Why Sony Should Not, and Will Not, Leave the Hardware Business

Video game journalism, like every kind of journalism, often thrives on negativity and controversy. Since the inception of the trade, writers have been scrambling to cover wars, fires and robberies a lot more eagerly than any kind of news that would make the (non-sadistic) reader smile. It’s part of human nature, mind you, so it’s hard to honestly blame them and claim to be free of guilt. If a writer comes to you swearing to have never done that, he’s probably lying, me included.

In our industry the journalistic community often loves to choose a cyclical poster child of negativity and to collectively bash on it for a while before moving on the next victim. When that happens, one of the entities operating in the business becomes the one that is cool to hate on, and in the last few month the bulls-eye has been painted on Sony.

There’s no day waning without a writer setting in front of a keyboard somewhere to bemoan Sony’s current situation. According to our friendly neighbor armchair businessmen, Sony’s obviously inept executives can’t do anything right, and lately I’m even reading articles suggesting that the consumer electronics giant should abandon the hardware business altogether. To that I say “bollocks”.

I understand that an extremely oversimplified vision of business and of the industry could suggest the simplest solution to the current problem. When a business isn’t making you money or is losing it, you just close it and move on with your life. It may be that simple when you’re running a lemonade stand, but moving up from anything beyond a corner store it isn’t, let’s not even talk about a multi-billion corporate giant with a revenue bigger than the gross domestic product of a small nation.

To be completely honest, if all the armchair businessmen suggesting magical solutions to solve Sony’s (or Apple’s, or Nintendo’s, or anyone else’s in the industry, really) problems were savvy enough to make any sense, they’d probably be working for them or compiling resumes to that end instead of writing on websites. It would make them way more money and suddenly buying the next console or a top-of-the-line gaming PC wouldn’t be a problem anymore. Yeah, I’m no exception to this rule either.

Of course, everyone is free to express his own opinion. Without that kind of speculative (or wildly imaginative) articles in which everyone thinks everything would go much smoother if he was in charge, we’d have a lot less to write about, and probably a lot less fun. After all science fiction is a very legit genre and millions enjoy reading it.

Nevertheless, call me a spoilsport if you will, but I personally prefer a reasonable degree of cold realism. That’s why I’m not going to offer solutions today, as there are people that studied business, brand management and marketing a whole lot longer than I did (and as a matter of fact, I did) thinking over plenty solutions of their own, and I will simply tell you: “don’t worry, be happy, Sony’s here to stay” and offer a few reasons why. I’m sure I’ll be stating the obvious for a lot of you, but apparently we’ve come to a point in which some need to be told and I’m always glad to be of service.

Let’s start by looking at the issue from a corporate point of view: the big problem is that during the last financial quarter the game division of Sony lost 45 million dollars.

I’m sure that sounds like a whole lot of money to me, you and every other average taxpayer, but Sony is a company worth 166 billion dollars in assets, with a quarterly operating income of  19 billion. A loss of 45 million for a single financial quarter is obviously not going to make any investor happy (no figure in the red would), but a financial giant like Sony is going to eat it, smile and keep on coming. We’re talking about a loss of a whopping 0.027% of the company’s assets. This kind of loss isn’t even going to tickle, at least for a while.

A rather funny fact is that the game division isn’t even near to being the biggest red number in Sony’s quarterly reports. Between the branches of the business that lost money in the latest quarter, it’s actually the one that lost the less.

The Home Entertainment & Sound division (that includes Sony’s declining TV business) lost 126 million dollars, Sony Pictures lost 62 and Mobile Products and Communications (mobile phones and laptops) lost a relatively sizable 356 millions. So why are people suggesting to leave the console hardware business when Vaio computers and Bravia TVs are losing Sony a lot more money and have been for a while longer?

Let’s move right along to another basic concept of business: successful brands are considered, nowadays, one of the most valuable assets a company owns. While brand equity doesn’t directly translate to cash, the PlayStation brand has been rated over three and a half billion dollars in value. Closing the console hardware division would mean throwing that value right into the recycle bin. I can tell you right now that no one in his right mind is going to set that “little” treasure on fire, and while Japanese businessmen are known to indulge in a few cups of Sake while relaxing and socializing, it would take way more than that to get one drunk enough to waste a brand worth three billion.

Know-how also has a very relevant value in any kind of business, and Sony Computer Entertainment accumulated an immense amount of experience and research over the years since the company started working on the first PlayStation. Admittedly, some of that research could be applied to other fields like TVs and Mobile devices, but if Sony were to quit making consoles, a lot of it would simply go wasted. Again, not going to happen.

The public image and trust in the Sony Brand would also be impacted in a crippling way by the closure of PlayStation, that has been a poster child for the company for a long while. Stock prices would collapse on the spot, and millions of voices of investors all over the world would suddenly cry out in terror, and then be suddenly silenced.

Let’s not even go into the fact that thousands of workers would find themselves without a job, and firing several thousands of employees isn’t exactly a joke in Japan, without even mentioning all the companies that work on manufacturing PlayStation consoles, that would suddenly find themselves in very bad waters due to the loss of business. Closing the PlayStation brand would probably cause a mini-financial crisis in Japan, all by itself.

In the best case scenario Sony would receive an absolutely crippling blow by giving up on PlayStation, and in the worst (and most likely) scenario the aftereffects across the board would simply bring the company to bankruptcy. To  be completely honest the option is not even realistic, as the company could take much less damaging steps before even thinking of doing something that radical. Even in the extreme scenario that would see them willing to go as far as closing a whole brand, there are others that perform and have performed much worse, and have a lot less market share, visibility and impact on the overall image of the company.

Ultimately there isn’t even a solid reason for Sony to drop their console manufacturing. Losses are too negligible to even consider it. The PS3 is performing well in Europe and extremely well in Japan (that remains one of the most relevant markets for the company), and it’s way too early to write off the Vita. While the degree of success is inferior to the previous generation due to the presence of very solid competition, the next generation is already around the corner, and there’s plenty of room for growth there.

Of course, the above is just a look at the business-related point of view, and many gamers are more interested on the impact of such a scenario on their enjoyment and pockets, more than on the pockets of a bunch of businessmen sitting across a big pond.

One thing is pretty much for sure. If Sony quit the hardware business the effects on our hobby would be very negative across the board, and not just for those that own or care about owning a PlayStation console.

First and foremost such an option, if it was even possible (and it pretty much isn’t for the foreseeable future), would remove a prominent element of competition from the market, and the home console industry doesn’t have that much competition to begin with, counting only three major players.

Add the fact that Nintendo is partly in its own niche, as the Wii offers a very different kind of product, aimed to a very different target from the PS3 and the Xbox 360, and the Wii U will most probably place itself in a generational middle ground between those two and their successors, and things look even more like an invitation party instead of an healthy market with many players. The portable console market is even worse, with only two major names, even if mobile devices provide indirect competition that make things a little less fossilized.

That’s a problem, as the console market thrives on competition, especially at the advantage of the customer. This generation has been peculiar because all three major home consoles were very solid and popular products, prompting each other to step hard on the pedal of quality and innovation in order to gain a competitive edge, not to mention to reduce prices as much as possible.

There hasn’t been another generation, in which gamers have been pampered, coddled and cherished as much by console manufacturers, that not only had to strive to make their consoles as affordable as possible, but also took steps in order to offer additional services and bonuses on top of the best games possible in order to respond to each other’s advancements.

This is, to put it down simply, an ideal scenario for gamers.

The removal of a major competition factor would inevitably give more breathing room to the remaining companies, causing them to live in a situation of semi-monopoly where they would not be as compelled to offer more quality, more innovation and more services at a lower prices as they are now. Ultimately, if Sony (or anyone else, mind you) were to leave the hardware business we’d have worse products that would retain their initial high price point longer.

Sony is also a major driving force for technological innovation in the console hardware industry, while Nintendo has driven functional innovation. Both factors are necessary to evolve the industry at a good pace, and if Sony were to simply call it quits, the console industry would slow down sensibly, while the already large performance gap with PC-based platforms would increase.

Some think that we wouldn’t lose the cutting edge exclusive games Sony Computer Entertainment develops with its first party studios if PlayStation were to disappear, arguing that they’d simply be playable on other platforms, with the additional benefit of more resources available to software development, but that’s simply not realistic.

Sony’s exclusive games don’t have the current degree of quality (and the lovely quirky vision that often characterizes their smaller projects) because SCE’s first and second party studios are magically better than everyone else working on consoles.

Instead, it’s because first and second party studios are given the blessing of working with a lot more support from the hardware manufacturer, enjoying synergies that third party studios simply don’t have access to. They can use the best proprietary tools in the industry and have a much more direct approach to those that can solve any hardware problem they could encounter.

They can also afford spending a lot more resources on games, and to be bound less to sales figures in order to gauge success and failure. Their games aren’t only made to turn a profit by themselves, but their primary business purpose is to drive sales of the hardware. Even when they’re developed at a loss or narrowly break even, expenses are recouped by the income from royalties of third party games driven by hardware sales.

If PlayStation were to disappear, all those first and second party studios (at least those that would survive the aftereffects of the closure, and not all of them would) would suddenly find themselves in the same conditions as every third party studio, and while some would still probably have a certain degree of excellency, they would have to work with tighter budgets, a more attentive eye to sales, less access to resources and development tools and ultimately much worse conditions across the board.

Would they still make good games? Most probably. Would they be as good as they are now? Most unlikely.

It’s in the best interest of both gamers and investors for Sony to hold tight on the PlayStation brand, its assets and its legacy of research and excellence.

Will they take steps to address the current situation (that isn’t nearly as bad as many describe)? Of course they will, but they will probably do it in the way that is rooted in the corporate culture of most Japanese companies: they will roll up their sleeves, pump even more quality and services into their product and increase customer satisfaction as much as possible in order to come out on top again. Whether they will succeed or not is for the posterity to decide, but that’s not the point.

Some may think that the old and stubborn “Samurai spirit” in business is outdated, replaced by a more modern and catchy focus on marketing and promotion and by cutting losses as much as possible. They might even be right, to a point, but ultimately that spirit is good for us, and PlayStation is here to stay.

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Giuseppe Nelva

Hailing from sunny (not as much as people think) Italy and long standing gamer since the age of Mattel Intellivision and Sinclair ZX Spectrum. Definitely a multi-platform gamer, he still holds the old dear PC nearest to his heart, while not disregarding any console on the market. RPGs (of any nationality) and MMORPGs are his daily bread, but he enjoys almost every other genre, prominently racing simulators, action and sandbox games. He is also one of the few surviving fans of the flight simulator genre on Earth.

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