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.
John Casteele owns shares of Microsoft. The Motley Fool recommends Moody's. 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.
More from The Motley Fool
3 Virtual Reality Stocks to Buy for 2018
Virtual reality isn't mainstream yet, but when it gets there, these tech companies should be in a position to dominate.
Alibaba Teams Up with Two Media Giants
The Chinese e-commerce giant expands its media ecosystem via new partnerships with NBCUniversal and Comcast.
Why Sony, Rockwell Automation, and Mondelez International Jumped Today
Two strong earnings reports and one spurned buyout bid helped these companies lead the market higher.