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

wccftech.com:

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.

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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