Is Sony really now ‘Junk’?

Today saw both Sony and Panasonic have their credit ratings downgraded to effectively ‘junk’ status. But why should we give a damn about this? What do these ratings say about the current state of affairs within Sony and the future of the Playstation brand? Grab a cup of coffee from the counter and I’ll begin…

 

It was the news some of us didn’t want to hear. Sony (along with Panasonic) have had their credit ratings downgraded.

Now I know some have this strange concept that I have a massive telegraph pole in my flat for Nintendo, but it’s simply not true to state that I wish anyone in the market ill. Except maybe Peter Molyneux, and even there, I don’t want him to be without a job. That is just a massive no-no in my world and I find it quite hurtful for anyone to suggest I might indeed wish people out of employment. Sony have been a part of my world for the majority of my life – from the Walkman, to the Playstation to the PSP. To deny they have had a big influence on my life would be ridiculous. I do love Sony.

But we must first accept a horrid reality that many find themselves unable to confront – that Sony is no longer the behemoth that it once was. Kotaku did a big piece last week about Sony and how the company was a shadow of its former self. The first thing that would be good for all of us is to accept that it is no longer the technology giant that it once was, it is no longer the company that spawned the funniest (albeit slightly racist) joke in Crazy People. Sony used to be the kings of all they surveyed, and like so many, they felt that they could spend wildly and farm out production to cheaper countries and manufacturing plants. With costs spiralling, a reputation in tatters and a string of PR blunders and problems over the years, the reality is that they lost control somewhere.

Anyway, let’s take a moment to consider the actual impact of what this downgrade means.

As you may know, everyone has a credit rating. It’s a decision held by a select group of financial organisations that dictates whether or not you are likely to pay back any credit that you take against your name and/or address. A good credit rating means you are more than likely guaranteed to be accepted for short-term or long-term loans, or credit card facilities. They also dictate whether or not you are likely to run off after maxing our catalogue limits and credit cards, or default on a mortgage. In effect, it is judged on your ability to pay bills and credit on time, when you have agreed to. Most ratings can change very quickly.

Companies are no different in this situation, as they can borrow based on the value of their properties – rather like a mortgage, just different definition of property in this case – and their company. But at the heart of every credit rating is a need for those lending you the money to feel they can get it back. They want to see a return on their investment, and get the interest on top as that is often how they make money as well. When your company can’t make enough money to break even, then you cannot pay back your creditors and some debts need to be deferred or re-arranged. Credit may be convenient and easy to get hold of, but the more hassle it is for those lending to get any return on their money means the less likely they are to want to lend to you.

Hence the credit downgrade by Fitch Ratings. It, along with other organisations like Standard & Poor’s Ratings Services and Moody’s Investors, had little choice but to do so; Sony in particular here. Sony have had a troubling few years, with four straight years of negative growth (i.e. losses) and seven consecutive quarters of negative profits. In layman’s terms – Sony can’t make money. It hasn’t been making money for a long time, and it is predicting a fifth year of negative growth as well. There is no sign yet that the company – now helmed by Kaz Hirai, he of the Playstation brand and the infamous “RIIIIIIIDGE RACER!” call – have found a way to stem the financial haemorrhaging that has caused such a problem. The company is restructuring, trying to go over every aspect to work out where it can cut such incredible outgoings, but Sony is a big company and it needs money to invest in new technology. So the credit ratings have decided that Sony is ‘junk’ – or rather, very unlikely to be able to pay back investments. This is actually a disaster for Sony because it depends on investments and yes, if Sony can stem the tidal wave of losses then like any credit rating, it can go back up. It is not a one-way street.

What it does suggest though is that Sony have been reckless in recent years. It doesn’t take very long to come up with a list of places where money went to be invested and hasn’t really found a way to generate income of its own;

  • Blu-Ray. Sony invested heavily in this not only because they depended on it for the PS3, but because there was a rival on the scene, the cheaper HD-DVD. Traditionally, it is the cheaper media that tends to win out as despite the limitations, it is cheaper. Which allows for profits. Sony had already been burned twice on pushing new media – the Betamax and the Minidisc – and it wasn’t about to find itself shut out for a third time. Pride is an odd thing. For all the investment, for all the millions it took to cripple HD-DVD with Blu-ray exclusives, it is still not the de-facto media of choice. More people prefer to stick to DVD, and now we’re in the digital age of streaming. It means that Sony may have blown all that money on what amounted to nothing more than an interim stop-gap in the media market.
  • The PS3. I know this might be a little cheap but it must be said that the PS2 was a financial powerhouse the PS3 couldn’t ever really match. It was a very expensive, very complicated device with an astronomical price tag at the start, and a PR campaign that treated the consumers as little more than wallets with legs attached. They thought the consumers would pay MORE for the PS3 because there was brand loyalty attached to it. What happened? The X-Box 360 was easier to make games on and cheaper. Both were outclassed sales-wise by Nintendo, who employ cheaper tech tuned to gaming rather than trying to push a technical agenda. The PS3 has been a slight disaster, but of course nothing compared to…
  • The PS Vita. What can you say about the Vita that hasn’t been said a million times before? Yes, I accept and concede it is a spectacular piece of equipment. But it has been consistently outsold by its cheaper rival, the Nintendo 3DS. The Vita is expensive and also making losses, which we’ll come to in a moment, but it’s not selling in the volume required to make up for it in games sales and accessories. Make no mistake about it; if Sony were to drop any aspect of its Playstation division right now, I’d expect it to cut off the Vita. Unless it magically picks up in terms of sell-through, then the chances of its long-term survival are about as good as that goat in Jurassic Park; the one in the Raptor pen.

So why is loss-leading such an issue then?

Well. Loss-leading is where you sell a product like a games console at a relative loss to its parts cost. The idea of this is to ensure it is attractive to a consumer market enough that they will buy it because you can then start to make money from them in other areas – such as the games they buy from stores, or their digital services for example. They can also make money from other companies who wish to be a part of the network; the more users, the more attractive the machine is to the likes of Hulu or Netflux, and therefore the more money a console maker can get away with charging. Also take into consideration extra controllers and other parts and spares and you can make more money from a consumer from the secondary sales than you could make on the initial sale.

The issue comes in one of two ways; the first is if the machine is making too large a loss comparatively to what consumers can buy. If a machine is making a loss say of $100 per sale, and the first-party games make it $8 per sale, that means one consumer will need to buy thirteen games in order for that console to be in profit. Getting that volume of first-party titles onto the market quickly is suicidal in the extreme. If a console makes $4 per sale on third-party games, then it needs to sell twenty-five games to one person for that to be in profit. Now, I dislike attachment rates because they don’t always tell the whole story (as I said, services and accessories can bridge the gap too – X-Box Live subs should cover Durango losses for example!) but what they do is demonstrate an idea; that you can’t just make huge losses without the sensible means available to make money with it. You need to understand the consumer and make them want something, but not at the expense of self-harm.

The second issue is one regarding sales; if the console isn’t selling, then its not making any money. Less sales mean fewer people buying games, which means that developers tend to look towards other machines first. They still need to make money as well, after all. Less games means less appeal in buying the machine and therefore less games being made which… yeah, you can see where I am going with this, right? Consoles can’t afford to lose too much money; but they can’t afford to lose so little that its cheaper rivals are a more appealing alternative.

That’s a balancing act that Sony have found themselves struggling with. You may have heard the Nintendo Wii-U should be in profit with just one or two games sales (depending on the titles). So whilst the machine is losing money, it isn’t losing so much that it can’t reasonably be able to make it back on the average consumer in a reasonable amount of time. That might shock you but it demonstrates a real and present problem, and one even the next generation from Microsoft and Sony (if they can survive that long) will have to contend with; do you make huge hardware losses and play the long game, or go for making a consistent profit margin in a sensible time frame from your loyal customers? Microsoft may be in a good position to do the first, but if Sony finds itself playing the latter hand – Microsoft may find itself in a spot of bother.

As you can see, everything is connected. This tangled web is not built on deception, but inception.

Effectively Sony need to start being more sensible with their money. That’s the long and the short of it. Sony have spent wildly on laptops, Playstation consoles, 3D technology, Blu-Ray and more, and none of it is paying its way. If it can’t make money, it will find itself with less and less money to play with until an inevitability occurs; that it won’t have the money to continue its basic operational costs, and at that point there is only one more step down to insolvency. Sega showed this a decade ago with ample style and grace, when it was forced to withdraw from console hardware because it could no longer continue to delude itself over its financial status. The Dreamcast was an amazing system, but countless years of mistakes and financial mismanagement had left them relying on the Dreamcast alone. It did very well – just not well enough to justify the costs.

Sony aren’t that far from “doing a Sega”. Years of mistakes and financial sinks have taken their toll on what is still an internationally-recognised company, and that continues in some part to be its saving grace. It’s Playstation division, the home consoles, clearly are one of its strengths. It has names and brands that hold value, weight and promise. It can continue to stumble on, but no-one should delude themselves into thinking this will be an easy road for Sony. They are on the precipice of disaster, teetering on the edge. They are throwing everything to the front of their vehicle to ensure it doesn’t fall off, but eventually something has to come along and save them. For all the rearranging, it alone will not be enough to ensure their survival. Maybe the PS4/Orbis is their saviour? Who knows?

Don’t think for a second I want Sony to fail however. I would miss them, and it will be a massive bodyblow for an industry that thrives on competition between the main players. Less competition means less reason for the rivals to push down costs. It will also mean that you end up with a two-tiered console market, and that’s actually going to cripple progress rather than aid it. There’s no sensible reason to wish anyone out of the market. Even if you don’t like Sony, or Nintendo, or Microsoft – their presence benefits you indirectly. They are important in maintaining the status quo.

But in order to stay in the market, Sony are going to have to start showing the goods sooner rather than later. It needs to gauge public reaction. It needs to know if it can justify the expenditure, or cut back in certain areas. It needs to know if the Wii-U really can get a foothold in the market; if it can, then they might feel a recycled, upscaled PS3 is a better alternative to a brand-new console. And there’d be nothing wrong in that either.

In effect; Sony need to know if we’re still interested in what it is doing. My answer is yes – more so now than ever. I like design by necessity; it always comes across better than design without borders. Stripped back and down to the core, it’s nice to have a focus on a machine rather than its surrounding problems. If Sony can get it right, I will be there day one to buy it. Without any hesitations.

Good luck Sony. ‘Cause heck knows right now you need it…

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