Product innovation is crucial for any technology company and determines its market performance and trends.
Since February 14th, when technology giant Sony Group, headquartered in Japan, disclosed its performance for the third quarter of 2023 as of December 2023, Sony's total stock market value has evaporated by approximately $10 billion. As of the close on February 16th local time, Sony closed at $88.84 per share, down 3.42%.
The reason behind the poor performance of the capital market is that Sony has lowered its sales forecast for the entire fiscal year of its gaming division, due to weak hardware sales. Its flagship product, PlayStation 5 (hereinafter referred to as "PS5"), sold 8.2 million units in the third quarter, which is about 1 million units lower than market expectations.
Sony expects sales for this fiscal year to be 12.3 trillion yen, lower than the previously expected 12.4 trillion yen. In addition, Sony expects sales of the PS5 for this fiscal year to be 21 million units, lower than the previously expected 25 million units. According to financial report data, Sony's gaming business's revenue in the third quarter increased by 16% year-on-year to 1.4 trillion yen, but the operating profit of the department decreased by 26% due to increased hardware losses caused by promotional activities and a decrease in sales of first party games. At the same time, Sony also lowered its sales forecast for the gaming division this fiscal year by 210 billion yen to 4.15 trillion yen, with hardware sales expected to decline.
Last week, Sony Group President Yushu Shishi stated that after the PS5 broke through the sales threshold of 50 million units in December last year, this product has entered the "second half" of its lifecycle. This also means that the shipment volume of the PS5 will continue to decline from the next fiscal year to the following fiscal years. He also stated that for the new fiscal year starting in April, Sony has no plans to launch first tier blockbusters such as God of War and Spider Man.
Affected by this news, the capital market immediately responded negatively. However, analysts who already believe that Sony's PS5 target expectations are too high say that the larger and deeper problem facing the Japanese tech giant is the sustained low profit margins of the company's key gaming business.
Wall Street analysts have questioned whether Sony's gaming business has seen any improvement in profit margins despite the launch of digital game sales platforms and PS Plus subscription services, among other high profit products. In a report to clients on Wednesday, Atul Goyal, a stock analyst at Jefferies, a major Wall Street firm, stated that the downward revision of PS5 shipment forecasts is not a disappointing indicator, but rather Sony's consistently low gaming operating profit margin. He pointed out that before the quarter of January to March 2022 in the calendar year, Sony's gaming business unit had an operating profit margin of approximately 12% -13% in the past four years. Despite various favorable factors that should have raised Sony's gaming business operating profit to around 20%, Sony's operating profit in the last quarter is still in single digits. He said that Sony's current operating situation is "very disappointing." Sony's gaming business's operating profit margin is currently the lowest in nearly 10 years.
According to a report by game website Kotaku citing information leaked by hackers, last year's release of Spider Man 2 was produced by Sony's Insomniac Game3, with a cost of approximately $300 million. Serkan Toto, CEO of Kantan Games, a Tokyo gaming industry consulting firm, stated that over time, these budgets have had a significant negative impact on its gaming business profitability.
Except for Sony, gaming giants including Nintendo and Microsoft have all entered a period of sluggish growth in 2024. According to Bloomberg on February 19th local time, following Nintendo's announcement that the Switch successor may be delayed until early 2025, the company's stock price fell 8.8% at one point, marking the largest daily decline since October 2021 and the largest decline in the past year.
Microsoft also faces the same problem of selling its exclusive games on rival platforms in order to generate higher revenue. According to the Financial Times, Microsoft recently released a management dialogue in its official Xbox podcast. In an interview, Microsoft's gaming CEO, Phil Spencer, stated that based on Microsoft's specific strategy, Four Xbox side games will soon be available on other console platforms, such as Sony PlayStation and Nintendo Switch.
Although the gaming business is sluggish, like other technology companies, Sony is also betting on AI. According to the Science and Technology Innovation Board Daily, Sony will collaborate with American hard drive manufacturer Seagate Technology to mass produce mechanical hard drives (HDDs) to meet the growing demand for AI. Sony plans to double the capacity of hard drives and use new semiconductor components to store a large amount of AI data. The company is expected to start mass production of lasers for hard drives in May and will invest approximately 5 billion yen in building new production lines.