Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

It's going to be a good year for Sony Corp. 

Analysts have been saying it, traders have been saying it, and now finally the company itself on Friday said it.

Although Sony's operating income forecast for the year through March 2018 was slightly below analysts' estimates (500 billion yen, or about $4.5 billion, versus 507 billion yen), there's a sense that the company may be low-balling the numbers so it can give investors an upward revision later in the year.

Strength to Strength
Sony forecast a solid year thanks to a turnaround in chips and continued growth in games and pictures
Source: Bloomberg, Sony

The standout among the various divisions was a massive turnaround at Sony's chip business. But most of that can be attributed to one-time gains from asset sales and the absence of earthquake-related losses that weighed on performance a year ago.

In reality, it's Sony's games division that will anchor sales growth in the coming year, and continue the bottom-line gains delivered in the 2016 financial year. Between them, games and music account for half of Sony's value, according to a sum of the parts valuation by Jefferies analyst Atul Goyal.

Yet there's been one major event recently that seems to threaten the golden goose. That's the release of Nintendo Co.'s Switch games console.

By all accounts, Switch -- a hybrid set-top and handheld device -- is doing well and will sell 10 million units this year, according to both analysts and the company.

Like Sony, Nintendo may be underplaying its forecast for hardware and games sales. Analysts had modeled for 4.7 titles to be sold per unit, while Nintendo estimated 3.5. Investors didn't buy into the conservative outlook and sent the shares up 2.1 percent on Friday after the announcement.

Listen and Play
Jefferies estimates that games and music are the two most valuable parts of Sony's business
Source: Jefferies
*Imaging Products & Solutions/Home Entertainment & Sound.

The question is whether sales of Switch will hurt Sony's marquee PlayStation 4, and if so by how much.

An early look at the data indicates the impact isn't too severe. Switch went on sale March 3 and shifted 1.6 million units for the month, according to VGChartz.com. That certainly hit PS4 sales, but by my analysis only about 1.1 million units could be considered to have been taken from Sony , which recorded a 62 percent drop in March from a year earlier. Microsoft Corp.'s Xbox also took a hit, as did other Nintendo machines.

Console Growth
Sony's PS4 and Microsoft's Xbox One both took a hit from the launch of Nintendo's Switch in March, but the overall market expanded
Source: VGChartz.com

What's important for Sony is that it's continuing to sell PS4 units, because doing so doesn't just provide hardware revenue; it increases the install base from which it can then sell software titles and other network services. History has also shown that Sony fans are better customers, buying more games per unit than Nintendo.

It's unlikely that customers will buy a new PS4 if they've already purchased a Switch, although the reverse is quite possible. However, Switch versus PS4 needn't be seen as a zero-sum game because both machines are facing a much bigger foe: mobile.

Games for smartphones outpaced consoles last year, according to Jefferies. That's not just a revenue risk to Nintendo and Sony, it could change gamer habits as they spend more time tapping virtual coins on their phones and less time slaying dragons in 42-inch full-HD glory. 

If the hype and success of either platform brings gamers back to consoles, then these habits can be rebuilt, leading to further title sales. That would be a win-win for both companies.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. I used recent PS4 average growth rates to guesstimate how many Sony could have expected to sell during the period, versus how many it actually sold. Not a perfect science, but it gives a good indication.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net