Sony's Gaming Business Is in Trouble

With the PlayStation 4 debuting to incredible success, Sony's gaming division would look to be in great shape. However, things are not as rosy as they appear.

Mar 16, 2014 at 7:00AM

Rsz

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.

God Of War Ascension

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.

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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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Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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