How, with 3+ times the install base of GC, could SCE not generate even as much profit as Nintendo did with GC?!
Financials for the big 3 graphed from FY2000
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NathansFortune
Regular
Cell R&D was moved from Sony Electronics to SCE. This accounts for a lot of expenditure during that 3 year period where it looks like PS2 was making no money.
As a whole my company estimate that the PS3 project from start in 2003 as a concept to finish in 2009 (with the release of the slim) has cost Sony $4.7bn in R&D, and $5bn in losses arising from higher than expected cost of sales. In that same period the PS3 has brought in around $0.7bn in profit by itself. Since the introduction of the slim the PS3 has made around $0.6bn in profits and it looks like it will increase until later next year.
Nintendo otoh spent almost nothing on R&D, they took a very old concept and jazzed it up a bit on the cheap and reused a lot of GCN designs, made it look less like a lunchbox and hey presto the Wii was born. The profits from GCN weren't wasted on overdesigning its successor, so they made more money.
I think as company Sony probably made more money in the timeframe which honestly what matters, but the PS3 wasted a lot of money for them that they should have invested elsewhere like mobile phones and network integrated devices where they are now struggling to compete with Apple. However, with Krazy Ken gone there is unlikely to be a repeat and I would be very, very surprised to see a high price on NGP that sells below cost like PS3.
My expectations are that NGP will lose money in its first iteration using older process tech and it will go through an internal revision quite quickly for 32/28nm and it will become profitable as Sony refine the manufacturing process. The price I think will come in very competitive with 3DS and people will wonder how Sony are selling it so cheap, but in fact it is Nintendo that are charging the Earth for outdated tech and a fancy screen.
As a whole my company estimate that the PS3 project from start in 2003 as a concept to finish in 2009 (with the release of the slim) has cost Sony $4.7bn in R&D, and $5bn in losses arising from higher than expected cost of sales. In that same period the PS3 has brought in around $0.7bn in profit by itself. Since the introduction of the slim the PS3 has made around $0.6bn in profits and it looks like it will increase until later next year.
Nintendo otoh spent almost nothing on R&D, they took a very old concept and jazzed it up a bit on the cheap and reused a lot of GCN designs, made it look less like a lunchbox and hey presto the Wii was born. The profits from GCN weren't wasted on overdesigning its successor, so they made more money.
I think as company Sony probably made more money in the timeframe which honestly what matters, but the PS3 wasted a lot of money for them that they should have invested elsewhere like mobile phones and network integrated devices where they are now struggling to compete with Apple. However, with Krazy Ken gone there is unlikely to be a repeat and I would be very, very surprised to see a high price on NGP that sells below cost like PS3.
My expectations are that NGP will lose money in its first iteration using older process tech and it will go through an internal revision quite quickly for 32/28nm and it will become profitable as Sony refine the manufacturing process. The price I think will come in very competitive with 3DS and people will wonder how Sony are selling it so cheap, but in fact it is Nintendo that are charging the Earth for outdated tech and a fancy screen.
DuckThor Evil
Legend
Well in the past everyone was speaking how the handhelds are carrying Nintendo, and I would agree that they helped Nintendos column quite a bit. Nintendos first party games have always sold pretty well and to me atleast they have always looked quite simple and probably relatively cheaply made.
corduroygt
Banned
Cue Rangers saying there's no way Sony shipped the same 6.3M consoles as MS did, and they're going in double secret warehouses or landfills
More importantly, SNE had $564M operating income for the quarter, 3x more than last year's results, and almost as good as Microsoft's, without having as many sales in the US, where people generally buy more software for their console compared to EU or other places, and without forcing people to pay for online play, or a phonemenon like Kinect.
Silent_Buddha
Legend
Also mentioned in that is that PS2 is doing particularly well in less developed nations where the console can be sold cheaply and old games can be sold at nearly full profit.
PS2 is 40% of PS3 hardware sales. And while it generates less revenue it probably generates more profit per console.
PS2 software being ~12.1% of PS3 sales is a fair indication of either a healthy used games market in those less developed countries or the greater ease of using pirated games. But this isn't nearly as much of a concern as the PS2 hardware itself generates a healthy profit in those areas.
All that will be a big boost to SNE's operating income.
Regards,
SB
PS2 is 40% of PS3 hardware sales. And while it generates less revenue it probably generates more profit per console.
PS2 software being ~12.1% of PS3 sales is a fair indication of either a healthy used games market in those less developed countries or the greater ease of using pirated games. But this isn't nearly as much of a concern as the PS2 hardware itself generates a healthy profit in those areas.
All that will be a big boost to SNE's operating income.
Regards,
SB
NathansFortune
Regular
From the investor call it looks like SCE made $531m which means the rest of NPS made $33m.
Exactly how did your company generated these numbers? Taking 15 minutes perusing Sony reports and using a bit of quick and dirty math, I calculated $4.8 billion in R&D expense from FY03-FY09 and $5.3 billion from FY04-FY10. I simply used Sony's annual R&D Game expenses and the annual average yen currency exchange rate in Sony's reports to generate those figures.
How is your company attributing what is effectively 89% or 98% of Sony R&D costs related to the Game division over that time period strictly on the back of the PS3? You state that Cell R&D was moved to SCE, but did you know that the semiconductor R&D was recorded under the Game division until FY2004, where it was then transfered to Electronics in FY2005.
Sony states in its reports that most of the R&D phase of the PS3 was completed in FY2007, which is the same fiscal year it launched. The PSP launched in FY 05. I pretty sure the PSP contributed handsomely to the Sony R&D expenses over the first half of your timeline especially considering that the PSP moved from the 1000 to 2000/3000 to the GO. Your company ends its timeline at FY09 or FY10 representing the introduction of the PS3 Slim. The PS2 Slim was released in FY2005 with revisions all the way up until 2007.
The most expensive R&D items are the Cell, BluRay and the GPU. None of these were strictly funded by Sony Gaming division.
NathansFortune
Regular
I can't really go into it. During the period you are talking about SCE didn't just release the PS3. The PSP accounts for some of the R&D expenditure and some of the losses over the period. PS2 didn't contribute to any losses and very little R&D expenditure. PS3 hardware development pretty much ended with the release of the slim. I'm sure there is still money spent on internal redesigns, but it is very little compared to the amount they spent on the PS3. Also, NGP starts to muddy the waters in 2009 so it's much more difficult to calculate, especially since NGP uses off the shelf parts.
We included Cell and RSX development costs in PS3 costs since the only product that actually used them was actually the PS3. I think there was an add in board with both and an Arcade unit that used it, but neither were made in major quantities like the PS3.
There was actually a big showdown within Sony about where R&D costs should be attributed and eventually Stringer made sure that PS3 expenses were properly attributed to SCE and not pawned off to Electronics and other units unfairly.
Anyway, like I said, you can't run a company by thinking in the past and what's done is done. NGP will follow a different trajectory and sold for a decent price for a smallish loss to compete with 3DS properly.
We included Cell and RSX development costs in PS3 costs since the only product that actually used them was actually the PS3. I think there was an add in board with both and an Arcade unit that used it, but neither were made in major quantities like the PS3.
There was actually a big showdown within Sony about where R&D costs should be attributed and eventually Stringer made sure that PS3 expenses were properly attributed to SCE and not pawned off to Electronics and other units unfairly.
Anyway, like I said, you can't run a company by thinking in the past and what's done is done. NGP will follow a different trajectory and sold for a decent price for a smallish loss to compete with 3DS properly.
The Cell is mostly used in the PS3 but the R&D was shared between Sony, IBM and Toshiba. Just because IBM and Toshiba failed to see high volumes of Cell use in their products doesn't mean that wasn't what was envisioned by those two entities and thus Sony must of ate the majority of the R&D costs. The RSX is a modified part from Nvidia, it is not a complete redesign and most of its R&D cost were incurred by Nvidia and expensed to Sony in the form of a premium built into a per unit manufacturing licensing fee.
We are not even into the discussion of Sony game related software expenses where other than distribution, manufacturing, maintenance and marketing mostly falls under R&D. Software like PSN shouldn't be strictly recorded as a PS3 R&D expense because its used by PSP and meant for inclusion in future hardware. And expensing game development under PS3's R&D hardware costs would be like MS expensing its mouse and keyboard R&D under Window OS R&D costs.
I can see in no way where the vast majority (85-90%) of the costs of Sony game R&D over your timeline can be strictly attributed to the hardware of the PS3. Sony even states in their annual reports that the majority of the R&D phase of the PS3 hardware was incurred by FY07, so I don't see how one can expense Sony R&D cost afterwards mostly on the back of PS3 hardware.
Given Sony return of investment of the PS1 and PS2, I highly doubt they forsaw a level of profit so high in the PS3 that it warranted a $4.7 billion dollars investment on hardware R&D alone.
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RnD includes all the choices evaluated even if they were rejected including whatever Toshiba and Sony may have been trying. rumours were RSX was something of a last minute choice, suggesting a couple of years maybe of graphics RnD.
Cell R&D was $500M, this is a known quantity, with costs distributed across STI and Sony bearing the brunt. I can't see the chart in the OP because it seems to have bandwidth'd out, but we've been through all of these figures and stats enough times over the past several years that I don't think we need them either; Sony's greatest upfront costs as they relate specifically to the PS3 were definitely cost-of-goods sold and sourcing/manufacturing costs. The back-end costs people attribute to its development can't be lumped generally into "R&D," because the majority of what people label Cell R&D was in fact capex associated with fab capacity build-out. Sony's recent accounting shifts over the past two years have made it more difficult to pinpoint where certain assets and revenues come to outside of their larger umbrella division assignments, but I think it would be wrong to state a level of cost without breaking it out further to see exactly what size certain aspects encompassed.
We've got a rough breakout of Sony's PS3 costs/efforts through those earlier years around here somewhere, but as far as future console development goes, I think we'll see lower costs by default if only due to the fact that Sony seems content with their present fab capacity (after re-purchasing the fab they sold to Toshiba, which was the same one they spent said billions on to begin with), outsourcing production to external sources, and the idea that the next system will not be allowed to loss-leas to the extent that PS3 did.
And then of course there's the whole debate as to what PS3 was loss-leading for to begin with upon its launch: game sales or Blu-ray. And in the context of Blu-ray propagation, I don't think whether we'll know if Sony felt the price too high in retrospect until several years from now, if ever.
It showed Sony never got above a billion in profit any year in PS2's life, whereas Nintendo exceeded that with GC. And then Sony blew every penny they made off PS2 on PS3. Even if the figures were known, I had never appreciated Sony were so unable to capitalise on their success, and I would like to understand it. All those PS2 years where SCE was propping up the rest of the company, Sony weren't raking it in as expected. That's confusing!
DuckThor Evil
Legend
Gameboy Advance and the SP model sold over 100M units during that time + software, DS also came out in 2004 and Nintendo doesn't lose money with the hardware. The fact that Nintendo made money really well is not at all surprising, they are very good at that. Likewise GC still allowed Nintendo to sell a lot of first party content.
I do agree that it is a bit strange that Sony didn't make more money during it's greatest years.
The striking part in the graph to me isn't the profits made by Nintendo in GC days or the profits right after Wii (we know it was dirt cheap to make).
The striking part to me is the most recent bar in the graph for Nintendo.
What happened to their profits?
$5Billion to $5.5 to $4 to less than $1b.
That's even less than they made in the GC days and that's with the highest (even still) selling console and highest selling portable.
Are they selling the Wii for a loss in some parts of the world?
Developing Cell5000?
Trashing tens of millions of those awful DSxl portables?
Buying Cisco little by little?
What in the world is going on there?
They are still selling each Wii for a profit (and even at a reduced rate, still rather brisk), they are still selling tons of peripherals for profit. Still selling DS for profit. I see nothing to justify such a significant cut in their profitability.
The only thing which could account for SOME of it is differences in exchange rates of dollar vs yen. But even that shouldn't account for the absolute slaughter to their bottom line.
Anyone?
Bueller?
The striking part to me is the most recent bar in the graph for Nintendo.
What happened to their profits?
$5Billion to $5.5 to $4 to less than $1b.
That's even less than they made in the GC days and that's with the highest (even still) selling console and highest selling portable.
Are they selling the Wii for a loss in some parts of the world?
Developing Cell5000?
Trashing tens of millions of those awful DSxl portables?
Buying Cisco little by little?
What in the world is going on there?
They are still selling each Wii for a profit (and even at a reduced rate, still rather brisk), they are still selling tons of peripherals for profit. Still selling DS for profit. I see nothing to justify such a significant cut in their profitability.
The only thing which could account for SOME of it is differences in exchange rates of dollar vs yen. But even that shouldn't account for the absolute slaughter to their bottom line.
Anyone?
Bueller?
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They took a $750M currency charge as a once off and they are facing falling DS game sales as well as an overall decline in console sales.
Ok, but that was a reduction of more than 75% of their profit.
$750m accounts for less than 25% drop in profits ($4b to less than $1b). Sales fell off, but not enough to make up that difference (20-30% drop in sales).
Theres also the overall changes in currency during that time, the 20% ($50 price cut, the inclusion of Wii M+ in all consoles along with a game and the decline of stalwart games like Mario Kart and Wii Fit especially.
Silent_Buddha
Legend
As well Wii sales have dropped quite significantly for some publishers on the Wii platform. That's going to also see a fairly significant drop in licensing revenue.
Combine that with the currency charges, drops in console hardware sales, drops in 1st party software sales, and potential developement costs for 3DS and possibly the Wii's successor and you can probably find a large chunk of that.
Regards,
SB
Combine that with the currency charges, drops in console hardware sales, drops in 1st party software sales, and potential developement costs for 3DS and possibly the Wii's successor and you can probably find a large chunk of that.
Regards,
SB
DuckThor Evil
Legend
http://www.nintendo.co.jp/ir/pdf/2011/110127e.pdf
Well this pdf of their latest financial release has lot of the answers.
It is pretty much a combination of lower sales and foreign exchange losses. If I read the paper right, I think it says that the strong yen didn't only hurt their net sales, but forced them to re-evaluate some assets, which caused a large hit, I don't think that should be a recurring event. R&D was about the same as before. DS(i) hardware and software and Wii hardware sales took a big hit. Wii software didn't drop much.
It does not appear that anything else is going on.
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