Sony's PS5 price increase marks the end of an era
Hello and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Friday, we’re discussing Sony’s bombshell news yesterday that it’s 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 harder to get in most places around the world. Not because of supply issues, though those persist, and not because of re-sellers or bots or another middleman keeping Sony’s game console from the masses. Instead, it’s Sony’s own doing in the form of an unprecedented price increase of about 10% in most markets around the world, save the U.S.
It’s an alarming turn of events for the company’s gaming division that, until this year, had been riding high on the success of the PlayStation 4, as well as a strategy of exclusive games and a lucrative ecosystem growth on the backs of big hits like Epic’s Fortnite and Activision’s Call of Duty. PlayStation’s golden age may very well be over.
Sony is feeling the pain. Like many of its peers in the game industry, Sony is experiencing a drop in sales after two years of booming pandemic-era growth. The company hasn’t released a major exclusive hit since God of War and Marvel’s Spider-Man in 2018, and supply issues have hamstrung the growth of the PS5. Consumer spending on games is now down across the board.
- After analysts began forecasting a decline in game industry revenues earlier this summer, Sony reported dire fiscal Q1 earnings last month: a year-over-year decline in software sales of 26%, only a 4% increase in PS5 shipments and a double-digit reduction in its annual profit forecast. Sony’s stock is down more than 30% this year, too.
- Sony attributes its struggles, and the price hike, to a variety of factors: inflation first and foremost, but also “adverse currency trends” and macroeconomic pressures that have begun to affect video game spending and industry growth.
- As for why the game industry is starting to decline, Sony CFO Hiroki Totoki said earlier this month that “opportunities have increased for users to get out of home as COVID-19 infections have subsided in key markets.” Game time on PlayStation was down in Q1 by 15%, the company added.
- It’s also true that game delays have been happening left and right, while last year’s Call of Duty, a big moneymaker for PlayStation, massively underperformed.
- Research firm NPD reported this month that Q2 revenues in the U.S. declined year-over-year by 13%, citing high gas prices, the return of spending on travel and live events, and a “lighter release slate of new games” alongside “hardware supply constraints.”
PlayStation’s larger issues are more existential. Sony will undoubtedly weather the current storm, and the PS5 price increase is designed to help it do so. But the company is facing a bigger threat: industry changes to game distribution in the form of cloud streaming and subscription services pushed by a much more formidable Microsoft.
- Microsoft admitted this month in a regulatory filing that Sony’s PS4 outsold the Xbox One more than two to one. But the Xbox 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 its larger company coffers to buy its way to a more advantageous position. Xbox chief Phil Spencer said this week he feels “good about the progress” his company is making on satisfying regulators to get its nearly $70 billion Activision Blizzard deal closed.
- The Xbox, thanks in part to lighter demand, has also been easier to find than the PS5, helping Microsoft lead three straight quarters of U.S. game 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 released 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 flagging PS Plus growth, after subscriptions declined the past two quarters.
- Sony has also begun investing heavily in live service gaming with its purchase of Destiny developer Bungie this year for $3.6 billion and its pledge to release 10 live service games by 2026.
Sony has room to bounce back. The company’s PS5 is still the leading console platform of the new generation, and Sony has plenty of reasons to be hopeful for the future of its gaming business.
- In a year of lackluster AAA gaming releases, Sony’s Santa Monica Studio is releasing the highly anticipated God of War Ragnarök this November, and Naughty Dog is launching a PS5 remake of The Last of Us next month. The company is also pouring money into film and TV adaptations of its games to diversify its entertainment business.
- Analysts don’t expect the PS5 price hike to dampen sales of the console in the months ahead. “The high pent up demand for Sony’s device means that this price increase of around 10% across most markets will have minimal impact on sales of the console,” wrote Ampere Analysis’ Piers Harding-Rolls. “We expect Sony’s sales forecast for the PS5 to remain unchanged.”
- “PS5 Digital Edition has always been sold at a loss. Standard Edition was being sold at a profit, on a per unit basis, earlier this year,” explained Niko Partners' Daniel Ahmad. “In other words, Sony wants to keep hardware profitability stable, is passing on increased costs to consumers, and expects high demand for the console will allow it to hit FY targets.”
- For now, Sony knows where its most heated battleground is: here in the U.S., where competition with Microsoft’s Xbox is strongest and the strong dollar means prices can remain unchanged and keep margins stable. But a PS5 price hike, in the middle of ongoing supply issues, has handed Microsoft another advantage.
- The PS5 is “still supply constrained, so won't see any potential demand impact for a while,” wrote NPD’s Mat Piscatella. “But theoretically at some point the markets won't be constrained. Then things will get interesting.”
— Nick Statt
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#TGIF: How to spend your weekend
“Lost Ollie” — Netflix. Lost or discarded toys trying to find their way back to their owners is a tale as old as time, and there have been what feels like a dozen “Toy Story” movies dealing with the same subject. 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 types of adventures only children and the young at heart can undertake. A great 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 emergence of VR fitness (“It happened way sooner than I thought”) and the future of visual computing and brain-computer interfaces, you kind of have to tune in. Just be warned: The whole conversation is almost three hours long!
Netflix Heads Up! — App Store, Google Play. The charades game “Heads Up!” has been a hit on iOS and Android for some time. Now Netflix has licensed the title as part of its growing mobile games initiative. But instead of replacing the existing version, the video service simply released a Netflix-specific version with tons of charades prompts 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. A Netflix subscription is 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. All together, the video game industry has seen 651 transactions totaling $107 billion during the first half of this year alone. Will this trend continue, what is it driven by and what does it mean for game developers, players and the industry at large? In this deep dive, The Ringer explores the age of the gaming mega mergers, and it’s well worth a read.
— Janko Roettgers
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Thoughts, questions, tips? Send them to email@example.com. Enjoy your day, see you Tuesday.