PlayStation launches used to lose money – but with PS5 Sony expects its best year ever

If you look back at the earnings history for Sony’s PlayStation division, you can see a clear cycle. PlayStation earns the most money when a concept is mature. This happens for many reasons. Manufacturing costs are dropping, and more consoles in the market means a larger audience buying games. Sony Interactive Entertainment’s worst profit years meanwhile are the transition years from one console generation to another.

Sony’s gaming profits have skyrocketed during the first or two years of the PlayStation, PS2, PS3 and PS4. For the PS3, it was more than a year or two. You can see those patterns in a helpful chart by Daniel Ahmad, senior analyst at Niko Partners, on Twitter.

Above: Graph provided by Daniel Ahmad / @ZhugeEx on Twitter.

So shouldn’t we expect to see the same downward trend with Sony launching PlayStation 5 in November? Well, no. It seems that Sony has broken the cycle. The company’s outlook for the current financial year puts its profits at an everyday high for PlayStation.

And the key to this momentum has little to do with the PS5 itself. The system is much like the previous PlayStation consoles. It is a leading gaming device that Sony is selling at a loss due to high component cost. And it’s not like Sony stealth launched the PS5 without marketing – it spends as much as ever on advertising and publicity.

But while the PS5 is much like Sony’s previous hardware, the games and services have completely changed the way the business makes money.

Games and services break the cycle of profits and losses

The problem with console transitions for a company like Sony was never the hardware. The problem was that the selling point on an outgoing console increased and it was then passed on to the next successor. But without adjoining experiences like 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 players from PS4 to PS5. At the same time, live service games have increased in popularity. It is more common for players to spend most of their time on console playing a single, persistent game for years. These players tend to spend a lot of money on one game. The engagement is also easier to maintain at the end of a generation, because games like Fortnite and NBA 2K are not going to leave players behind if they use on old hardware.

These services and transactions through PlayStation Network have high margins and increase Sony’s earnings.

PS Plus has 47.4 million subscribers – and each member pays a monthly, quarterly or annual fee.

“Revenue from PlayStation Plus, PlayStation Now, PSN advertising revenue and other PSN services was $ 3.5 billion in 2020,” Ahmad wrote on Twitter. ‘[That] does not include game sales or additional content sales – only subscribers and network revenue. ”

This highlights the importance of these services and why companies like Sony, Microsoft and even Nintendo are so focused on it. They have the ability to avoid losses during a console transition, and this also makes them the key to growth as the new hardware begins its first year.