedly in trouble after a negative review by Bungie.
• As Ryan told Fidelity managers, “it would be naive” for PlayStation to assume that all of the upcoming live service games will become big hits. But here is a great rhetorical question from Carless: “Are IPs like The Last of Us and God of War really ones people want live service games of, btw?”
• Sony may eventually cancel some of its planned GaaS projects, or even revamp its current strategy following Jim Ryan’s upcoming departure and amid the current market environment where many companies (see Sega’s recent decision to cancel Creative Assembly’s multiplayer shooter Hyenas) fail to succeed with their live service attempts.
• To sum it all up, it is worth recalling Mark Darrah’s take on the so-called “live service trap”: “You can only do one engrossing live service at a time. […] So these live services tend to be dominated by one winner, two or three runners-up, and then a lot of live services that aren’t really surviving.”