PlayStation Decade-Low Profit Margins Worry Analysts Amid Runaway Game Budgets

Sony’s most recent earnings report wasn’t a great one for the previously-strong-seeming PlayStation brand. As we reported, Sony downgraded their fiscal year 2024 (which runs from the beginning of April 2023 to the end of March 2024) target for PS5 sales from 25 million to 21 million. They also admitted that no major AAA franchise entries will be published over the course of this coming fiscal year. Needless to say, this wasn’t received that well, partly leading to a plunge in Sony stock that subtracted an estimated $10 billion from the Japanese company’s value.

That said, a number of financial analysts are actually more concerned about another figure from Sony’s most recent earnings – it’s operating profit margin. A company’s operating margin basically measures what percentage of every dollar they spend is made back in profit, and for this past big holiday quarter, Sony’s margin was only 6 percent. By comparison, the margin was 9 percent for the same quarter a year ago, and around 12 to 13 percent prior to 2022.

Jefferies analysist Atul Goyal found this declining operating margin particularly puzzling, as in his opinion, “various tailwinds that should have driven up the margins towards 20 percent.” These tailwinds include the increasing prevalence of digital games, which Sony reaps all the profits from without having to kick back anything to retailers, record live service spending, and revenue from the new multi-tier PlayStation Plus. Per Kantan Games analyst Serkan Toto, manufacturing costs have also come down as a result of the redesigned PS5 model released in 2023, so that’s not eating into profits.

So, what’s the issue here? The most likely culprit is ballooning game development costs – as we’ve reported, the recent Sony leaks indicated Spider-Man 2 cost over $300 million to make (three times the original game). There’s also been plenty of waste within PlayStation recently, such as the cancelation of Naughty Dog’s open-world The Last of Us multiplayer game, which was said to be the most ambitious thing they’d ever made and probably already racked up a pretty juicy price tag.

Perhaps it’s no surprise that one of the first things new Sony Interactive Entertainment’s interim CEO Hiroki Totoki had to say upon taking over for the departing Jim Ryan is that he wanted to increase profit margins, perhaps by being more aggressive with PC releases…

“In the past, we wanted to popularize console, and the 1st party titles’ main purpose was to make the PlayStation console popular. It is true, but there is a synergy to it. So if you have strong first-party content, not only with our console but also other platforms like computers, 1st party can be grown with multiplatform and that can help operating profit to improve. So that is another one we want to proactively work on.”

What do you think? What can Sony do to combat the issue of ballooning development costs and shrinking operating margins? Releasing games on PC quicker may be a band-aid, but it seems like reducing costs, and perhaps rethinking the kind of games getting made, is what Sony will have to focus on longer term.