Sony shares lost $10 billion in value last week after the tech giant lowered its forecast for expected PlayStation 5 sales this year.
However, this announcement hides a bigger problem according to financial analysts reported by CNBC. Although Sony's decision to reduce its prediction of 25 million PS5 sales in the next fiscal year to 21 million caused the company's shares to fall, this move is just a symptom of a larger problem at the tech giant, according to the Jefferies equity analyst, Atul. Goyal.
Goyal said Sony's “forecast cut for PS5 […] That's not what's disappointing.” Rather, it all comes down to a drop in the company's gaming operating margin. For those who don't know, an operating margin refers to the leftover profits an organization makes after covering all operating costs.
According to CNBC, Sony's operating margin in the gaming industry came in at just under 6 percent last quarter. This is notably lower than the 9 percent we saw this time in 2022. Goyal also added that before the start of 2022, Sony's margins were around 12 and 13 percent over the previous four years. The analyst called this narrowing of margins an “extremely disappointing” trend.
What's especially curious is how revenue from digital sales and ancillary content is “at all-time highs.” This means that although Sony has a profitable gaming section, it is also costing the company a lot of investment.
According to Serkan Toto, CEO of Tokyo-based games consultancy Kantan Games, this reduced margin is due to the rising cost of creating games, which has a “significant impact” on potential profits.
In 2020, Shawn Layden, former president of Sony Interactive Entertainment Worldwide Studios, predicted that the PS5 era would involve an even more expensive development process. “I don't think that in the next generation it will be possible to take [development costs] and multiply them by two and hope that the industry continues to grow” (via Kotaku).
In response to “rising AAA budgets,” our own Rhys Wood recommends that we prioritize smaller games in 2024, advice that could also benefit executives.
No matter how expensive they have been to manufacture, the best ps5 games and the the best PS5 exclusives They are excellent games in their own right.