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Hey Sony, Nintendo! We’re Not Playing Games Anymore

Hey Sony, Nintendo! We’re Not Playing Games Anymore

Wednesday, 11 August, 2021 - 05:15

There’s not a lot to do when you’re stuck inside for weeks dodging a pandemic. Thankfully, as Covid-19 was raging we could build digital worlds, drive cartoon go-karts and play virtual baseball on consoles built by Sony Group Corp. and Nintendo Co. 1


But now millions are vaccinated and restrictions are easing across many economies, allowing us to explore physical worlds and throw real baseballs. Great for us, but bad for Sony and Nintendo, which reported June quarter earnings this week.


As expected, games revenue from both companies weakened, largely because a year ago we were at the height of lockdowns and consumers were rushing to get their hands on software titles and the hardware to play them on. A more appropriate comparison would be against the June quarter two years ago, and on this basis the most recent period looked pretty solid.


Sony, for example, posted just a 0.6% rise in its games division — which includes hardware and software — compared to last year but that figure was 36% higher than in 2019. Nintendo’s total revenue was 10% lower than 2020 but 87% higher than two years ago.


It’s worth remembering that while games are Sony’s biggest division, at 29% of sales and 32% of profit on a full-year basis, it does still have a buffer in the form of music, pictures, semiconductors and even financial services. Nintendo is reliant entirely on that one business, which also includes associated licensing of characters like Mario and Zelda.


Serendipitously, Sony released its latest console, the PlayStation 5, in November right in the middle of the pandemic and ahead of Christmas. In fact, the company would have done well to get the device to market earlier but supply chain problems including chip shortages and tight manufacturing capacity made that impossible. Nintendo’s Switch, on the other hand, came out back in 2017, with the company offering up a cheaper handheld version called the Switch Lite in September 2019. It’s next incarnation, the Switch OLED with a better screen, isn’t due until October.


Alongside hardware, these companies enjoyed solid growth in the sale of games software during the peak virus period from March through December last year. This is the true driver of long-term profits because often they’re willing to sell the console at or below cost and bet on consumers buying numerous titles over the coming years.


But now that pandemic-powered gravy train is looking derailed. Leisure and sporting goods companies are reporting solid sales and revising up their outlooks as customers get off the couch and outside.


On Thursday, Germany’s Adidas AG raised its 2021 operating income forecast by around 10%, noting that sales in Europe and North America almost doubled thanks to a phasing out of lockdowns and the return of sporting events. Nike Inc. already gave a heads up on this rebound at the end of June when it forecast full-year sales will surpass $50 billion for the first time.


Fewer couch potatoes isn’t good news for those who sell to them, though. Sony’s game software revenue dropped 20% from a year ago. The only thing that juiced the unit was the fact that it brought out a fresh console in the interim, allowing it to bathe in consumer demand for that shiny new toy. But that excitement has waned and it sold just 2.3 million units for the quarter, 40% lower than the March period which is already a traditional low season for console sales.


Of greater concern, however, is the continued decline in monthly active users of its PlayStation Plus subscription service, falling to 104 million at the end of June from 114 million a year prior. Although paid memberships, which cost $9.99 per month or $59.99 annually, rose slightly, this drop in active usage is a sign that customers are becoming disengaged. If console owners are booting up less often, the risk is they’re far less likely to spend time or money on more games.


Nintendo also suffered. Shipments of console hardware dropped 22% year-on-year and software was down 10%. Even worse, sales of the Switch Lite, intended to be a cheaper and more portable device, fell by almost 60% while downloads also dropped, indicating the ease of purchasing new games wasn’t enough to keep consumers enticed.


If there’s any upside, it’s that neither company is particularly exposed to China. State media reports labelling online games “spiritual opium” and advocating a need to fight addiction earlier this week were followed up by calls to end tax breaks for the sector. This raises the likelihood that China’s industry leaders including Tencent Holdings Ltd. and NetEase Inc. could find themselves in regulatory crosshairs, which would crimp growth. Yet Sony gets less than 8.5% of its games sales from the country with Nintendo also barely deriving revenue from there.


But the pandemic is not over yet. New delta and delta-plus strains threaten to send countries back into lockdown and spur more indoor activities. That might be good for Sony and Nintendo, but it could also hurt the global economy and force people to tighten their belts. Should that happen, games companies may find that consumers just aren’t willing to play anymore.


Bloomberg


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