Archive notice: This article was originally published on July 8, 2008. Links and embedded videos are preserved as part of the historical record.
According to pressetext, the new generation of Sony’s PlayStation 3 video-game console is proving to be a multibillion-dollar sinkhole for the Japanese electronics manufacturer. As Handelsblatt reported yesterday, Tuesday, citing a mandatory stock-market disclosure published on June 23 of the current financial year, the group puts its losses to date from the high-tech games console at around USD 3.3 billion. In the statement, the company notes that “there is a risk that investments will not be recouped.” It also cannot be ruled out that the PlayStation 3 will have a “significantly negative” impact on the profitability of the entire group.
“Even if the device becomes profitable, it is unlikely that Sony will ever recover the losses it has incurred,” the report quotes David Cole, an analyst at market-research institute DFC Intelligence, as saying. Erste Bank analyst Ronald-Peter Stöferle takes a less severe view of Sony’s current situation: “The losses are not affecting the company that drastically, so we continue to have Sony on our recommendation list. It should not be forgotten that, as a games-console manufacturer, you first have to invest heavily in developing and producing the devices to be able to play a role in the international market,” the expert emphasized in response to a pressetext enquiry. According to the analyst, the PlayStation 3 contains a “revolutionary chip with enormous computing power.” The global economic slowdown, however, is currently proving problematic and, according to Stöferle, is weighing not only on Sony but on the entire industry.
The PlayStation 3’s current earnings position is nevertheless critical. Experts agree that it would be a disaster if the forecasts failed because Sony’s large-scale investments were not recouped. After all, the games division has traditionally been the group’s cash cow. Although it accounts for only USD 8.5 billion, or around 12 percent of total group revenue, over the years the division contributed as much as 60 percent of operating profit. Because Sony often operated at the margins of profitability with its televisions and DVD players, its struggling music division and its film business, the games segment had previously generated lucrative high returns, according to the report. The financial figures support this assessment: since the first PlayStation was introduced in 1995, the division has brought more than USD 5 billion into the Japanese company’s coffers.
“The history of consoles has shown that a vendor’s success in one generation of games consoles does not necessarily continue into the next. With Sony, we have a company that dominated the previous two console generations with PlayStation 1 and 2 but is the clear loser in the current generation. In other words, Sony has lost a battle, but not the war for the console market itself,” Bernd Hartmann, a consultant at Goldmedia GmbH Media Consulting & Research, emphasized in an interview with pressetext. According to the analyst, the group is diversified enough that one division will not drag it completely into the abyss. “It is also clear that this is a wake-up call. For the next generation of games consoles, Sony must review its entire console business model and once again become a driver of innovation,” Hartmann stressed to pressetext.
Nevertheless, Sony is not alone in facing problems with games-console sales. Group CEO Howard Stringer recently described the PlayStation 3’s profitability as “slightly catastrophic.” Microsoft, the second major player in the fiercely competitive market, is also troubled by its Xbox 360 business. Its console operations account for around 12 percent of total revenue.
Despite similarly devastating losses, insiders agree that Microsoft can absorb these setbacks better than Sony. The main reason is that the Redmond company generates most of its profits from its extremely profitable software business. Even so, Microsoft’s console business is ailing. Between 2002, when it launched the Xbox, and 2006, when its successor the Xbox 360 was released, the company sustained losses of more than USD 7 billion.
Further Links:
- More information
More information