The PlayStation 5 is coming. Sony Interactive Entertainment is launching the next-generation console this holiday. And one of the ways you can tell it’s imminent is that the company’s current games business is going through a cyclical decline. As part of its third-quarter earnings report, Sony announced that PlayStation sales dropped 20% compared to the same period in the previous fiscal year.
Sony’s Game & Network Services Segment generated 632.1 billion yen ($5.8 billion). That’s down 158.5 billion yen ($1.4 billion) from 790.6 billion yen ($7.2) in Q3 of fiscal 18/19. The company claims that the decline is due to decreased PS4 hardware sales. A decrease in sales from third-party games hurt both Sony’s revenues and operating income, which declined from 73.1 billion yen ($667 million) to 53.5 billion yen ($489 million).
For Sony, none of this is out of the ordinary.
“Our financial results this fiscal year are in a period of adjustment as we approach the
transition to the PS5 next-generation console,” reads Sony’s financial report. “And because the contribution of free-to-play titles last fiscal year was quite large.”
While PS4’s hardware sales are slowing, the company did reveal it surpassed 108.9 million PS4s sold.
PlayStation sales slow along with Fortnite and third-party delays
One of the “free-to-play titles” that is dragging down Sony is Fortnite. That game was a phenomenon through holiday 2018. And platform holders like Sony, Microsoft, and Nintendo get 30% of every item purchased through their stores for third-party games. That inflated the results for the PlayStation business and made for a tougher comparison for holiday 2019. Microsoft’s Xbox division saw a similar trend and was down a nearly identical 21% year-over-year as a result.
To be fair to Fortnite, it is still very successful. It’s just not sustaining its peak performance.
But because of Fortnite and some notable third-party delays, Sony is not expecting to generate as much revenue or operating income for its current fiscal year. The big delay that most affects Sony’s current fiscal year is Final Fantasy VII Remake. Square Enix moved Final Fantasy VII Remake from a March 3 release to April 10, which puts it just outside of the end of Sony’s Q4.
“We revised downward our [fiscal-year] sales forecast by 50 billion yen to 1 trillion 950 billion yen and our operating income forecast by 5 billion yen to 235 billion yen,” reads Sony’s statement. “The revision in sales was due to a change in our forecast for third-party software sales, including the impact of postponement into next fiscal year of the sale of several titles.”
A smoother transition from PlayStation 4 to PlayStation 5
The big reason that Sony isn’t panicking about its PlayStation business dropping 20 percent year-over-year is because this is normal. The PS4 debuted November 2017. By now, Sony has saturated much of the market for dedicated gaming consoles. And even as more people get interested in the space, many are likely holding off to purchase a PlayStation 5 or Xbox Series X this holiday instead.
And it’s possible to look at PlayStation’s year-over-year decline as a good thing because it could be much more drastic. But Sony’s shift toward services like the PS Plus and PS Now subscription services are helping to ensure a more gradual jump from current hardware to the next system.
“When you look at our results over the mid- to long-term, you can see that our game business is steadily growing, as is evidenced by the growth of network services like PS Plus,” reads Sony’s statement. “And we expect that growth to continue going forward.”
PS Plus now has 38.8 million subscribers. That generates significant sales for Sony, and the membership number is continuing to grow.
Keeping PlayStation players in the PlayStation ecosystem
Sony can also use PS Plus benefits, like a library of games you can claim each month but only keep as long as your subscription is active, as a way of moving its huge PS4 audience to PS5.
“We aim to leverage this large community and network services revenue stream to affect a smooth transition from the current console generation to the next,” reads Sony’s statement. “[This is] unlike in the past when profitability deteriorated significantly due to development and marketing costs.”
You can see in this chart from Niko Partners analyst Daniel Ahmad exactly what that past deterioration looked like.
You can see even during the massively successful PlayStation 2 years, Sony’s operating income plummeted near its end of life. The PlayStation 3, meanwhile, was a very expensive operation for Sony and only had two years of generating an income. And now, Sony expects to generate a massive operating income even as it launches new hardware, which is something it has never pulled off before.
This is why services are so important to gaming companies like Sony, and it’s why the entire industry is moving in that direction.