Sony must now prove its PS5 is a real winner

Sony Group Corp. copped it on multiple sides last quarter. Its sensor business was hurt by a smartphone slowdown, the entertainment arm suffered from a relative lack of hits, and software sales disappointed at the marquee games division. But with PlayStation 5 production shortages finally fading, the Japanese giant needs to show this coming year that its latest console can carry other underperforming divisions.

Revenue for the fiscal third quarter climbed 13% to 3.41 trillion yen ($26.4 billion), missing estimates for 3.5 trillion yen, even as an 8% fall in operating profit beat expectations. Removing foreign exchange impacts, sales would have actually dropped 2%, the company said. More than 83% of the increase in sales at its game and network services business so far this fiscal year have come from a weaker yen, according to Bloomberg Opinion calculations based on data released by the company Thursday. It’s a similar story for the other divisions. The company trimmed its full-year revenue outlook while slightly boosting the operating income forecast.

Earlier, Sony announced that Chief Financial Officer Hiroki Totoki will add president and chief operating officer titles to his resume. News of a fresh management team comes just a week after the shock transition at Toyota Motor Corp. was announced. But with Kenichiro Yoshida retaining the chief executive officer and chairman roles at the electronics giant, it’s a much smaller change than the automaker’s: Yoshida and Totoki are already a long-standing team who come from Sony’s internet service provider So-net.

The two will be resting their hopes on the return to form of the company’s PlayStation 5 unit. A record 7.1 million units were sold in the quarter, although that trailed estimates of 7.3 million. Since being launched during the Covid-19 pandemic in late 2020, Sony has complained that it couldn’t make enough PS5 devices. Its first Christmas saw the games-hardware unit deliver the worst holiday quarter in 14 years, since the 2008 financial crisis. Things further deteriorated as lockdowns and other virus-related restrictions caused production and logistic snarls that crimped output both of finished consoles and many of the chips that go inside. Sales the following shopping season dropped to just 3.9 million units, but the uptick last quarter means Sony can finally boast having surpassed 32 million PS5 units two years after launch. That’s about three to six months slower than its predecessor.

Asked about the PS5 sales miss at a press conference in Tokyo on Thursday, Totoki said supply constraints had still not been fully eased. “We still haven’t gotten enough consoles to customers,” he said. “We’re not worried about the momentum of demand — our focus is on making sure we are getting enough units delivered.”

While production constraints are a legitimate gripe for Sony, which relies on third-party assemblers and chip vendors, they’re not new. The PS3 and PS4 were both hit by shortages as supply chains struggled to get up to speed and cater to seasonal peaks and troughs. This current disruption appears both longer and more severe, yet the struggle to procure and sell hardware doesn’t negate another uncomfortable truth Sony must grapple with. Subscriptions for its PlayStation Plus service have dropped four times in the past eight quarters, an unprecedented sign of weakness since it was launched more than seven years ago. Additionally, monthly active users have declined, showing less engagement among those who did manage to get their hands on a console.

The flow-on impact could be even more severe. Sony sold 86.5 million units of gaming software in the most recent quarter, 6 million fewer than a year earlier and averaging 5.8 units per console sold over the prior year. That’s well below historical figures for the December quarter of prior years. Demand for the PlayStation VR2 unit, which goes on sale later this month, seems weak, no doubt thanks to its prohibitive price point — at $549.99, it costs more than a PS5 itself.

However, Totoki can take heart in the fact that more than 20 million of those software sales were its own first-party titles, from which Sony takes home all the proceeds. More than half of that amount came from success of God of War Ragnarok, the sequel to the 2018 hit, which has shifted 11 million units since going on sale in November. Its first-party content strategy is starting to pay off as well in the success of The Last of Us, the HBO show based on its videogame that is breaking viewing records in the US. Sony has taken a long time to get its own library of exclusive franchises together that can compete for eyeballs with Microsoft Corp.’s Halo or Nintendo Co.’s treasure trove of intellectual property. But with Microsoft’s Xbox division floundering and Nintendo’s Switch console aging, the PS5 increasingly has the field to itself.

And after two years in which it was nearly impossible to walk into store and pick up a PS5, the supply crunch has finally been eased. Gamers who couldn’t find a unit won’t have missed that much, with few titles that weren’t also available on the aging PlayStation 4. That’s about to change, with a wave of games beginning to hit exclusively for PS5, including two Final Fantasy games from Square Enix Holdings Co., as well as Spider-Man 2 in 2023.

Performance of those titles and the PS5 itself will show if the console can propel the firm in the same way its predecessor did — or if demand for gaming is being depressed as inflation cuts into entertainment budgets worldwide. That’s a day-one problem that Totoki would rather not have to deal with.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.

Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.