During this morning’s Investor Relations Day held by Sony in Tokyo, PlayStation head honcho Andrew House held a presentation in which he explained that the gaming arm of the company aims to increase the operating income margin to between 5 and 6% of the revenue by the fiscal year 2017.
This raised questions among analysts on why Sony predicts lower income margins during the first part of the life cycle of the PS4 won’t be as high as those in previous life cycles, especially considering the shift towards a network-oriented business.
House explained the reason, also mentioning that the company is taking a conservative approach to its forecasts.
I think you’re specifically referring to the PlayStation 2 life cycle where saw peack margins in the double digit range. You’ve also almost implicitly answered the question in the question itself. A lot of this is driven by a structural shift in the business away from purely physical media to a much more complex margin structure around network distribution.
A point that I would highlight is that on the PlayStation 2 life cycle, because we were dealing only with third party physical sales it was a royalty base model and obviously now that shifted to more of an e-commerce-based retailer margin model, and that is having significantly some impact on the shift.
I think as well that we are seeing some more complexity in the form of the way the consumers are purchasing content. We’ve moved from buying purely a single game sale to the purchase of add-on content, to the purchase of avatars, micropurchases that are associated with the game. We’re starting to see the emergence of free to play games, which are making their way to consoles for the first time.
I would say in summary that based on many of these different shifts, this is leading us to take a somewhat more of a conservative view of the outlook for margins over the business. We feel that’s a reasonable way to approach the planning for this cycle.
We’ll have to wait and see if the PS4 and the rest of the PlayStation business will manage to outperform Sony’s conservative approach. Things seem to be going well, and the Sony is aggressively reducing production costs. Time will tell how successful they will be.