We all know, at this point, that rumors about the death of the gadget have been greatly exaggerated. This narrative has been firmly established for nearly a decade, supported by the introduction of various smart devices – smartphones, smart TVs, etc. – and some rather optimistic notions about 5G technology and internet speeds in general.
The logic was simple: the world was filled with devices you could play games on, and with the possibility of streaming games in ways that didn’t require a device at all on the horizon, selling an expensive dedicated gaming console to consumers seemed like a harder prospect with each passing day. Even as each successive generation of gaming hardware boomed, confident prophets told us that the industry was doomed to irrelevance.
Ultimately, those people who predicted the end of consoles were wrong (at least so far) for a very simple reason: they didn’t actually understand the appeal of consoles in the first place.
If we assume that a console is simply a piece of hardware dedicated to playing games, then the continued existence and even health of this segment in a world of high-end smartphones, iPads, laptops, and other devices that are perfectly capable of running decent-quality games is a mystery. However, this framework underestimates the value of console hardware—the effort and engineering that goes into building a dedicated device that is fun and enjoyable to play games on, the thousand and one small and big decisions that make the experience smooth, seamless, and enjoyable, which many consumers value greatly even if they can’t pinpoint what those differences are.
It also misunderstands what a gaming console actually is: it’s not a piece of hardware that’s launched into the market and then forgotten about, but rather the center of an ecosystem of software, services, development studios, licensing, and marketing, making something like PlayStation a business and a brand, not just a curved box of microprocessors.
The old story about the imminent death of the console came to mind this week when looking at Sony’s latest financial results, because those numbers would have certainly been the stuff of those results in years past.
Financially, of course, everything looks pretty healthy — the headline numbers in terms of revenue and operating profit, both for the company as a whole and for the gaming division specifically, suggest that Sony is currently running pretty well and is pretty successful. But anyone looking for evidence of console declines will have to head to the hardware sales page, where they’ll find that Sony missed its PS5 sales target for the quarter, with hardware unit sales for the unit falling a whopping 27% compared to the same quarter last year.
With the PS5 boosts we’re expecting next year, the tiny fractions of hardware numbers will likely soon be forgotten.
In theory, we’re out of the era where all year-over-year comparisons looked crazy because they were compared to a pandemic-era baseline, so these numbers might actually mean something significant. On the other hand, they might not, because we’re still in the throes of the pandemic’s impact on sales; Q1 of last year was at the point where post-pandemic supply was finally starting to catch up with PS5 demand, so sales were strong as pent-up demand for the console worked its way through the system.
However, the headline unit sales numbers aren’t great, not just because of the year-to-year comparison, but because it also means Sony missed its targets for the quarter by a decent margin.
These numbers suggest a hairline crack in what has been a pretty solid PS5 sales story so far, but it’s important to put them in perspective; PS5 sales are still outpacing PS4 sales in launch-related numbers as far as I can tell, even after the pandemic shortages.
Furthermore, there are two huge events on the horizon for the PS5 that will have a significant impact on sales — both in terms of boosting future demand, but also dampening demand in anticipation. First, there’s the PS5 Pro launch, which we expect later this year but could still slip into early 2025; then there’s the event the entire industry is holding its breath for, the launch of Grand Theft Auto 6 next year. Both events are hugely important for the console, and while they’ll almost certainly boost sales significantly when they finally happen, the anticipation of these events right now will likely lead to a decline in hardware sales. GTA6 will likely be the point at which many PS4 sticklers finally upgrade their hardware (even as a cross-platform title, GTA’s launch has historically had a hugely positive impact on PlayStation compared to other platforms). Some people may be explicitly waiting for this point, perhaps waiting for other bundles or deals, or perhaps simply operating on the logic that “I’ll get a PS5 for GTA 6, so I don’t need to get it yet.”
The rumored PS5 Pro coming later in the year is also a clear dampener on sales of the current model. Even people who aren’t specifically planning to buy a Pro model will want to avoid buyer’s remorse, and would rather wait and see what the new hardware actually looks like before committing to a current model. All of this may be dragging down sales right now, but it will pay off in a big way when it comes next year; those unit sales are being delayed, not cancelled. The hardware market’s stellar health continues — and I would argue that elsewhere in Sony’s financial reports, we can see some details that shed light on exactly why hardware is doing so well, and how diversifying its business models around hardware has set it up to continue to be central to the industry for years to come.
Let’s start with another number that doesn’t look good on the surface: software sales in terms of units are down, down about three million units year-over-year to 53.6 million. However, software revenue is up 20%. In reality, the unit sales decline isn’t that significant in isolation — this number isn’t expected to be flat given the different games being released from quarter to quarter, and this change is within the expected margin. Still, the implication that Sony is making significantly more money per unit sold is certainly significant.
Some of the reasons for this are explained in the report, while others are not. One major reason can’t be found in these numbers: the shift to $70 price points is almost complete, as this has become the default price for most major new releases. The move may not be popular, even if it’s more justified than the inflation that has occurred since the last time games were priced, but it’s a fait accompli at this point, and it will add a few percentage points to revenue from new games at launch.
There’s another reason for the increase that’s more obvious in the numbers: DLC sales are up 37% year-over-year. This is a number that covers a wide range of different transaction types. Some Elden Ring Shadow of the Erdtree add-on sales will be included in this number, for example, along with free transactions in Genshin Impact, Fortnite and Overwatch battle passes, and so on. On the other hand, this diversity makes it a bit difficult to pinpoint exactly what’s happening in this category — it would be great to know how much of this year-over-year increase is due to Shadow of the Erdtree from an analytical perspective. However, when viewed more broadly, the diversity of transaction types within this category is a testament to the breadth and strength of the business Sony has built on its storefront.
This isn’t a business that just booms and busts depending on whether a hit game launches in a given quarter — it’s also easily able to withstand a temporary dip in one category or another. The ability to grow software revenue strongly in a quarter when unit sales are down is exactly the kind of performance this diversification is supposed to deliver, while other aspects of the business continue to provide growth even if one corner slips a bit.
With the PS5 business expected to see a boost next year, the fractional hardware numbers will likely soon be forgotten. What’s more important is that Sony is showing that it can grow its top numbers even in a barren and troublesome year for Playstation like 2024 — something that only makes sense when you consider the entirety of this diverse and complex business, not just the PS5’s status as a consumer hardware product.
It’s the PlayStation business as a whole, not just the chips in a curved box, that is very well positioned to face whatever challenges the coming years may bring.
