Despite Strong PS4 Sales Numbers, Is Sony in Trouble?


Sony's (NYSE: SNE  ) PlayStation 4 console was a major hit this past holiday season, with units disappearing from store shelves amid fierce competition with Microsoft's (NASDAQ: MSFT  ) Xbox One. Both consoles reported more than 1 million sales within their first 24 hours, but the PlayStation 4 managed to do so in a single territory (as compared to the 13 territories that the Xbox One released to initially).

Despite the success of the PS4, however, Sony may be running into trouble. Due to problems in its electronics and film segments, the company's debt rating has been downgraded by Moody's (NYSE: MCO  ) with a warning that the company's profitability was likely to remain volatile.

What does this mean?
Moody's downgraded the company's debt rating to reflect the difficulty that Sony was having turning a profit. According to the Moody's press release that accompanied the downgrade, the company felt that "while Sony has made progress in its restructuring and benefits from continued profitability in several of its business segments, it still faces challenges to improve and stabilize its overall profitability and, in the near term, to achieve a profile that Moody's views as consistent with an investment grade rating."

Of particular concern were the challenges facing Sony's TVs and computers, with global competition and rapidly changing technology making the company's products obsolete before their time. Even with the company's Games segment showing a surge from the release of the PlayStation 4, Moody's believes that the surge won't top 2010 levels or be enough to prop up the electronics segment that's dragging the company down.

The PS4 doesn't stand alone
When considering the PlayStation 4's performance, it's important to remember that it's also in the early stages of a console war against the Xbox One. While the PS4 holds a power advantage over Microsoft's offering and has been providing noticeably better graphics for some cross-platform games, the Xbox One isn't out of the picture yet.

Microsoft plans to release a patch to improve graphics quality by eliminating some of the GPU reserve that is held out for the Kinect sensor, though this won't magically close the gap between the Xbox One and the PS4. It will provide a more stable gameplay experience, however, and when combined with exclusives such as Microsoft's recently obtained "Gears of War" series could put more pressure on the PS4 going forward. Even if the PS4 dominates the console generation, competition from the Xbox One could still put pressure on sales for years to come.

What about Sony Pictures?
The brightest point for Sony at the moment is its music and film segment. Though seasonal lulls may drag down profits from Sony's film studios, upcoming films such as the Robocop reboot and The Amazing Spider-Man 2 have the potential to bring in big money at the box office.

Of course, very few things in Hollywood are sure things these days. If these and other films from Sony or Columbia Pictures fail to connect with moviegoers and perform well below expectations, it could end up putting a damper on one of the primary sections of the company that Moody's expects to support the rest through its turnaround.

Is Sony doomed?
Generally, when someone talks about a console maker being doomed, they're referring to Nintendo (NASDAQOTH: NTDOY  ) and the problems that it's had with its Wii U console. Given Nintendo's $8.3 billion in cash and shares, though, it's in little immediate danger of going under and has time to develop new strategies for profitability. Sony also has a nest egg, reported at $14.92 billion on Sept. 30, which should sustain it in spite of being downgraded to a "junk" rating.

Sony still has time to turn things around. Despite the success of the PS4, however, the console market isn't going to be the turning point. Unless it can fix some of its problems in home electronics and make its TVs, PCs, and other electronics more competitive, then the Moody's downgrade might be the least of its problems.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2014, at 4:32 PM, BlackTar wrote:

    LOL this site loves M$ and it's subpar products.

    M$ couldn't beat Sony with a yr+ head start and all the US media smear that money could buy last gen.

  • Report this Comment On January 30, 2014, at 4:44 PM, amenamerica wrote:

    Sony has been on the brink of collapse for a long time. I can't even remember the last time I went into someone's home and saw a Sony television. They've failed at selling cell phones, failed at selling consumer electronics, accumulated huge debts from too many years of losses and now they are clinging to their low-marging Playstation as if it will be some sort of savior for the company. It might make some money, but it certainly isn't a savior.

  • Report this Comment On January 31, 2014, at 2:30 AM, chrismireya wrote:

    @ BlackTar: What are you even talking about? This is analyzing Sony's current profit stream as a whole and not the console segment. Like the article states, Sony's Playstation division is doing well. The rest of the company is suffering through some business malaise.

    Like amenamerica says, there was a time when Sony's electronics were the cream of the crop. They have since "missed the boat" of opportunity on many important strategic levels (e.g., cell phones, tablets, mp3 players, etc...). It isn't that they didn't make products; rather, it is simply that they didn't push innovation with the products that they introduced and ended up lagging behind Apple, Samsung, LG and other electronics manufacturers. Consequently, their bottom line and "prestige" (in terms of innovation) suffered.

    This isn't about Microsoft (or, as silly fanboys call it, M$). It is about Sony suffering the consequences for not taking the innovation that they apply with the Playstation line and using similar levels of innovation in their other products.

  • Report this Comment On January 31, 2014, at 9:35 AM, GuitarJim wrote:

    Sony's problems in consumer electronics come from it's philosophy that consumers are willing to pay for superior quality. Designing that quality into their products takes longer, so Sony products with comparable features arrive later than products from their competitors, and they cost more.

    The problem is that it doesn't make sense to design a laptop computer that will last for ten years when that laptop is going to be obsolete in two years. Consumers would rather spend less on a competitor's product that uses cheaper parts and a flimsy enclosure because it costs substantially less, and usually lasts at least until they're ready to replace it.

  • Report this Comment On January 31, 2014, at 7:08 PM, kensal wrote:

    yup...sony have shot themselves time and time again ...instead of improving the quality of their products or competing with the changing tech climate quicker when they had a huge advantage they relied on old tech and their name standing to think they could see it through..when they decided to wake up and compete it came all too late. Their already selling the PS4 at a loss and the initial line up of games are poor and in fact lagging behind M$ Xbone's lineup (which aren't that fantastic either)....so it will be interesting to see what they release in terms of content and new tech in the future...but i wouldn't be surprised if another company went in for them.

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