Is Nintendo getting squeezed out?

[London Geezer]

Do they factor in the money invested in fabs, R&D for Cell, Nvidia oursourcing etc.?

All those things are not accounted for in "profits", and those numbers only give the profits.

For all we know, they're keeping those huge costs separate in their books because it just "had to be done". They're fixed costs.

I'm not sure about the legality of "keeping those costs out", since the shareholders would want to know exactly how much money Sony are spending, but it could be done in theory.

 

[Carl B]

Do they factor in the money invested in fabs, R&D for Cell, Nvidia oursourcing etc.?

Yes, the profit is after all of that. R&D gets expensed - c'mon, people think it just goes off into 'mystery accounting' land?

 

[PatrickL]

You can be very creative with accounting you know

 

[Carl B]

You can be very creative with accounting you know

That's true.

But you ARE expensing the cost of R&D somewhere, and taking it from cash - you can't then turn it into net profit, even if you can manage to turn those expenses creatively around into assets.

 

[RancidLunchmeat]

A couple of questions.. why are we looking at N's and Sony's liabilities for analysis without also examining their assets? Cash, profit and liabilities don't give you a total picture.

Also, maybe I'm coming at this from a different angle (mainly to Teasy on this one), but when I think profit on consoles, I'm really thinking about profit on hardware VS profit on software.

It's absolutely meaningless if N, Sony, or MS sell each console at a $25 dollar loss, but also sell an average of two additional peripherials per console at a $50 gain. The only thing that's relevant at that point is the fact they are making $25 per unit profit. Unless Sony, MS or N start to make peripherals for competitor's systems, at which point you'd be unable to attribute their peripheral sales to their console sales and have to segment the two.

Also, to address See Colon (?): No, all three companies are not in this competition to make money. In fact, only N is in this competition to make money. Striking, considering they appear to be the only one successful at actually doing so. The other two are suffering planned losses for market share.

To say market share is meaningless and the only thing thats relevant is profit, is to miss the strategy of both MS and Sony. They are willingly sacrificing profits for market share. N appears to be doing the exact opposite, which is why we keep having these debates.

N is profitable but losing market share, and there's a point where your market share degrades to a level where you simply can't stay profitable. N has already lost the social recognition they obtained after Atari's failure to place an importance on QA. Which is yet another reason why N's market share is shrinking: they know exactly why Atari failed, why they became the big giant and it has largely to do with QA.

MS's "end game" in all of this is so far down the road that nobody can even put forth a reasonable speculation as to how they plan to profit if they do succeed. Sony's is a bit more clear because they already own the content, but it is also far down the road. So it's only N that is focused on profits in the immediate future. The others are all about market share.

Step 1) Jump into the hardware market and start designing and selling game consoles
Step 2) Put an Xwhatever in everybody's living room
Step 3) ???
Step 4) Profit!

 

[Carl B]

No, all three companies are not in this competition to make money. In fact, only N is in this competition to make money. Striking, considering they appear to be the only one successful at actually doing so. The other two are suffering planned losses for market share.

To say market share is meaningless and the only thing thats relevant is profit, is to miss the strategy of both MS and Sony. They are willingly sacrificing profits for market share. N appears to be doing the exact opposite, which is why we keep having these debates.

N is profitable but losing market share, and there's a point where your market share degrades to a level where you simply can't stay profitable. N has already lost the social recognition they obtained after Atari's failure to place an importance on QA. Which is yet another reason why N's market share is shrinking: they know exactly why Atari failed, why they became the big giant and it has largely to do with QA.

MS's "end game" in all of this is so far down the road that nobody can even put forth a reasonable speculation as to how they plan to profit if they do succeed. Sony's is a bit more clear because they already own the content, but it is also far down the road. So it's only N that is focused on profits in the immediate future. The others are all about market share.

Step 1) Jump into the hardware market and start designing and selling game consoles
Step 2) Put an Xwhatever in everybody's living room
Step 3) ???
Step 4) Profit!

Are you saying the business goals of Microsoft and Sony in the console business is unclear, and might be something other than turning a profit?

And by this: "MS's 'end game' in all of this is so far down the road that nobody can even put forth a reasonable speculation as to how they plan to profit if they do succeed. Sony's is a bit more clear because they already own the content, but it is also far down the road." ...you seem to be implying that Sony's 'end-game' is down the road. Dude - it's their most profitable division!

To say that Nintendo's goal (and the implication being it's short-sighted!) is profit but Sony and Microsoft have other, more 'obscure,' reasons for being in the console space - I don't know, you're scaring me.

I think you have a completely different notion of what 'success' in the console market means from what I do. For me, it is not strictly market share.

 

[Shifty Geezer]

To say that Nintendo's goal (and the implication being it's short-sighted!) is profit but Sony and Microsoft have other, more 'obscure,' reasons for being in the console space - I don't know, you're scaring me.

RancidLunchmeat is following on from another topic here. Sony and MS's big goals have nothing to do with games. They want a distributed media network where they get a cut of every transaction. Every film you watch, every song you buy, every game you play, they want a bit of licensing money. If it comes to that, it'll be the most profitable market model ever in the history of humanity, and that's why MS have already thrown several billion at the chance without any sign of a profit, and why Sony have spent billions on PS3 development despite getting little more about $150 million per annum profit from their gaming division.

 

[Evil_Cloud]

http://www.forbes.com/business/feeds/ap/2005/05/26/ap2057595.html

160% increase in profits, they're not being squeezed out, that's for sure.

I also think their Pokémon profits are booked seperately.

 

[Carl B]

To say that Nintendo's goal (and the implication being it's short-sighted!) is profit but Sony and Microsoft have other, more 'obscure,' reasons for being in the console space - I don't know, you're scaring me.

RancidLunchmeat is following on from another topic here. Sony and MS's big goals have nothing to do with games. They want a distributed media network where they get a cut of every transaction. Every film you watch, every song you buy, every game you play, they want a bit of licensing money. If it comes to that, it'll be the most profitable market model ever in the history of humanity, and that's why MS have already thrown several billion at the chance without any sign of a profit, and why Sony have spent billions on PS3 development despite getting little more about $150 million per annum profit from their gaming division.

Those are things I addressed in an earlier post, but even with that aside, I think the video game business in and of itself is no chump prize, being larger than Hollywood at this point. And where did you get those Playstation returns on an annual basis? I will begin a search for them, but I know them to be quite a bit higher than that. Afterall, if they are 'depending' on Playstation, their profit is over a billion, and the PS3 only contributes $150 million of that - something does not compute.

 

[Diplo]

http://www.forbes.com/business/feeds/ap/2005/05/26/ap2057595.html

160% increase in profits, they're not being squeezed out, that's for sure.

They are doing brilliantly in the hand-held market but not in the home console market, which is what is being discussed:

The instant success of the handheld Nintendo DS helped offset the slumping sales of Nintendo GameCube game consoles due to intense competition, the company said.

Now, if Sony eat in their share of the hand-held market as ruthlessly as they have the home console market what do you think is going to happen?

 

[Carl B]

@Shifty: After a quick search, I return with this article 'soundbite':

Sony's game division underperformed for FY2004, despite the launch of its new portable gaming machine and redesigned, slimmer PlayStation 2 unit. However, the division did hit a new record in sales: 252 million software units shipped worldwide, an increase of 30 million units over the previous year.

Both hardware and software for the PlayStation Portable experienced solid sales as well. The company shipped 2.97 million PSP handheld units in the last months of the fiscal year and 5.7 million pieces of PSP software--roughly two games for each device.

While software shipment was on the rise for Sony's game division, the shrinking demand for (and supply of) its PlayStation 2 hardware and price markdowns on the machine affected the division's overall revenues, bringing it down by 6.5 percent to 729.8 billion yen ($6.87 billion).

PlayStation 2 hardware shipments fell by 3.93 million to 16.17 million units for the full year, while PSOne units were down 540,000 to 2.77 million units. Operating profits in the game division were also hit by costs related to the PlayStation Portable launch--plunging 36.1 percent to 43.2 billion yen ($407 million).

What this tells me, is that even after a 36% drop in operating profit from the previous year due to the PSP launch, the games division still contributed $406 million for the year to Sony's operating profits. That's not bad.

Here's the article: Link

 

[g35er]

To make this clear, I'm referring only to their console business. I'm no thread cop, so if the topic diverges, I don't care, but I'm just referring to their console business.

I know Nintendo is doing well and I don't believe they will go under anytime in the the next few decades. But the report itself (thanks for the link) says Gamecube sales is sluggish. At some point, N5 or N6, if Nintendo's marketshare in the console business remains stagnant or declines, they may say "We're doing so well in handhelds and IP's that it may not be worth it to keep R&D and manufacturing of consolses."

It's a fact that they went from 90%->20%. Yes the pie is getting bigger and it's a different game from the 80's and 90's, but if they don't light a fire in their console business, only the Zelda and Mario crowd will buy their hardware. Yes, that's a big crowd, but not a tens of millions crowd.

That fact that they didn't say much in E3 is disturbing. True, E3 is retail and consumer focused but it's also suppose to excite the developers to devote a % of their resources to your system. Sony and MS are getting support and if Nintendo falls behind, developers may have allocated most of their budget to the other systems.

 

[Carl B]

Points solely refering to the console biz began this thread, and I feel, should have ended it. But apparently there is still disagreement. For my part I have nothing new to say or use as rebuttal, but as to your questions in the last post:

I don't know if the Mario and Zelda crowd is tens of millions, but it's in the millions.

and

I don't think Nintendo is sweating the third party support too much, by their own admission. I mean as it stands now, though the point was made earlier that it is in some ways a system mover, RE4 is the only third-party exclusive that counts I can think of on the system whatsoever. And I guess Viewtiful Joe for awhile earlier on... (Capcom you wily dogs!)

 

[Shifty Geezer]

@Shifty: After a quick search, I return with this article 'soundbite':

What this tells me, is that even after a 36% drop in operating profit from the previous year due to the PSP launch, the games division still contributed $406 million for the year to Sony's operating profits. That's not bad.

Here's the article: Link

Last Sony fiscals I saw were for FY2003/2004 I think. Whatever, they had the gaming division taking about $150 million. That doesn't tie in with the article's claims of a drop in Gaming Division's profits but I don't have the report to hand to check.

Even at $400 million it'll be five years to get back $the 2 billion spent at least in preparation for PS3. A lot of that will feed back into their consumer electronics too, so it is a wide investment. Also regards gaming being bigger than movies (something I've never subcribed to), Sony's film division :

Operating profits in Sony's movie division increased by 81.4 percent to 63.9 billion yen ($603 million) due to a rise in worldwide sales of its DVD and VHS offerings

The end result - content is more profitable. You have a once-off fee to create it and then with distribution over the internet, overheads are next to nothing. When Sony have everyone paying them 50 cents to watch a movie from any studio because all movies are seen through 'Sonynet', these paltry little billions will be scoffed at!

 

[Carl B]

Even at $400 million it'll be five years to get back $the 2 billion spent at least in preparation for PS3. A lot of that will feed back into their consumer electronics too, so it is a wide investment. Also regards gaming being bigger than movies (something I've never subcribed to), Sony's film division :

Operating profits in Sony's movie division increased by 81.4 percent to 63.9 billion yen ($603 million) due to a rise in worldwide sales of its DVD and VHS offerings

The end result - content is more profitable. You have a once-off fee to create it and then with distribution over the internet, overheads are next to nothing. When Sony have everyone paying them 50 cents to watch a movie from any studio because all movies are seen through 'Sonynet', these paltry little billions will be scoffed at!

Movies have been good lately, that's why Stringer is where he is. But movies is not an industry you can count on for consistency in terms of profits - it's very hit driven, in part the reason for their MGM purchase I discussed earlier.

As for the profits at the gaming division, these profits take into account current expenditures on yearly console R&D, so PSP R&D, PS3 R&D - so actually the business is a lot stronger than you think, and the expenditures on R&D are recouped on a continual basis, once the business has been established.

One caveat though - Cell. I don't know how much if any would be under the games division R&D, as technically it was a project of the semiconductors division, was it not? Cell will play a role as an outsource chip replacement in a lot of Sony electronics going forward, so it will be difficult to qualify/estimate the ROI until a later date. But that being said, it can't be looked at as an investment in consoles alone, and regardless we need the numbers out of semiconducter (or whatever division it's under) to get a feel for that certain string of expenses.

 

[see colon]

Also, to address See Colon (?): No, all three companies are not in this competition to make money. In fact, only N is in this competition to make money. Striking, considering they appear to be the only one successful at actually doing so. The other two are suffering planned losses for market share.

To say market share is meaningless and the only thing thats relevant is profit, is to miss the strategy of both MS and Sony. They are willingly sacrificing profits for market share. N appears to be doing the exact opposite, which is why we keep having these debates.

the end result of both sony's and microsofts console strategy is making money. they might take losses now, but if they drive out all of the competition the proit from the entire industry will be theirs.

even so, nintendo is maintaining it's profitability without withdrawing from the console arena. since this disscussion is about nintendo withdrawing from the home console market, and they are making money by staying in that market, i see no reason for them to leave.

 

[PC-Engine]

Do they factor in the money invested in fabs, R&D for Cell, Nvidia oursourcing etc.?

Yes, the profit is after all of that. R&D gets expensed - c'mon, people think it just goes off into 'mystery accounting' land?

What I'm asking is do they include that in the gaming division's financials or do they somehow push that toward the CE division?

Completely on the side, one more point I want to make concerning MGM.
I don't believe MGM was purchased for the movies they make now whatsoever, but soley for the movies they already have the rights to. Having the largest catalog of movies of any studio, they can be leveraged in a significant way to promote blu-ray, with HD re-releases of this-and-that movie; their movie catalogue is easily worth, in terms of movies that can be brought out, probably any two other studios combined - so when MGM supports blu-ray, which they obviously do, it means something more than might immediately be apparent in terms of support. And, of course whether blu-ray wins, HD-DVD wins, or some other format wins, these are movies that will always be there for Sony, to be dragged out and sold again every format generation - so for them it's an IP and steady returns model with MGM rather than a traditional studio play like with Columbia.

The question is, are these the movies that sell great numbers? You can have the biggest library in the world, but if only 10% of that library is worth paying money for from Joe consumer's POV, then is it worth $5 billion?

 

[Carl B]

What I'm asking is do they include that in the gaming division's financials or do they somehow push that toward the CE division?

Yes, they would be included within the division's numbers - or should be at least, with the caveat of Cell, like I said - and blu-ray R&D as it applies to PS3 was probably in good part footed my the CE division, or whatever division is in charge of optical formats.

The question is, are these the movies that sell great numbers? You can have the biggest library in the world, but if only 10% of that library is worth paying money for from Joe consumer's POV, then is it worth $5 billion?

Well, that's a question alright - but it is a source of potential recurring revenue, and DVDs form the majority of Hollywood's take, rather than the box office, so the strategy seems sound from a number of angles. Possibility of disaster? Always... But I think the MGM move was a good one.

 

[jvd]

Mgm move was good for sony it gives them much needed content . however bluray may end up sinking them and more and more i think bluray / hd-dvd will be the laser disc and what comes after will be the dvd .

 

[PC-Engine]

Well, that's a question alright - but it is a source of potential recurring revenue, and DVDs form the majority of Hollywood's take, rather than the box office, so the strategy seems sound from a number of angles. Possibility of disaster? Always... But I think the MGM move was a good one.

The problem I have with this is due to MGM's performance prior to the purchase which wasn't all that great IIRC. How is SONY going to reverse that trend?