Last month, we reported that Sony had recorded a $6.4 billion net loss for the fiscal year ending on March 31. This was followed by an announcement from Sony CEO Kaz Hirai that the company would be shifting to refocus on the areas that bring in the most revenue, which includes the gaming, mobile phone, and digital imaging departments. A month later, it has now come to light that the hardware producing division of Sony, the consumer products and services division, has experienced a $2.8 billion loss for the year.
The consumer products and services division includes the PlayStation hardware, TVs, computers, digital cameras, and various other electronics. Sony’s TV division is already well known for bleeding money, as it has experienced a loss for eight solid years. This is one of the driving reasons for Hirai’s plan to cut 6% of its global workforce and to cut costs by 60%, reduce the available models by 40%, and improve quality. Now in addition to its TV business performing poorly, hardware sales for PS3s, PSPs, and PS2s are dropping, and the Vita has performed poorly in comparison to the 3DS and even the PSP.
For some perspective on the Vita sales, in six months’ time, the Vita has sold only about 400,000 units more worldwide than the PSP sold in Japan alone in its first six months. Additionally, PS3, PSP, and PS2 sales dropped to 13.9 million, 6.8 million, and 4.1 million, respectively.
Besides the drops in sales, it is also important to note the effects of the Touhoku earthquake and tsunami as well as the very strong Japanese yen. Normally, the yen hovers around 1 USD being approximately 100 yen, but now 100 yen is currently exchanging for about $1.25, meaning a rather large loss in export sales.
Analysis: While price and sale drops likely have a large effect on the company’s losses, I think there are more important factors at work here. First of all, the TV business bleeds money and Hirai’s plan is probably the first time Sony isn’t just trying to put a band-aid on a bleeding artery. Second of all, exchange rates by far hurt the company’s export sales.
Put simply, in the video game hardware business, the pricing models traditionally use the same number value between the U.S. and Japan. This means that if the Vita is ¥29,980 in Japan, it’s priced at $299.80 in the US. Recently, Eurogamer had an independent company do a teardown on the Vita and priced the individual components. Total, the device components cost about $159.10, not including assembly. Now, assuming that the device would’ve cost about ¥12,710 to manufacture in Japan, each sale of the Vita priced at $299.80 in the US only earns them ¥11,240 versus the ¥17,270 they would earn by selling the same thing in Japan. Granted, none of these values include assembly, but the effect is still readily apparent. In our example, there’s a difference of 6,030 which is about $75.48. That is a lot of money lost when selling millions of units. If you add in the cost of assembly, that’s even more profit lost.
In the case of the PS3, it was easy to reach a point where each unit sold actually lost (a lot of) money. The PS3 didn’t reach a profitable point until the hardware used in the system was cheapened by a great amount. While it’s not uncommon for a manufacturer to actually lose money on the game system and make up for it in software sales, the combination of MSRP in the U.S. and the weak US dollar versus yen make it more difficult to turn profits big enough to make up for the loss in hardware sales. It’s likely the Vita will struggle with that throughout its lifetime. It’s also a little known fact that Japan does not have a solid pricing scale for software, so the costs of games, CDs, and other media is often much more expensive than it is in the U.S. Because of this, it’s harder over all for a Japan-based company to turn a profit from things it sells outside of Japan.
Over all, Hirai’s a good businessman and will likely be able to make Sony a profitable company again. He did a very, very good job with the PlayStation when he was in charge, making the PlayStation successful and allowing the company to retain rather large profits during the era of the PlayStation 2.