Sony stock lost $10 billion in value last week after the tech giant lowered its forecast for this year’s predicted PlayStation 5 sales.
However, according to financial analysts, this announcement hides a bigger problem as reported by CNBC. While Sony’s choice to lower its forecast of 25 million PS5 sales in the next fiscal year to 21 million caused the company’s shares to plummet, the move is just a symptom of a larger problem at the tech giant, according to stock analyst Atul van Jefferies. Goyal.
Goyal said Sony’s “prediction for PS5 (…) is not disappointing.” Rather, it amounts to a decline in the company’s gaming operating margin. For those who don’t know, an operating margin refers to the profit an organization retains after all operating costs have been covered.
According to CNBC, Sony’s operating margin in the gaming industry last quarter was just under 6 percent. This is significantly less than the 9 percent we saw this time in 2022. Goyal added that Sony’s margins before early 2022 have been around 12 and 13 percent for the past four years. The analyst called this margin decline an “extremely disappointing” trend.
What’s especially curious is how revenue from digital sales and add-on content is “at an all-time high.” This means that while Sony has a profitable gaming division, it also costs the company a lot of investment dollars.
According to Serkan Toto, CEO of Tokyo-based games consultancy Kantan Games, this reduced margin is caused by the rising costs of making games, which have a “significant impact” on potential profits.
In 2020, Shawn Layden, former chairman of Sony Interactive Entertainment Worldwide Studios, predicted that the PS5 era would present an even more costly development process. “I don’t think you can multiply development costs by two in the next generation and expect the industry to continue to grow” (via Kotaku).
In response to ‘exploding AAA budgets’, our own Rhys Wood recommends that we prioritize smaller games in 2024 – advice that executives can also benefit from.
As expensive as they were to make, the best PS5 games and the best PS5 exclusives are excellent games in their own right.