Sony’s stock suffered a massive $10 Billion loss in value last week after the company’s controversial comments about the PS5 entering the latter stage of its life cycle while cutting its sales forecast for its flagship PlayStation 5 console for the fiscal year. For context, the PS5 did not meet Sony’s expectations for the last quarter, and the Japanese tech giant has slashed the previously indicated 25 million PS5 units during the 2023 fiscal year to 21 million units.
Moreover, despite outperforming Xbox’s current-generation consoles at a two-to-one ratio, Sony CFO Hiroki Totoki commented that the console is reaching its latter stage and would naturally begin to sell less until the release of the PS6. His statement prompted discontent from the online PlayStation community as Jefferies equity analyst Atul Goyal highlighted the bigger problem in its operating margin.
For example, according to a CNBC calculation using FactSet data, Sony’s operating margin during December 2023 was around 6%, a 3% drop from its December quarter in 2022. As Goyal stated: “The shipment forecast cut for PS5 is not what is disappointing. What is disappointing is the low level. Despite various tailwinds, such as their revenue on digital sales, add-on-content, and digital downloads are at all-time highs that should have driven up the margins towards 20%, their margins are at decade-lows. It is just not acceptable.”
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Why Are Sony’s Stock Plummeting?
Software Development Costs and Poor Margins
As mentioned above, Sony’s stock plummeted due to its PS5’s software development costs and the poor margins surrounding their gaming division. For example, despite the company generating profit through its sales of its first-party games and high-margin PS Plus subscription service, it’s also costing the company a great deal of investment dollars.
According to the CEO of Tokyo-based games consultancy Kantan Games, Serkan Toto, despite hardware production costs coming down, the ballooning cost of making games has significantly impacted game profits and margins.
For example, using info from a ransomware group hacked into Insomniac Games, the cost of producing Spider-Man 2 was around $300 million, resulting in an unbalanced margin on their gaming margin despite the game being the fastest to sell 2.5 million physical and digital copies in its first 24 hours.
Throwback to 2020, Shawn Layden, the former chairman of Sony Interactive Entertainment Worldwide Studios, predicted that the PS5 era would make for an even more costly development process. “I don’t think, in the next generation, you can take development costs and multiply them by two and expect the industry to continue to grow.”
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Delayed Released and Shorter Lifespan of the New Generation Consoles
Since the emergence of gaming platforms, Microsoft’s Xbox and Sony’s PlayStation have dominated the console generation standard with the release of generations seven, eight and now nine. However, there is a similar flow with each generation released, such as the shorter lifespan since the start of the venture. For context, the seventh generation consoles lasted 11 years before its discontinuation, from 2006 to 2017, while the eight generation started in 2012 and still has its older consoles going strong.
As for our current ninth generation consoles, it took to the stage in 2020, and it’s already nearing the end of its lifespan just three years after its release. It is a sad turnaround as many expected the newest generation to last longer as the shortages of PS5 pointed towards the potential of giving users the full immersion of a new gaming era.
On the subject of shortages, the ninth generation consoles actually began at the height of the pandemic, causing chip shortages and leading to a hugely limited supply. Moreover, as Sony only resolved the PS5 shortage at the start of 2023 with the only available stocks inflated, many stayed with their eighth generation consoles, something still continuing, with numerous games opting for the older console, anticipating the release of a potential tenth generation.
What Are Sony’s Plans Moving Forward?
After such a massive loss, one would suspect Sony to salvage its stock with a backup plan. However, Totoki has stated that no massive new first-party titles would launch for the console until at least March 2025, meaning the company will take the loss at its surface and move forward.
Fortunately, not all news seems terrible from the Japanese tech giant, as Sony seemed to be working on new hardware and software, with plans to launch a new device to succeed its ageing Switch console. Despite the console still using seventh-gen components, the hybrid home-portable device continues to attract consumers even as it nears its eighth year on the market. While Nintendo President Shuntaro Furukawa is adamant about “maintaining the momentum of the Switch business”, it could be a while before we receive more news regarding a Nintendo Switch 2.
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