Games sales at Sony Corp. and Nintendo Corp. were among the beneficiaries of the Covid-19 pandemic when consumers rushed for home entertainment options amid lockdowns around the globe.
A look at Sony’s March-quarter data hints that such a boost may be fading, spurring a need for the Japanese electronics giant to seek new ways to juice interest in its latest games console.
At first glance, the data appear solid. Sony released the PlayStation 5 console in November and sold 7.8 million units for the fiscal year, higher than a company forecast of 7.5 million. But we’re accustomed to management setting expectations low in the hope of wowing investors with a solid beat, so that figure doesn’t mean much.
The first hints of trouble instead come from quarterly operating income, which climbed 88% but actually missed analyst estimates by around 10%. Sony’s pictures division was the biggest drag on earnings, but with cinemas shut worldwide we knew this would be weak, though predicting the scale of the damage was always going to be difficult.
The games division should have helped earnings, but didn’t. Instead, the unit posted a 29% drop in operating profit. Sony explained that it deliberately took a hit on the PlayStation 5 by selling the device at less than manufacturing cost.
With Nintendo’s Switch being a strong competitor and supply-chain bottlenecks pushing costs higher, there’s sound logic behind deploying this razor-and-blades strategy to get more consoles into homes. The company has been willing to make such sacrifices in the past, and was well-rewarded by bringing in solid sales and profit in subsequent years. With the most recent release, it combined this loss-leader tactic with higher selling expenses incurred to launch the device. Again, a reasonable approach.
Unfortunately, the payoff is looking weak. Each new gaming device becomes a money-making machine in the months and years after that initial hardware purchase as consumers come back for new titles. Margins on software are exponentially higher than hardware, so companies like Sony, Nintendo and Microsoft Corp. bet their business models on creating an addictive device that spurs incremental software sales.
That may not be happening this year.
A 27% drop in unit sales of the PS5 from the prior period was to be expected, since the March quarter not only followed the peak Christmas shopping season but also the initial launch window for the console. Of concern, however, is a 41% plunge in shipments of software titles. Not only was that the largest quarterly decline for at least four years, the actual volume shipped was lower than any period since March 2019.
This tells us that the PS5 hasn’t elicited the kind of repeat-purchase enthusiasm Sony should be hoping for with a new machine. In a call with reporters Wednesday, management noted that demand was boosted by lockdowns in the middle of last year, followed by a decline. Yet these latest quarterly shipments fall below figures posted in each period of the fiscal year prior to the Covid pandemic.
Furthermore, there are signs that loyalty might be ebbing. Subscribers to Sony’s PlayStation Plus service climbed a mere 0.4% for the period, while monthly active user figures fell. Some of that may come down to the expiration of introductory packages that often accompany new purchases. That still doesn’t bode well for the notion that a fresh device should revive excitement in the PlayStation franchise and spur more sales.
A caveat here is that we’re only a few months into the lifecycle of this console, while the pandemic means that normal rules of economics and consumer behavior don’t necessarily apply.
But with vaccines coming and customers itching to get out of the house, Sony may need to develop an inoculation against consumer apathy.
Bloomberg
