The PlayStation DualSense controller and the PlayStation 5 console.
Jakub Porzycki | Nurphoto | Getty Images
About $10 billion in value disappeared Sony’s shares last week after the Japanese tech giant cut its sales forecast for its flagship PlayStation 5 for the fiscal year.
Analysts, who already thought Sony’s PS5 target was too high, told CNBC that a bigger problem for the company is shrinking margins in its core gaming business.
Sony announced this week that it now expects to sell 21 million units of the PS5 in the fiscal year ending in March, compared to its previous forecast of 25 million units.
The company’s shares fell after the announcement, with about $10 billion worth of the stock wiped from the forecast cut, according to a CNBC calculation using FactSet data.
But analysts were watching another key metric — operating margin in the gaming business — which came in just under 6 percent for the December quarter, according to a CNBC calculation. In contrast, Sony’s operating margin was over 9% in the December 2022 quarter.
“The reduction in the PS5 shipment forecast … is not what is disappointing … What is disappointing is the low level” of the operating margin, Atul Goyal, equity analyst at Jefferies, said in a note to clients on Wednesday.
It added that before the January-March 2022 quarter, margins in the gaming unit were around 12% to 13% over the previous four years.
Sony’s single-digit profit margin last quarter is there “despite various tailwinds that should have pushed margins up to 20 percent,” Goyal said, adding that the situation is “extremely disappointing.”
Those tailwinds include sales of first-party games, which are increasingly in the form of digital downloads, in addition to the high-margin PS Plus subscription service, which has about a 50% margin, according to Goyal.
“Their (revenue) turnover from digital sales, add-on content, digital downloads is at an all-time high … And yet their profit margins are at decade lows. That’s just not acceptable,” Goyal said in an email to CNBC.
Goyal pointed out that the current profit margin for Sony’s gaming business is “almost at an almost decade low.”
The analyst questioned how, with all these higher-margin products, the gaming division’s operating margin remained so thin.
Serkan Toto, CEO and founder of Tokyo-based game consultancy Kantan Games, said he believes hardware production costs have actually come down since the PlayStation 5 is more than three years old and Sony would have better economies of scale by that moment.
Toto said part of the reason margins have been squeezed more recently is that the cost of producing software has risen.
“Spiderman 2,” released last year and produced by Sony-owned Insomniac Games, cost about $300 million to make, according to gaming website Kotaku, citing an internal presentation leaked by a ransomware group. hacked the company.
“So those budgets appeared to have a significant impact on their gaming margin over time,” Toto said.
Sony and Insomniac Group did not immediately respond to CNBC’s requests for comment.