Sony Q2 Financials: More Losses

[SensualPoet]

Sony released international financial figures yesterday for the period ended Sep 30 (Q2 2007).

In the Game segment, operating loss increased primarily due to the loss arising from strategic pricing of the PS3 at points lower than its production cost.

...

An operating loss of $841 million was recorded, a $463 million deterioration year-on-year. This deterioration was primarily due to the loss arising from the strategic pricing of PS3 at points lower than its production cost and the increase in PS3-related inventory write-downs recorded during the current quarter compared to the same quarter of the previous year.

...

Regarding the operating income forecast for the second half, we expect lower income in the Game segment as compared to our July forecast

Source:
http://www.sony.net/SonyInfo/IR/fina.../07q2_sony.pdf

Translation:

Sony's Game Division is losing money driven by management decisions to sell the PS3 below cost. Anyone who believes Sony can continue, indefinitely, to use the PS3 to generate Blu-ray market share needs to reflect on financial realities.

Also, a % of existing supplies of PS3 were written down to lower value due to price pressures (ie they may have carried a unit on the books at $600 but wrote off $100 when the unit was re-priced to $500; multiple by inventory in the channel at the time of the re-price).

Losses in the Game Division were about double the same period 2006 (ie. before the PS3 was released).

Q2 (July 1 to Sep 30) performance in the Game Division was significantly poorer than expected as recently as three months earlier leading to a lower sales projection for the second half of the year (including Xmas) -- Oct 1 2007 thru Mar 31 2008.

Also, buried in the financials: the Game Division loss of $841 million almost balanced out the $930 million earnings of the Electronics Division. Put another way, the PS3 fiasco (financially speaking) wiped ought nearly all profits from TVs, cameras, phones, computers, laptops and everything electronic Sony makes that isn't in the Games Division.

Conclusion:

Selling PS3s at a loss, strategic or not, is not sustainable indefinitely.

PS3 is not the way for Sony to win the hidef format war.

[hc666]

They should have just put out a 399 1080i BR player and left the PS3 alone at an overprice.

[99semaj]

Not sure if you knew this, but Microsoft's gaming division has lost billions in the past seven years, never having had a profitable year in its existence.

Competition (which is a good thing!) is driving Sony's bottom line deterioration. Their decision to include a HD optical player is directly a result of their attempts to deliver more value in their console than the competition.

You can try to paint a fishbowl picture of failure, but it just doesn't play out in the grander scheme of things.

[HT gearhead]

Truth hurts, doesn't it. Sony screwed up big time with the PS3 and Bluray fiasco. The PS3 should have never had BD. They could have made money with the PS3 at a lower price without bluray but Sony's reinventing the wheel again.

[MattD2]

Sorry everyone,
I'm not sony fan is this is music to my ears

[SensualPoet]

Originally Posted by 99semaj

Not sure if you knew this, but Microsoft's gaming division has lost billions in the past seven years, never having had a profitable year in its existence.

Sony lost twice as much in Q2 2007 as Q2 2006. The difference? The PS3 did not exist in Q2 2006; and PS2 and PS1 software sales were much higher in 2006 than 2007.

Sony is not only losing money faster than before since they released the PS3 but their "legacy" gaming platform is selling less software as well.

It's not clear to me the competitive advantage of losing close to $1 billion in three months on a Games Division nearly wiping out all profit in the Electronics Division worldwide ... and I suspect if you were a Sony shareholder you might be asking some pointed questions, as well.

Check out Q2 2006 if you like:

http://www.sony.net/SonyInfo/IR/fina.../06q2_sony.pdf

Sony was bleeding red ink then due to the preparations for the release of the PS3; a year later it's managed to double its losses in the corresponding quarter.

No company, not even Sony, can sustain losses of this magnitude indefinitely. It's one thing to shoulder "start up costs" and another to have these loom so large that they nearly wipe out all net earnings from your bread-and-butter which for Sony is cameras, tvs, walkmans, etc.

Microsoft has never been so foolish as to allow a single product to wipe out all profits from it's main line of business. The comparison isn't one.

[99semaj]

I'm not arguing any of what you are saying. The business ratios don't lie.

As a PS3 enthusiast, I truly hope they can drive their sales up and manufacturing costs down. I also hope that their product strategy for HD optical drives pays off. It was a gutsy move, driven partially by arrogance, partially by vision.

Don't downplay the MS comparison, though. The competitive influence is most significant.

[SensualPoet]

I'd be interested to see if Sony says they can sell the Blu-ray stand alone at a profit. If the PS3 is losing money at $499, and the Blu-ray BDP-S300 is $499 ... is it making money? My guess is ... yes. But it also suggests a $349 price point for the stand-alone might enter in "loss leader" territory.

I would not have said so in January but it's increasingly looking like Sony may have drastically missed the boat ... again.

Fortunately, the PS3 as a gaming platform is enhanced by a Blu-ray drive but not dependent on it. PS3 will rise or fall on the strength of its gaming software, usability, price, user community, etc ... Blu-ray movies is a very nice perk. The game console could survive without Blu-ray as a movie platform.

[entropy05]

Originally Posted by MattD2

Sorry everyone,
I'm not sony fan is this is music to my ears

Oh, don't worry about it. You don't have to apologize for that here.

[entropy05]

Originally Posted by SensualPoet

Microsoft has never been so foolish as to allow a single product to wipe out all profits from it's main line of business. The comparison isn't one.

Microsoft's Entertainment and Devices division has had 2 profitable quarters in the past 6 years--let's call them Halo 2 and Halo 3.

People seem to forget that in both previous generations (of videogame consoles) Sony (and everybody else not named Nintendo) has used the same model--initially sell the console at a loss, drive costs out of the design, and eventually turn a profit on the hardware. That they are incurring financial losses right now should come as no surprise to anybody.

[U]

Originally Posted by HT gearhead

Truth hurts, doesn't it. Sony screwed up big time with the PS3 and Bluray fiasco. The PS3 should have never had BD. They could have made money with the PS3 at a lower price without bluray but Sony's reinventing the wheel again.

A next-gen console should have a next gen optical disc player. Blu-ray is more than just a format for movies, it can hold a lot of data and eventually we will see games that take advantge of that extra space...

[uberchuckie]

Microsoft just posted a $4.29 billion profit from the 1st quarter. If it's a war of attrition between Microsoft and Sony, I don't think Sony will stand a chance if things don't change.

[Hoowaa]

Sony did not lose money contrary to the post's title.

http://www.forbes.com/feeds/ap/2007/...ap4262979.html

Sony Corp. saw $646.7 million in group net profit for the second quarter - or 73.72 yen, up from 1.68 billion yen in last year's second quarter. Quarterly sales jumped 12.3 percent to $18.27 billion.

They are subsidizing the gaming division which lost money.

They can play this game for years if they truly believe that Blu-Ray has a viable chance to be the media of choice.

[99semaj]

Originally Posted by uberchuckie

Microsoft just posted a $4.29 billion profit from the 1st quarter. If it's a war of attrition between Microsoft and Sony, I don't think Sony will stand a chance if things don't change.

Not in the gaming division...they just posted the single largest cost-of-poor-quality debacle in the history of consumer electronics.

Xbox 360 and Zune both prove that MS is incompetent in the hardware business. Unix and Mac OS enthusiasts could debate their incompetence in software, too, but that's a complex discussion

[SensualPoet]

Originally Posted by Hoowaa

Sony did not lose money contrary to the post's title.

They are subsidizing the gaming division which lost money.

They can play this game for years if they truly believe that Blu-Ray has a viable chance to be the media of choice.

The post made it very clear the losses were entirely due to the PS3; not that Sony overall lost money.

As a shareholder, I am not sure Sony can "play this game for years": the scope of the losses from the PS3 are staggering.

Electronics Division - Sales $14.5 billion; net rev $930m
Gaming Division - Sales $2.2 billion; net rev ($841m)
Pictures Division - Sales $1.6 billion; net rev $23m
Financial Services - Sales $1.4 billion; net rev $201m
Other (mainly Music) - Sales $0.8 billion; net rev $94m

Sony sold $2.2 billion worth of stuff (including software) in the Gaming Division and lost $841 million doing so ... put another way, they sold $3.0 billion worth of goods but only charged $2.2 billion.

So counter-balance, they had to sell SEVEN times that in their core Electronics Division -- $14.5 billion (where they actually charge more for their products than they cost to make and market -- what a concept!).

Sure, Microsoft has losses on its Gaming Division and, like Sony, believes it is a strategic investment. But the losses are in proportion to generous earnings elsewhere in the company -- like sales of Windows Vista and Office.

If this is ALL about Blu-ray ... yikes! (But I believe it's about anchoring the brand around the Home TV ... Blu-ray is a nice-to-have but Sony could accomplish the same thing with a Bravia HD DVD player.)