Despite strong revenue growth, many investors and analysts were disappointed by the performance of Sony’s gaming business in the most recent fiscal quarter. The main reason was the company’s declining margins.
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- As reported by CNBC, Sony shares fell shortly after the release of its Q3 report last week, wiping around $10 billion off the Japanese company’s market cap.
- One of the reasons was the lowering of the PlayStation 5 sales forecast, as Sony now expects to sell 21 million units of its current-gen console in the fiscal year ending March 31, 2024 (instead of 25 million). PS5 sales also reached 8.2 million units in the third quarter, 1 million below expectations.
- However, the biggest concern for analysts was the continued decline in operating margin in the company’s Game & Network Services segment. According to CNBC, it reached just 6%, down from 9% in the same period last year (ended December 31, 2022).
- It is worth noting that prior to the fourth fiscal quarter of 2022 (from January to March 2022), its gaming margins were around 12-13% in the previous four years.
- Jefferies equity analyst Atul Goyal called PlayStation’s single-digit margin “extremely disappointing.” “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,” he told CNBC.
- Kantan Games CEO Serkan Toto cited increased video game production costs as one of the reasons for the declining margins.
Speaking of rising costs, the recent Insomniac hack revealed that Marvel’s Spider-Man 2 had a total budget of $315 million, including development and marketing costs. With over 10 million units sold globally, the game has likely recouped its investment (the studio expected a 35% ROI with lifetime sales of 10.5 million copies).
However, AAA production is getting more unsustainable and probably cannot be offset by growth in digital sales and other higher-margin products like subscriptions.
Sony Group president and COO Hiroki Totoki, who will soon succeed Jim Ryan as CEO of Sony Interactive Entertainment, sees the lack of growth as the main problem of the company’s gaming division. He thinks that SIE doesn’t “necessarily have deep understanding of how their work is being translated to growth, generation of sustainable profits and higher margin for the unit as a whole.”
It is unclear how exactly Sony plans to improve its gaming margins, but Totoki also told investors that the company won’t launch “any new major existing franchise titles next fiscal year” (ending March 31, 2025). Instead, PlayStation will mostly rely on third-party titles and platform exclusives from its partners like Square Enix (Final Fantasy VII Rebirth).