Sony Group Corp. is facing a challenge in its gaming business, as its operating margins in the segment have fallen to near decade lows, despite high demand for its PlayStation 5 console and digital services. Analysts say the company needs to improve its profitability and efficiency in the gaming industry, where it faces fierce competition from rivals like Microsoft and Nintendo.
Sony cuts PS5 sales forecast amid supply constraints
Sony announced on Wednesday that it has lowered its sales forecast for the PS5 console for the fiscal year ending in March, from 25 million units to 21 million units. The company cited supply chain disruptions and component shortages as the main reasons for the revision. Sony said it expects to sell 15 million units in the second half of the fiscal year, which is still higher than the 14.8 million units it sold in the same period last year.
The PS5, which launched in November 2020, has been in high demand among gamers, but Sony has struggled to meet the demand due to production bottlenecks and logistics challenges. The company said it has increased its production capacity and secured more components, but it still faces uncertainty and volatility in the market. Sony also said it has raised the prices of the PS5 in some regions, such as Europe and Japan, to reflect the higher costs of materials and transportation.
Sony’s gaming margin disappoints analysts
While the PS5 sales forecast cut was not surprising to analysts, who had already expected Sony to miss its original target, they were more concerned about the decline in the operating margin of the gaming business. The margin, which measures the profitability of the segment, was just under 6% in the October-December quarter, according to a CNBC calculation. This was down from more than 9% in the same quarter of 2022, and around 12% to 13% in the previous four years.
Analysts said the low margin was disappointing, given the various tailwinds that should have boosted the profitability of the gaming business. These include:
- Higher sales of digital games and add-on content, which have lower distribution costs and higher margins than physical games.
- Growth of the PlayStation Plus subscription service, which offers online multiplayer, cloud storage, and free monthly games to its members. The service has around 50% margin, according to Jefferies analyst Atul Goyal.
- Increase in revenue from licensing and royalties from third-party developers and publishers, who pay Sony a fee for using its platform and technology.
Analysts questioned why Sony’s gaming margin was not higher, despite these higher-margin products and services. They also wondered how Sony could compete with its rivals, who have higher margins and more diversified revenue streams. For example, Microsoft’s gaming margin was 18.5% in the October-December quarter, while Nintendo’s was 38.9%.
Sony needs to improve its gaming efficiency and strategy
Analysts suggested that Sony needs to improve its efficiency and cost management in the gaming business, as well as its strategy and innovation. Some of the areas that Sony could focus on are:
- Reducing the development and acquisition costs of its first-party games, which are exclusive to its platform and are often used to attract and retain customers. Sony has been investing heavily in its own studios and acquiring new ones, such as Bungie, the developer of the popular Destiny franchise. However, some of these games have been delayed or have underperformed, such as Horizon Forbidden West and Gran Turismo 7.
- Expanding its presence and reach in the PC and mobile markets, which are growing faster than the console market and offer more opportunities for recurring revenue and user engagement. Sony has been slowly porting some of its PS4 and PS5 games to PC, such as Horizon Zero Dawn and Days Gone, but it still lags behind Microsoft, which has been releasing its Xbox games on PC and its cloud gaming service, xCloud, on various devices. Sony also needs to develop more mobile games and apps based on its IP, such as Uncharted and God of War, to tap into the huge and lucrative mobile market.
- Enhancing its user experience and value proposition, by offering more features, content, and services to its customers, especially in the areas of cloud gaming, social gaming, and live streaming. Sony has been lagging behind Microsoft and Nintendo in these areas, as its PlayStation Now cloud gaming service has been underwhelming, its PlayStation Network online service has been prone to outages and hacks, and its PlayStation Vue live TV service has been shut down. Sony also needs to improve its communication and marketing with its customers, as it has been criticized for its lack of transparency and clarity on issues such as PS5 availability, backward compatibility, and cross-play.
Sony’s gaming business is still one of its most important and profitable segments, accounting for nearly a third of its total revenue and operating income in the last fiscal year. However, the business is facing increasing challenges and competition in the gaming industry, which is undergoing rapid changes and innovations. Sony needs to address these challenges and improve its margins and efficiency, in order to maintain its leadership and growth in the gaming market.
