Playstation in 2024 | Show me the margin.
A few weeks back Sony had their annual segment review, looking at how all their business lines from TV’s to game consoles sold. I gave the deck a read - full copy here and wanted to highlight the top slides people need to understand to really grasp where Playstation is at in 2024.
Let’s start with this claim that PS5 is the most profitable generation. This is somewhat surprising at first glance because of 3 reasons.
1) Current gen consoles supplies were clogged during COVID, hurthing Sony and Microsoft’s ability to move consoles, and subsequently sell software.
2) This console generation isnt’ “over” yet and probably won’t for another 24-36 months
3) Hardware sales globally have stalled, causing some to question the value of consoles in todays games industry.
However, as we’ll see in other slides - the profit story is only party on the revenue/sales side. Of course the second side of the coin is cost. That story starts with where customer lifetime value comes from when they buy a PS5.
This is only a somewhat surprising chart. We all understand that live service elements in modern games means more spend on in-game add-ons. Whether that’s MTX in Free-to-play games like Fortnite, Genshin, Apex etc. or paid expansions for new premier titles (think Cyberpunk 2077 or Elden Ring’s upcoming DLC). We have all witnessed a marked increase in add-on spend.
What scratches some heads though is just how hard Sony doubles down on AAA premier titles like Ghosts of Tsushima or God of War when they lay out a 12% drop in full game sales. That isn’t to say they should deprioritize those, Sony is best in class in ultra-polished, $60, single player titles. It’s just striking that, apart from buying a couple of studios for live service revenue, that Sony isn’t getting in front of this.
Linking this back to the previous slide, when you’re not shipping hard copies of games and digital sales of add-on content is really where the PS5’s lifetime value comes from, you’re going to see better operating profit. We’ve been seeing this is in recent generations anyway with the increasingly widespread adoption of digital games (RIP gamestop). This is where the margin lies, and where the shareholders get happy. High operating leverage by selling high price, low cost digital goods on a strong install base that can span both PS4 and PS5. This is great in the short run but I also fear that it will make Sony’s life tougher trying to sell the PS6. The marginal improvements generation to generation are so slim, that they may find themselves in a 3 generation revenue picture.
Right above is the money slide. Half of PS’ revenue coming from 10 or so titles, nearly half of them being free to play.
The biggest punchline? The games industry is increasingly a winner take all market. The 7000-9000 titles fighting over 50% have such a steep mountain to climb to not only get any market share/revenue but to turn a profit. The 12 titles comprising the other 50% have so much operating leverage being an established live service game. Players are either in their “forever games”, pumping another 100 hours into Fortnite or they’re trying out Helldivers II or Palworld for the weekend before heading back to Fortnite.
What’s interesting is that this 50/50 split really hasn’t shifted much in the last 36 months. Also the fact that most of those titles are muli-platform being on both PS4 and PS5. They can tap into the 49M active PS4’s as well as the 50M PS5’s. This remark is part of a much bigger commentary on the death of console exclusives and the case of multi-platform releases.
If you’re curious about it - I highly recommend this polygon article
This slide basically categorizes the PS slate into 3 categories. “Tentpoles” are your Spidermans and Ghosts of Tsushima while “Transformational” are your Hell Divers II or The Finals. The deck doesn’t really give an example of “Experimental” games - hmmm I wonder why? Probably because the 12 titles that make up the 50% of revenue are all Transformational, live service games. The experimental category just isn’t commercial enough to Sony. Also “discipline on scope and budget” is very funny wording.
To Wrap
This was a pretty quick and dirty post on Sony’s latest strategies. I think the market isn’t surprised with what they’re seeing here, but it is refreshing to see a quantification of the qualitative insights people have been deriving. I recommend you look at all the slides if you want to dig a bit deeper!
