The gaming industry suffered a blow last week as Sony cut its sales forecast for the PlayStation 5 console, leading to a massive drop in the company’s stock value. The company’s shares fell after the announcement, with around $10 billion of value wiped off the stock since the forecast cut, according to a CNBC calculation using FactSet data.
Analysts believe that the declining margins in Sony’s key gaming business are a bigger issue for the company. The operating margin in the gaming business came in just under 6% for the December quarter, according to a CNBC calculation. By contrast, Sony’s operating margin was more than 9% in the December quarter of 2022.
Atul Goyal, equity analyst at Jefferies, expressed disappointment in the low level of operating margin, stating that margins at the gaming unit were around 12% to 13% in the previous four years. He also highlighted that despite various tailwinds that should have driven up the margins towards 20%, the current margin for Sony’s gaming business is almost near decade lows.
Serkan Toto, CEO and founder of Tokyo-based games consultancy Kantan Games, suggested that hardware production costs have actually come down, and part of the reason why margins are being squeezed more recently is that software production costs have been rising. He cited the example of “Spiderman 2,” which cost around $300 million to make, as an example of rising software production costs.
Overall, the gaming industry is facing challenges with declining margins and rising production costs, which are impacting the profitability of companies like Sony.
