Sony's stock lost $10 billion in value last week after the tech giant lowered its forecast for this year's predicted PlayStation 5 sales.
However, this announcement belies a bigger issue according to financial analysts as reported by CNBC. Though the choice by Sony to drop its prediction of 25 million PS5 sales in the upcoming fiscal year to 21 million caused the company's stocks to dive, this move is just a symptom of a bigger problem at the tech giant, according to Jefferies equity analyst Atul Goyal.
Goyal said that Sony's "forecast cut for PS5 [...] is not what is disappointing." Rather, it comes down to a fall in the company's gaming operating margin. For those not in the know, an operating margin refers to the leftover profit an organization makes after all operating costs are taken care of.
Per CNBC, Sony's operating margin in the gaming industry came into just under 6 percent last quarter. This is markedly less than the 9 percent we saw this time in 2022. Goyal also added that, before the beginning of 2022, Sony's margins were around 12 and 13 percent during the previous four years. The analyst called this reduction in margins an "extremely disappointing" trend.
What's especially curious is how the revenues on digital sales and add-on content are "at all-time highs." This means that, though Sony runs a profitable gaming section, it's also costing the company a great deal of investment dollars, too.
According to CEO of Tokyo-based games consultancy Kantan Games, Serkan Toto, this reduced margin is caused by the ballooning cost of making games which has a "significant impact" on potential profits.
Back in 2020, Shawn Layden, former chairman of Sony Interactive Entertainment Worldwide Studios, predicted that the PS5 era would make for an even more costly development process. "I don't think, in the next generation, you can take [development costs] and multiply them by two and expect the industry to continue to grow" (via Kotaku).
In response to "ballooning AAA budgets," our own Rhys Wood recommends that we prioritize smaller games in 2024 - advice that could benefit executives, too.
Expensive though they may have been to make, the best PS5 games and the best PS5 exclusives are excellent games in their own right.
