Hello and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Friday, we discuss Sony’s big news yesterday that it is raising the price of its PlayStation 5 in most markets to combat inflation and other economic pressures. Also: what to read, watch and play this weekend.
Sony sounds the alarm
The PlayStation 5 has, overnight, become even more difficult to obtain in most places around the world. Not because of supply issues, although they persist, or because of resellers or bots or some other middleman that keeps Sony’s game console from the masses. Instead, it’s Sony’s action in the form of an unprecedented 10% price hike in most markets around the world except the US.
It’s an alarming turn of events for the company’s gaming division, which until this year had been riding high on the success of the PlayStation 4, as well as an exclusive games strategy and ecosystem growth lucrative on the back of blockbusters like Epic. Fortnite and Activision’s Call of Duty. The golden age of PlayStation might be over.
Sony feels the pain. Like many of its peers in the gaming industry, Sony is experiencing a sales slump after two years of booming growth in the pandemic era. The company hasn’t released any major exclusive hits since God of War and Marvel’s Spider-Man in 2018, and supply issues have slowed PS5 growth. Consumer spending on games is now generally down.
- After analysts began forecasting a decline in game industry revenue earlier this summer, Sony last month reported strong fiscal first-quarter earnings: a 26 percent year-over-year decline in software sales, just a 4% increase in PS5 shipments and a double-digit increase. reduction in its annual profit forecast. Sony shares are also down more than 30% this year.
- Sony attributes its struggles and rising prices to a variety of factors: inflation first, but also “adverse monetary trends” and macroeconomic pressures that have begun to affect video game spending and industry growth.
- As for why the gaming industry is starting to decline, Sony CFO Hiroki Totoki said earlier this month that “opportunities for users to leave their homes have increased as infections by COVID-19 has declined in key markets.” Play time on PlayStation was down 15% in the first quarter, the company added.
- It’s also true that game delays have been happening left and right, while last year’s Call of Duty, a huge moneymaker for PlayStation, underperformed significantly.
- Research firm NPD reported this month that second-quarter U.S. revenue fell 13% year-over-year, citing high gas prices, the return of spending on travel and live events and a “slate lighter release of new games” along with “hardware”. supply limitations”.
PlayStation’s biggest problems are more existential. Sony will certainly weather the current storm, and the PS5 price hike is designed to help it do just that. But the company faces a bigger threat: the industry’s shift to game distribution in the form of subscription and cloud streaming services powered by a much more formidable Microsoft.
- Microsoft admitted in a regulatory filing this month that Sony’s PS4 outsold the Xbox One by more than two to one. But Xbox’s business is radically different than it was a decade ago, and Microsoft’s gaming division is now at the forefront of subscriptions and cloud gaming with Xbox Game Pass, which in January reported 25 million subscribers .
- Microsoft is also using the coffers of its largest company to buy its way into a more advantageous position. Xbox boss Phil Spencer said this week that he feels “good about the progress” his company is making to satisfy regulators to close its nearly $70 billion Activision Blizzard deal.
- The Xbox, thanks in part to lighter demand, has also been easier to find than the PS5, helping Microsoft lead for three straight quarters of U.S. gaming hardware sales. In response to Sony’s price hike, Microsoft said yesterday that it had no plans to raise the price of its Xbox Series consoles.
- Sony has tried to respond to Microsoft’s stronger position, with mixed results. It launched a revamped version of its PlayStation Plus subscription platform to better compete with Game Pass, though we won’t know until next quarter whether it’s helped drive PS Plus growth, after subscriptions have declined over the past two quarters
- Sony has also started investing heavily in streaming service games with its purchase of Destiny developer Bungie this year for $3.6 billion and its promise to release 10 streaming service games by 2026.
Sony has room to recover. The company’s PS5 remains the leading next-generation console platform, and Sony has plenty of reason to be hopeful about the future of its gaming business.
- In a year of lackluster AAA game releases, Sony’s Santa Monica Studio will release the long-awaited God of War Ragnarök this November, and Naughty Dog will release a PS5 remake of The Last of Us next month. The company is also pouring money into film and television adaptations of its games to diversify its entertainment business.
- Analysts do not expect the increased price of PS5 to decrease sales of the console in the coming months. “The high pent-up demand for Sony’s device means that this 10% price increase in most markets will have minimal impact on console sales,” wrote Ampere Analysis’ Piers Harding-Rolls. “We expect Sony’s sales forecast for the PS5 to remain unchanged.”
- “PS5 Digital Edition has always sold at a loss. Standard Edition was selling at a profit, per unit, at the beginning of the year,” explained Niko Partners’ Daniel Ahmad. “In other words, Sony wants to keep hardware profitability stable, is passing on the higher costs to consumers, and hopes that strong demand for the console will allow it to meet its fiscal year targets.”
- For now, Sony knows where its hottest battleground is: here in the US, where competition from Microsoft’s Xbox is fiercest and the strong dollar means prices can stay flat and margins steady. But a PS5 price hike amid ongoing supply issues has given Microsoft another advantage.
- The PS5 “is still supply-constrained, so it won’t see any potential impact on demand for a while,” wrote NPD’s Mat Piscatella. “But theoretically at some point the markets will not be limited. Then things will get interesting.”
— On the contrary, Nick
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#TGIF: How to spend the weekend
“Lost Ollie” – Netflix. Lost or discarded toys trying to find their way back to their owners is a story as old as time, and there have been what seems like a dozen “Toy Story” movies dealing with the same theme. Still, Netflix’s new limited series “Lost Ollie” stands out from the crowd with its own take on growing up, the fleeting nature of childhood memories, and the kinds of adventures only children and the young at heart can have. undertake A fantastic four-parter to watch with your little ones this weekend.
The Joe Rogan Experience: Mark Zuckerberg — Spotify. Think of Joe Rogan what you will, but when Zuckerberg sits down with the podcaster to share some exclusive news (Project Cambria is coming in October), as well as his thoughts on Meta’s hardware strategy, the appearance of VR fitness (“It happened a lot sooner than I thought”) and the future of visual computing and brain-computer interfaces, you need to tune in. Just be aware: the entire conversation is almost 3 hours long!
Netflix warns! – App Store, Google Play. The charade game “Heads Up!” it’s been a hit on iOS and Android for a while now. Now Netflix has licensed the title as part of its growing mobile gaming initiative. But instead of replacing the existing version, the video service simply released a Netflix-specific version with tons of charade messages related to shows like “Stranger Things,” “Bridgerton” and “Squid Game,” as well as categories like ” Strong Black Lead”. ”, “Netflix Family” and “True Crime”. It’s a fun game to play with all the TV and streaming nerds in your life. Netflix subscription required.
The Great Consolidation of the Video Game Industry — The Ringer. Microsoft wants to acquire Activision Blizzard for $68.7 billion. Take-Two has spent $12.7 billion to acquire Zynga. Sony has paid $3.6 billion for Bungie. Overall, the video game industry has seen 651 transactions totaling $107 billion in the first half of this year alone. Will this trend continue, why is it being pushed, and what does it mean for game developers, gamers, and the industry in general? In this deep dive, The Ringer explores the era of gaming mega-mergers, and it’s well worth the read.
—Janko Roettgers
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Thoughts, questions, advice? Send them to entertainment@protocol.com. Enjoy your day, see you on Tuesday.