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Sony and Its Gaming Strategy

May 13, 2011

Sony is a giant in the gaming world – that is of no doubt.  The original Playstation changed gaming forever.  It was technically a great machine and pushed games and gaming into new areas. After an initial shaky start, the PS2 carried that momentum forward, selling 150 million units worldwide to date.  As well as the commercial success, some of the titles that came out on the PS2 were critically renowned too; Ico, Resident Evil 4, Shadow of the Colossus, GTA: Vice City to name but a few.

We’re now in a new era from then.  The rules of the game have not only changed, but are changing still.  This is no longer a simple console war-zone between Sony and rivals like Microsoft and Nintendo.  Sony is having a bad news month with the hacking of the Playstation Network, but are there deeper troubles – deeper than just the Playstation division?

Nothing much is easy at Sony, though – and not just because the company is in trouble amid the PlayStation Network hacking row. This is a vast conglomerate with turnover this year expected to be £54bn, which, as Charles Arthur points out on the cover, runs on tiny sub-1% margins. Any profits it makes on film and maybe music are blown away whenever the electronics business runs into trouble. Sony insists on staying in tough businesses like television manufacturing (where any rival in distress just dumps product on the market and profit is destroyed), and fails to develop its media businesses in the way that Rupert Murdoch might.

Sony is much more than games – it is the classic mega-media corporation that you look at in media studies for vertical and horizontal integration. It makes the Playstation 3 and will also sell you a TV to use with it. It makes games and films to use on your new PS3 and TV. It makes portable music players and music to use with it. Yet its vast empire is also a vast exposure to the ups and downs of markets:

When you dig deeper, Sony’s business isn’t actually that healthy. Yes, it’s enormous: last year’s annual revenue was ¥7.2tn (around $77.5bn) and profits ¥27bn (around $289m). But the slimness of the pre-tax margin – one third of 1% of revenue overall – points to the difficulty it faces.

The financial figures going back to April 2001 tell a story of a business that lurches annually from feast to famine, with the electronics division in particular (making items such as TVs and DVD players, but excluding the PlayStation consoles and Vaio PCs) generating about 75% of total revenues but increasingly vulnerable to the price wars.

Here’s the pattern: every year there is a bumper Christmas quarter (Q3 of its fiscal year), often followed by a loss-making one, and then two quarters’ climb back to profit, and a bumper Christmas again. (There are also oddities in there – a financial services business, for example, which generates a tidy profit from financing and leasing Sony’s professional equipment such as its professional video cameras, editing desks and PCs to businesses.)

Compare that exposure to Nintendo who make games and consoles and only really those. They are able to focus, while Sony struggles to reconcile the Xperia Phone with the PSP2 in the minds of its customers. In figures (from 2009) this means that Sony is about 13% gaming and 83% other stuff (electronics, films, music…)

Yet gaming drives consumer electronics. Home computers were purchased by people to play games on first and foremost. Games are also one of the key drivers in the move towards smart phones and the like. Content drives technology – not totally – as technology also shapes content. However the two are in a symbiotic relationship and I’d argue content, or to call it by its current media name, software, is the key driver.

Games used to be a closed world, yet the world of games today is a vastly expanded (and growing) one and games, including good games are freely available:

What used to be scarce was shelf space. It was limited in the physical world. It cost working capital to manufacture the products. A publisher could protect its position simply by being one of the few companies who could get a game into a store. Consumers recognised that the creation of one more copy of a physical disk cost money, and would pay for it.

In this expanded gaming world, I’ve always felt the difference that Sony could offer is one of curation and quality. To explain, as abundance of games grows, so does the choice. However, navigating in this expanded world is difficult. Finding good games amidst 100,000s of other games is hard. Sony have done a good job of curating some quality titles on PS3 – Heavy Rain, Flower – for example. Yet the Mini’s have been of a variable quality and until recently there was no in-system feedback loop by which players could say/see about the quality of a game. I think Sony needs to balance the quality with the abundance and with the ease of use – and if it gets that right, it can stand out from the crowd. If it can build a platform where every game on it meets a minimum high quality threshold, then it has something the others do not. It could use this platform to drive this ethos too in other areas…

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