If you look back at the earnings history of Sony’s PlayStation division, you can see a clear cycle. PlayStation makes the most money when a console is mature. This happens for many reasons. Production costs are coming down, and more consoles in the market means a larger audience buying games. Sony Interactive Entertainment’s worst year of profit, meanwhile, is the transition year from one console generation to another.
Sony’s gaming profits declined during the first year of PlayStation, PS2, PS3 and PS4. For PS3, it was more than a year or two. You can see these patterns in a helpful chart from Niko Partner’s senior analyst Daniel Ahmad on Twitter.
So should we not expect to see the same downward trend with Sony launching the PlayStation 5 in November? Well no. It seems that Sony has broken that cycle. The company’s outlook for the current fiscal year puts earnings at a full – time high for PlayStation.
And the key to this moment has little to do with the PS5 itself. This system is much like the previous PlayStation consoles. It is a groundbreaking gaming device that Sony is selling at a loss due to high component costs. And it’s not that Sony stealth launched the PS5 without marketing – it spends as much on ads and advertising as ever.
But while the PS5 is much like Sony’s previous hardware, the games and services have completely transformed how the business makes money.
Games and services broke the cycle of profits and losses
The problem with console transitions for a company like Sony was never the hardware. The problem increased the sales momentum of an outgoing console and passed it on to the next generation successor. But without consistent experiences as online services, each new console was a reset that forced Sony to rebuild from scratch.
Services like PlayStation Network and PlayStation Plus have changed that. They generate a steady stream of revenue that bridges the gap between gamers from PS4 to PS5. At the same time, games with live services have grown in popularity. It is more common for players to spend most of their time on the console playing a simple, continuous game for years. These players tend to spend a lot of money on one game. That commitment is also easier to maintain through the end of a generation because games like Fortnite and NBA 2K are not going to leave players if they use old hardware.
These services and transactions through PlayStation Network have high margins and fill Sony’s earnings.
PS Plus has 47.4 million subscribers – and each of the members pays either a monthly, quarterly or annual fee.
“Revenue from PlayStation Plus, PlayStation Now, PSN advertising revenue and other PSN services was $ 3.5 billion by 2020,” Ahmad wrote on Twitter. “[That] does not include the sale of games or the sale of additional content – only subscription revenue and network revenue. ”
This underscores the importance of these services and why companies like Sony, Microsoft and even Nintendo are so focused on them. They have the power to avoid losses during a console transition, and that also makes them the key to growth when the new hardware enters the first years.
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