Sony's Gaming Business Is in Trouble

Source: playstation.com

The Sony (NYSE: SNE  ) PlayStation 4 is off to an explosive start. Official statements from the company indicate that it had sold more than 6 million units to consumers as of March 2, substantially eclipsing the 5-million-unit sales target that it expected to hit in its current fiscal year. What's more, the competition hasn't done a great job of keeping up. Current estimates put the Xbox One from Microsoft (NASDAQ: MSFT  ) somewhere in the neighborhood of 4 million units sold, with a substantial drop-off in momentum since the console's launch. Meanwhile, the performance of the Nintendo (NASDAQOTH: NTDOY  ) console has become something of a recurring punchline.

If Sony looks to be dashing to an early victory in the console race, there are still reasons to doubt that it will be able to continue the incredible momentum it has enjoyed since the PS4's introduction. The console gaming business is a key component of the company's long-term viability, and the past month has seen some worrying stories bubble to the surface amid the waves of positive press. Despite arguably the most successful launch in the history of gaming, the PlayStation business could be in trouble.

So long, Jack
The news that the initial Japanese launch shipment of the PlayStation 4 had sold out was followed by the announcement that Jack Tretton will step down as CEO of Sony Computer Entertainment America. The position will be filled by Sean Layton, the current VP and COO of Sony Network Entertainment International. Tretton joined Sony in 1995 and he was instrumental in helping Sony break into the console gaming market. He found continued success before his promotion to the CEO role in 2006.

The reason for Tretton's departure will likely remain shrouded in mystery for at least the next several years. The supposedly mutual decision not to renew his contract may indicate that Tretton is looking for new career avenues or that he desires to go out on a high note. Still, it's not particularly commonplace (or a good sign) for a highly successful product launch to be followed up by the departure of one of its chief orchestrators. The timing of Tretton's desertion of his post becomes additionally negative when viewed in conjunction with other recent news about Sony's game business.

Trouble in the pantheon
Sony recently kicked off a restructuring amid substantial layoffs at its Santa Monica Studios, the high-profile developer behind the "God of War" series and one of Sony's chief gaming assets. In addition to laying off approximately fifty Santa Monica employees, the studio's new triple-A IP was also canned. Reports suggest that work on the game began shortly after God of War III had been completed, which suggests that the title had been in development for approximately four years.

Source: officialplaystationmagazine.co/uk

PlayStation's Software Product Development Head Scott Rohde has commented on the related matters, stating that high- profile studios and projects sometimes need to be rebooted. Of course, the reasons behind such necessity are rarely positive.

Different play styles
Sony's strategy for building up its internal studios and fostering creativity clearly has its drawbacks. While Nintendo has developed a reputation for over-reliance on its charming cast of characters, news about the company cancelling massive projects and instituting sizable layoffs is hard to come by. In an era that has seen rising development costs and heightened risks, there is a certain value in sticking with established franchises. Nintendo has taken this principle to an unfortunate extreme and it has been dragged down by its lack of foresight on the hardware side of its business, making its problems largely different from the ones that face Sony.

Microsoft, on the other hand, tends to favor exclusive partnerships with high-profile developers and publishers. The company's deal with Electronic Arts to secure Titanfall as an exclusive could be one of the defining plays in this round of the console wars. The downside of this approach is that the contracted parties often wind up wanting out from under Microsoft's wing as they hope to find greater freedom and endear their wares to wider audiences.

Source: xbox.com

What the heck is going on at Sony?
Sony's managerial style and green-lighting criteria are company-wide issues. In addition to the previously mentioned stumbles, the company also recently suffered the departure of Amy Hennig, one of the chief creative minds behind the "Uncharted" series. Then, consider the Japanese side of software development. Outside of the games in the "Gran Turismo" series, Sony Japan's output in the last console cycle was abysmal. The Last Guardian, an ambitious and ongoing SCE Japan project, has been in development for approximately seven years. The title was last shown publicly in 2010.

It can't all be good news
The PlayStation 4's explosive market debut makes it an easy favorite to win the console race. However, as the PlayStation 3 has already proven, the competition is more like a marathon than a sprint. Nintendo is all but guaranteed to remain irrelevant in this home console hardware cycle, but Microsoft may still be able to claw its way to market leadership. Sony's gaming division is not as strong as many have suggested.

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Read/Post Comments (17) | Recommend This Article (5)

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 March 16, 2014, at 5:45 PM, awang0718 wrote:

    The PS4 will continue to do fine, and will remain the market leader by selling 85 - 95 million units lifetime.

    THe real problem for Sony's gaming division is the lackluster sales of the PS VITA. Though the handheld has rebounded in Japan, it sells a fraction of what the Wii U sells in North America. If that doesn't concern Sony, nothing will.

  • Report this Comment On March 17, 2014, at 9:43 AM, ewro wrote:

    Sony has more first party development than Microsoft and Nintendo combined. Don't see how losing one writer and cutting some fat is going to make a difference. Sony has been restructuring for several years now and it's mainly because they missed the boat a decade ago on some key technologies. Like cell phones and tablets.

    Just like MS missed on cloud, the web, social, etc...

  • Report this Comment On March 17, 2014, at 12:20 PM, JJ82 wrote:

    I did not see one point made in this article that makes any sense at all when talking about trouble for Sony Entertainment.

    The gaming division of Sony is making a profit, something few parts of the corporation doing so, I would say of all parts of the company, the gaming division is safest.

    As for the Japanese side of Sony gaming, they were never huge there. The reason for success with consoles in Japan was 3rd party games.

  • Report this Comment On March 17, 2014, at 12:34 PM, speculawyer wrote:

    I think Sony is cutting back on internal studios because:

    1) They already have a substantial lead in the console war; and

    2) They already have enough great exclusive development from Naughty Dog.

  • Report this Comment On March 17, 2014, at 1:23 PM, keithnoonan wrote:

    Thanks for sharing your take, speculawyer! Naughty Dog is certainly a fantastic developer--a definite contender for the best in gaming. Relying so much on the output of one studio would be a questionable move, however. An Uncharted sequel probably won't hit until 2015 with a Last of Us follow up coming sometime after.

    From what I've read, Sony's internal studio shakeups seem primarily tied to quality and management problems. Official statements show that was the case with Santa Monica. Then you've got Driveclub from Evolution, which Scott Rohde said had to go back to the drawing board. The Order: 1886, despite its impressive graphics, debuted to a middling response. The Last Guardian is one of those "development hell" type games and the mediocre output from Sony's Japan studios is already causing the system problems in the homeland. It looks to me like there are very real problems with Sony's gaming wing. Great hardware launch, though.

  • Report this Comment On March 17, 2014, at 1:25 PM, PS4WiiU wrote:

    @Keith Noonan Faceplam!

    It's clear that you are a sony fanboy and it's the same with all you fanboys bashing Nintendo at every turn well Got bad news for ya..Nintendo is here to stay deal with it and heck i own the PS4 too and Im a gamer..Not some poser stuck to one console or doing console wars

  • Report this Comment On March 17, 2014, at 1:47 PM, Robarino wrote:

    Wow, it's like the people at Motley Fool are bi-polar and confused. Last week they write a rosy picture about Sony, this week it's the exact opposite. They do this with practically every company they write about.

    I don't care if you favor Sony, Nintendo, or Microsoft, Motley Fool has little to no credibility and you shouldn't be using anything they write as fuel for your stupid fanboy discussions.

  • Report this Comment On March 17, 2014, at 1:54 PM, PS4WiiU wrote:

    @Robarino Im not a fanboy..Console wars are for fanboys and i own all of them so nah i'll pass

  • Report this Comment On March 17, 2014, at 2:03 PM, JoeLemon wrote:

    Titanfall is out for the 360 and PC as well. It is also built on a 10 year old game engine. It doesn't look next gen even on a PC. Plus many are already saying it gets boring quick. EA has also hinted that it might be released for the PS4, and the sequel is almost a sure thing for the PS4.

    Sony needs to be worried about there TV and PC sales not the PS.

  • Report this Comment On March 17, 2014, at 6:58 PM, elle33 wrote:

    Looks like most people feel that Playtation now's

    game rental prices are unfair, at least that's what

    it looks like here:

    http://opi.cc/6ZXSQbOGCK60VF6B

  • Report this Comment On March 17, 2014, at 8:19 PM, awang0718 wrote:

    Most of the trouble coming from Sony's gaming division is coming from the poor sales of the PS Vita, not because Jack Tretton left the company.

    Like I stated before, the PS4 will be the generation leader during this console cycle.

  • Report this Comment On March 18, 2014, at 5:47 AM, jmaster1138 wrote:

    @Keith Noonan

    Is there a reason why all of the articles you post do not include any facts?

  • Report this Comment On March 18, 2014, at 1:05 PM, kev72 wrote:

    Sony's massive financial losses are the problem. Their credit rating is ba1 (close to as low as it can go) which means their cost of capital is very high. If their cmos sensor division wasn't doing so well Sony would probably have broken down completely. Since the PS4 units are sold at a loss 6 million consoles is not particularly helpful on the front end. They are already selling off entire divisions to raise capital and laying off people by the tens of thousands. I really hope they can stabilize the ship as their products are often great.

  • Report this Comment On March 18, 2014, at 2:58 PM, Mtowne32 wrote:

    Does anyone at the Fool actually look at what they out on the site or is it all fair game? You guys change your opinions on the big three game companies faster than the market changes. First Sonys winning, ten minutes letter they're taking with the Wii U killing the market. Titanfall comes out and all of a sudden Microsoft looks great after months of claiming they're done for. Why don't all of you at the Fool step back, breathe and gather yourselves...

  • Report this Comment On March 18, 2014, at 3:52 PM, sternfan wrote:

    Another stupid Motley Fool article.

    They endlessly trash the XB1, and then there's a huge sales spike before Titanfall even releases.

    Now they switch gears and start hating on the PS4.

    I can't believe these idiots offer tips on tech stocks, they're CLUELESS.

  • Report this Comment On March 18, 2014, at 4:24 PM, keithnoonan wrote:

    Hey kev72, thanks for the great comment and sharing your take on some of the issues facing Sony. I think you're spot on about credit and capital being huge issues amidst failing divisions. PS4 is supposedly profitable with the sale of a game or a yearly PS Plus subscription, so I don't see much in the way of losses coming from the division as a result of the launch. It seems pretty obvious there are huge management and oversight issues at the company, though. I'd also agree that they have a history of making great products. If the company could be a bit more unified in structure and implement the necessary oversight to get its assets in order, they could turn things around.

  • Report this Comment On March 18, 2014, at 9:08 PM, Valentine26 wrote:

    At the top right before you post it says comment from our foolish readers. After reading there gaming articles for awhile you realize we are foolish to read there non-sense. I always click on the article after reading a title link that is so bogus. I think they enjoy getting us to read there joke articles.

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