A Breakdown of Sony's Gaming Numbers

What of the prospects for Sony’s video game business? It’s one of the two core business divisions for the tech company that continues to be a drag on earnings. (The other is TVs, which I wrote about on the Eye on Asia blog.) Although Sony reported yesterday that its gaming division lost money in the fiscal year through March 31—the second consecutive year of losses—revenues jumped 26% to $12.3 billion.

Here’s why: Sony sold 9.2 million PlayStation 3 consoles, a 1.5-fold increase from 3.6 million in the previous year. Sales of gaming software also shot up to 57.9 million units, more than three times the 13.3 million of the previous year. This year, the company expects to sell another 10 million consoles—and that’s conservative, perhaps because of the possibility of a recession in the U.S. (Compared to Sony’s 12.8 million hardware units sold, Nintendo has sold nearly double the number of Wiis, at 24.5 million machines, and it expects to sell another 25 million this year.)

You could argue that Sony’s gaming business is finally hitting its stride. Goldman Sachs analyst Yuji Fujimori predicts the division will break even this year. So how does Sony plan to reverse the losses? By doing to three things: Adding blockbuster game titles, tinkering with the console’s design to lower costs, and introducing new online features. Sony’s games boss, Kaz Hirai, has talked a lot about beefing up the PS3’s games lineup, but it’s not that simple. “They need to make sure they have phenomenal games available,” Daniel Ernst of Hudson Square Research told me.

And they will this year, with as many as four highly anticipated titles on the way—Take-Two Interactive’s Grand Theft Auto IV, Polyphony Digital’s Grand Tourismo 5, Konami’s Metal Gear Solid 4 and Square Enix’s Final Fantasy XIII (no official release date on FFXIII yet but analysts expect it to be out before March 2009). That’s crucial in this business, which is a lot like selling razors for shaving. Profits roll in once people start buying replacement razors (royalties from game software sales are big for Sony).

Ernst thinks Sony may have put too much emphasis on extra features like the video downloads expected later this year and the 3-D online world, Home, which will be delayed by nearly a year when an open beta version goes live this fall. That would explain why Sony Computer Entertainment’s media relations kept trying to steer me away from the topic of Home when I had lunch with them last week.

Spokesman Satoshi Fukuoka says:

I understand your interest but am afraid it’s too early to discuss our Home strategy when we haven’t even started our closed beta testing [which is slated for summer]. Although Home’s core architecture is already in place, we have decided to further refine the service to ensure a more focused gaming entertainment experience.

Perhaps it’s also because Sony officials know that while diehards eagerly await Home’s release, it’s probably not going to be something that sends millions of ordinary consumers and casual gamers flocking to stores to buy a PS3. (I’m tactfully avoiding the issue of whether games are recession-proof or not, and how that might affect Sony’s chances of catching up to Nintendo.)

Still, fans, bloggers, analysts, journalists and developers—pretty much everyone who follows the business—are dying to know why Sony pushed back the launch date several months for the second time. (The first delay, to spring 2008, was announced at last year’s Tokyo Game Show.) Phil Harrison, who headed project but suddenly resigned a couple of months ago, appears to have been a casualty of the scheduling snafus. Without being privy to the details, I’m inclined to think that Sony has given in yet again to what’s known in tech circles as feature creep, as it did when it delayed the PS3's launch in 2006. Then again, if the company can get Home right, it would support the argument that Sony is getting its act together. And maybe, just maybe, it can convince more people that dropping a few hundred bucks on a PS3 and some killer games will amount to far more hours of pleasure than a movie, or a family ski vacation or a new TV.

    Before it's here, it's on the Bloomberg Terminal.