Stringer: PS3 loss doubles to $1.71 billion

[fulcizombie]

Sony looks for profits elsewhere to offset PS3

Mon Oct 30, 2006 4:11am ET15

BEIJING, Oct 30 (Reuters) - Sony Corp. (6758.T: Quote, NEWS, Research) said on Monday that it is looking for profits in movies and consumer electronics to offset the impact from price cuts and tough competition for its PlayStation 3 (PS3) game console. However, the world's second largest consumer electronics maker said it still planned to achieve profit margins of 5 percent next year.

"We promised the margins for next year will be 5 percent and we have every intention of doing that," Howard Stringer, chairman and chief executive, told reporters.

"Considering some of the additional costs of PlayStation 3," he said. "We have to generate some excitement and profits from elsewhere in the company to offset the performance of PlayStation 3."

The executive said Sony's movie unit was very strong this year and that consumer electronics as a whole was also a bright spot.

However, Sony expects losses at its game unit to nearly double from its initial estimate to 200 billion yen ($1.71 billion) for the year to March after it cut the price of a PS3 with a 20-gigabyte hard disk drive by 20 percent in Japan.

The bad news for the company continued last week when it posted an operating loss of 20.83 billion yen for July-September due to the mounting cost of recalling millions of computer batteries, in sharp contrast to a profit surge at rival Nintendo Co. (7974.OS: Quote, NEWS, Research) thanks to its DS handheld game machine.

However, Stringer said he was confident the performance for PS3 would be better in its second year when sales of higher margin software begin to increase.

"I think the idea of worrying about a delay in PlayStation is slightly strange to me. Every complex technology runs the risk of delays," said the executive.

"The point really is that PlayStation 3 is already finished and has been tested in America and has been deemed a creative success. In the end that is what counts."

Sony plans to launch the PS3 in November in Japan and North America, setting the stage for a three-way showdown with Nintendo's (7974.OS: Quote, NEWS, Research) forthcoming Wii and Microsoft Corp.'s (MSFT.O: Quote, Profile, Research) Xbox 360 in the nearly $30 billion video game market.
http://today.reuters.com/news/artic..._TECH-CHINA-SONY-PICTURE.XML&rpc=66&type=qcna

 

[mrboo]

They should get a ALOT of income from different companys/contracts because of Cell. Havent the army and other places enquired about using Cell? that should genertae some $$$$ IMO.

 

[Bobbler]

The bad news for the company continued last week when it posted an operating loss of 20.83 billion yen for July-September due to the mounting cost of recalling millions of computer batteries, in sharp contrast to a profit surge at rival Nintendo Co. (7974.OS: Quote, NEWS, Research) thanks to its DS handheld game machine.

I don't recall Sony losing money this last quarter. Everything I heard said they still made a profit, just less than they expected (far less).

If they are just talking about the game division, that's some creative wording on their part.

 

[Shifty Geezer]

They should get a ALOT of income from different companys/contracts because of Cell. Havent the army and other places enquired about using Cell? that should genertae some $$$$ IMO.

That won't shopw in the Gaming division. It'll be part of the profits from elsewhere in the company, and PS3 is a big-picture part of a Sony-wide move towards making more money. The benefits of PS3 won't just appear in the Gaming division results, which will skew the worth of the console in a lot of reports I imagine. eg. If PS3 loses $1 billion net over it's life, but BRD becomes the format of choice for movies in part due to it's inclusion in PS3, and nets Sony $5 billion profit in the same period, PS3 will have been very profitable for Sony, but be flagged as a loss-making division for the company and have anaylsts tooting a collapse in the historically strong Sony Gaming sector. When products become converged, looking at individual divisions performance in a company will become increasingly meaningless.

 

[Nesh]

Sony was unlucky to deal with the battery recall and unexpected PS3 production issues. Things would have been a lot better if those two didnt happen. But ofcourse Sony will do well later....if bad luck doesnt strike them again that is

 

[Inane_Dork]

But ofcourse Sony will do well later....if bad luck doesnt strike them again that is

Like legal fees and settlements over battery recalls?


Anyway, I cannot believe that the PS division's doubled loss is entirely due to the price drop in Japan. It sounds like a scapegoat to me. They have problems they did not forecast, and it's not clear how transient they are.

 

[Nesh]

Like legal fees and settlements over battery recalls?


Anyway, I cannot believe that the PS division's doubled loss is entirely due to the price drop in Japan. It sounds like a scapegoat to me. They have problems they did not forecast, and it's not clear how transient they are.

Thats a possibility right?

 

[scooby_dooby]

Well how many units will Japan see by March, 1.5-2 million at the most? So it seems a $100 pricedrop could account for $200 million tops, if they're estimated loss has gone up by $800 million it obviously is not just Japan.

 

[Shifty Geezer]

Anyway, I cannot believe that the PS division's doubled loss is entirely due to the price drop in Japan. It sounds like a scapegoat to me.

I think that was editorial in the article rather than anything Stringer said. GI.biz's coverage of this news hasn't mentioned the Japanese price cut as the reason, and common sense (or basic maths) shows it can't be accountable for half a billion dollars loss.

 

[Acert93]

Hey, only a hop-skip-and-jump away from 4B! That is a pretty big jump from $900M stated in the spring. We were just talking about this in the Xbox profitability thread. Just goes to show that both companies are dumping a ton of money in short turn to turn (hopefully!) a profit long term.

Question: How does this compare to past Playstations in regard to 1st year (and 2nd for giggles?) costs of launching the PS brands?

Maybe XBD can outline for us a year-by-year Sony Game Division earningings?

 

[Carl B]

Maybe XBD can outline for us a year-by-year Sony Game Division earningings?

I can indeed!

(all amounts in billions of yen - we are in fiscal 2007 for those who get confused on the years)

1997 - 57

1998 - 117

1999 - 137

2000 - 77

2001 - (51)

2002 - 83

2003 - 113

2004 - 68

2005 - 43

2006 - 8

So.... over the past nine/ten years, Sony's game division has contributed a net of 652 billion yen in operating income to Sony's bottom line. In dollars, this amounts to ~$5.5 billion in positive contribution.

Obviously Fiscal 2007 looks to be by far the most expensive year for the division, and all I can say to these revised estimates is... wow. Anyway I have a feeling costs will get contained in short order and losses will turn to profits before too long, but this is going to be a big initial hit to work through moving towards overall generational profitability. Who knows how many years it'll take before PS3 in it's entirety is a net positive on the balance sheet? But whether it take 3, 5, or 7, I do think that it will make that crossover eventually.

I agree also that the price drop in Japan cannot be causing this; my suspicion is those diodes again. We knew the yields were bad, and we knew that Sony was forceably going ahead with the internal sourcing of millions of these. Bad yields coupled with mandated high volumes equals crazy costs.

On the brightside, I think it's impressive the extent to which Sony as a whole has improved it's business operations over the years. From a company that before actually relied on gaming to keep it in the black, to a company that today can withstand a ~$2.25 billion hit between same year gaming losses and a battery recall, that goes to show that behind the scenes in the core electronics and media divisions, things are doing much better than before.

 

[PARANOiA]

On the brightside, I think it's impressive the extent to which Sony as a whole has improved it's business operations over the years. From a company that before actually relied on gaming to keep it in the black, to a company that today can withstand a ~$2.25 billion hit between same year gaming losses and a battery recall, that goes to show that behind the scenes in the core electronics and media divisions, things are doing much better than before.

Did they really have a choice to "withstand" it, though? What else could they have done?

Sony's entering a new era of departmental synergy here. It's a big gamble, and will either pay off big-time, or put a very big hole in their pocket. A very interesting event to watch from the sidelines

 

[Carl B]

Did they really have a choice to "withstand" it, though? What else could they have done?

Well, by 'withstand it' I mean they're still expecting the year to be profitable. Any of the last five years and a $1.7 billion loss in gaming - let alone this battery thing - would have easily pushed them into the red.

 

[Acert93]

I can indeed!

You da' man

Not even sure where to begin, your breakdown was really thorough and raises so many tasty tangents for speculation and conjecture. I agree there will be a cross over eventually, but is also seems Sony really took an aggressive stance with the PS3. I think you are right on with the diodes. It also reminds me that some had speculated that to control costs Sony many limit early production as well, which seems likely to a degree. Your observation that just 2 years ago we were all noting how Sony Games was keeping Sony in the black and how they have had a HUGE turnarround is really important, especially for the health of Sony and the industry as a whole. Again, great post!

 

[Powderkeg]

A new hurdle for Sony.

Sony said Tuesday the U.S. Department of Justice is probing its electronics unit as part of an industrywide investigation into sales of a particular type of memory chip. The news could spell more trouble for a company already stung by sinking profits, a global battery recall and product delays.

The Japanese company received a subpoena from the Justice Department's antitrust division seeking information about Sony's static random access memory, or SRAM, business, company spokesman Atsuo Omagari said.

http://apnews.myway.com/article/20061031/D8L3KCAG0.html

 

[AlNom]

That's wrt SRAM.

(How does that affect PS3?)

 

[Carl B]

Mitsubishi Electric is also having their SRAM operations scrutinized; I think it's just going to be one of those types of things where we see Japanese firms with US SRAM operations get investigated. Probably some accusation of collusion somewhere in the pipe.

 

[avaya]

The SRAM revenue was only $27.7m for Sony in 2005, if there are consequences it is likely not to be too big, but as XBD said I think this is just a case of a general check-up on the industry after the flare-ups from this past year.

 

[Shifty Geezer]

The SRAM revenue was only $27.7m for Sony in 2005, if there are consequences it is likely not to be too big, but as XBD said I think this is just a case of a general check-up on the industry after the flare-ups from this past year.

Could the results be one of those delightful 'you infringed our patent to make $30 million. We're suing you for $400 million' cases?

 

[avaya]

Could the results be one of those delightful 'you infringed our patent to make $30 million. We're suing you for $400 million' cases?

Wouldn't be surprised.