Sony Scores Early Points in New Console Wars

Sony Scores Early Points in New Console Wars

AARON BACK

Dec. 4, 2013 11:30 p.m. ET

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The console wars are back, and Sony 6758.TO -1.14% has a new battle plan. Initial reports indicate Sony’s PlayStation 4 has an early edge over Microsoft‘sMSFT +1.64%  XBox One. Both sold more than 1 million units on their first day, but Sony managed this in far fewer markets. Sony said Tuesday it had already sold 2.1 million units, while Microsoft hasn’t given an updated figure. Sony’s sticker price, which is $100 cheaper, seems to have given it the lead at this stage.

History shows it is still early days, though, and the one who sells the most consoles won’t necessarily make the most money. Console shipments tend to peak three to four years after a new system is introduced, and software sales peak one to two years after that.

Microsoft’s strategy is bolder than Sony’s. It is attempting to take over the living room with the XBox One, integrating online video, cable television and Skype, all through voice or gesture commands. If it works it will be a coup. But there have been many attempts to redefine the television experience for the Internet age, and nothing has quite caught on yet.

Sony, meanwhile, seems to have learned from the mistakes of its last lackluster videogame campaign. That should be welcome news for shareholders.

The problem with the PlayStation 3 is that it never really made money. In its own case of living-room overreach, Sony integrated then-expensive Blu-ray technology to play movies and sold the machines at a substantial loss. Subsequent game sales never made up the initial deficit. Jefferies estimates Sony’s gaming business made a cumulative operating loss of 275 billion yen ($2.67 billion) from when the PlayStation 3 was launched in 2006 to the end of the last fiscal year in March.

The PlayStation 4 is more focused on the gaming experience, which has won it buzz among serious users. And Sony isn’t making the console so much of a loss leader anymore. IHS estimates that the PlayStation 4 costs $381 to build—slightly less than the retail price of $399. In contrast, IHS figures the PlayStation 3 cost Sony $100 more than its retail price when it was first released.

Credit Suisse CSGN.VX -0.49% projects that Sony’s gaming unit may post an operating loss of 27 billion yen in the fiscal year ending in March, turning into a 37 billion yen profit in the 12 months to March 2015, and ramping up to 65 billion yen the year after. That would be higher than at any time since the heyday of the PlayStation 2 in 2004.

Some fret that both companies are fighting the proverbial last war as everything moves to the cloud and mobile devices, though both companies appear conscious of this risk, building in lots of online features and connectivity across devices.

Sony’s more cost-conscious approach this time around indicates it won’t bleed the treasury dry in pursuit of gaming glory. In the end, shareholders might even come out as winners, too.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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