Sony's Success Does Not Guarantee Their Future
How does Sony's singular focus and current success set them up for the future?
There is no doubt that Sony and the PlayStation 5 are performing well and showing strong results this generation. Their console sales exceed those of the Xbox Series X/S, and their roster of exclusive single-player narrative games has been both critically and financially successful.
Unfortunately, none of this entitles Sony to ongoing success.
In fact, they are racing towards an inflection point that will require them to change away from their tried and true methods.
Not a Console war, but a Console Strategy
It’s really easy to get wrapped up in the narrative that Sony’s success can only come at the cost of Microsoft or Nintendo, and vice versa.
But we tend to forget that the console wars are not between Sony, Microsoft, and Nintendo but instead between the earlier generation of consoles amidst the boom and bust of the early video game industry.
Atari, Activision, Nintendo, Sega, and a few others, genuinely risked going out of business if their console did not sell. Any sale of their competitors' consoles to a consumer directly threatened the existence of their business.
This is not the case with modern game companies.
The video games industry has more than enough money going around that it can and has easily supported three major console players for over twenty years now. I make this point because financial success actually means different things to each of the three companies and so despite Sony’s clear financial success these past two generations, the game they are playing is different because they are a different company.
For example, Sony is a multi-faceted company, selling electronics, films, and music, and is valued at around 100 billion dollars. In their 2022 financial report, Gaming made up 27% of Sony’s revenue, the largest of the company's revenue streams.
Contrast this with Microsoft, a services company valued at around 2 trillion, in the same financial year, where the Xbox brand accounted for less than 10% of their revenue.
How each company approaches its own future is different because the consequences are so different. Simply put if 50% of all gaming revenue disappeared in the next financial year it would be Sony who would suffer the most.
Nintendo has been running for over a hundred years and was the winner of the actual console wars. This was in part due to their conservative business practices but also to owning some of the most profitable and recognisable gaming franchises in all of history. They would manage confidently.
Microsoft would cover the shortfall using any number of their other bigger revenue streams. If gaming really took a nose dive they would just shut up shop and continue on with their other, far more profitable businesses.
But Sony is different, as gaming is what keeps their entire business going. With a reduction in gaming revenue, Sony would have to consider doing less in their other divisions and they would also have to consider investing less in video games. While you do need to spend money to make money, a company as small (relatively) as Sony would lose that luxury in this scenario. They may be forced to sell off gaming studios or shelve a franchise, like Horizon for example.
Each company builds a strategy that is catered to its position but grounded in the reality of its own financial standing and capacity to absorb failure when it happens. Sony’s future strategy not only has to be different from the other companies, but it also needs to adapt in light of the ever-changing market. With change comes risk, and as we have just covered, Sony has less wiggle room for risk to go wrong.
So what needs to change and why?
We all know that Sony has created some extremely profitable and impactful franchises that are the cornerstone of its profit model. These are all the fruits of a single strategy Sony began sowing many years ago. But as successful as they may be they are not Mario levels of successful.
Sony can’t put out ten The Last of Us games and make the same or higher levels of profit. Sony is actually at a crossroads with these franchises where they need to actively decide what to do next with each of them and hope that they can hit a second wind.
The Last of Us will almost certainly get a third game, given the recent success, however, Naughty Dog is focused on a multiplayer game first, so Sony has a bit of runway there. God of War isn’t getting a third game, so Sony Santa Monica has to do something new. Whether they do something new in that universe or take their tech and tooling and make a new game, both are viable options. There is risk in doing that, however, as the studio has for so long been associated exclusively with that IP.
We are coming up on our third Spider-Man game by Insomniac, who have already pivoted and are making a Wolverine game. The risk here lies in the fact that Insomniac, at least with their recent Spidey-powered pedigree, is the best at making fast-paced, ‘flowy’ games. Can Wolverine provide that same kind of flow as a superhero that is decidedly ground-based? Not to mention we are on borrowed time with the superhero trend and potential fatigue (or maybe I’m being pessimistic).
Finally, we have just had the second mainline release and DLC for the Horizon franchise. Guerrilla and Sony have already made moves to expand Horizon, both into a VR game and to television. I personally feel that this is among the weaker of their franchises and I question whether Sony is rushing too quickly to green-light a third title.
There is no doubt that all of these franchises are doing well, but they are all at a point where Sony needs to make new decisions about what to do with them. Do they push into new directions, or keep going and risk that fans, or even the studios making the games, might get bored with the same old thing? It’s very easy to squander a franchise with a bad release, and very expensive to try and bring it back on track.
Diversification of Revenue Streams
As I’ve extensively covered already, it is Sony’s strong narrative-driven games that at the primary reason for Sony’s success. For the most part, these are ‘pay once’ games where once the game has been purchased there are no further revenue-making opportunities. Sure some of these games receive DLC but this entire business model requires heavy investment up front, with the hope it will pay dividends several years later.
By Sony’s own admission, they want to explore other revenue models. When they purchased Bungie, makers of Destiny, they openly said they wanted Bungie to help them establish ten live-service games by 2026.
Now it’s great that Sony understands that they need to change and are making waves towards it but one does not simply make a live-service game and walk away and cash a cheque. The games industry is littered with the corpses of shuttered and failed live service games. It’s a delicate balancing act of the right subject matter, combined with the right gameplay, combined with the right revenue model.
I cannot see The Last of Us multiplayer game being such a title to nail that balancing act. The subject matter lends itself much more to a single-player experience, and whilst it has had arcade-like multiplayer in the past, it’s not something that screams ample monetisation opportunities to me. How many skins can you sell for Ellie? Will there be a season pass? What would a loot box contain?
The same goes for all of their current franchises, I don’t think any of them fit the mould for a live service game. I think Sony is genuinely going to be better off making brand-new franchises that are already a bit more live-service friendly, or dipping into the back catalog to see if they can do better than Sony All-Stars. Both approaches are fraught with risk.
Monetisation can also be a PR disaster. Get it wrong and you instantly come off looking predatory like many of the more-mobile friendly titles. With regulators getting wiser to dark patterns and manipulative tactics, it's pretty late for Sony to be joining the micro-transaction game, so they can’t afford to make any dumb mistakes.
Despite Sony's stated aspirations to launch ten live-service games in the next three years, I seriously doubt whether we’ll actually see all ten titles unless eight of them are mobile games. As I alluded to earlier, their risk threshold is lower than the competition, and a part of me wonders if Sony needs one or two to fail to get some practice under their belt - admittedly that’s why they claimed to have bought Bungie, to get that experience in house.
Regardless, Sony’s future revenue streams need to diversify and say all you want about how nasty micro transactions are (and I agree with you), but its now a necessary part of building a future-proofed games company.
Sony doesn’t just need to change their strategy. They also need to get better at responding to the market.
Their confusing response to Games Pass is a prime example of why Sony is far too different from Microsoft to be compared one-to-one, and why they need to be better at responding to the competition. In this example, they responded poorly. They tried to create a nearly identical-sounding product which forced the public to compare them like-for-like and in nearly every department Sony compared poorly.
They should have instead tried to create something of value for a PlayStation customer. They knew what lines they were unable to cross such as Day One first-party games, so they should have worked backward from there, rather than trying to meet Xbox where they were.
Sony isn’t used to having to compete like this, they have gotten used to being the leader. Everyone else has cottoned onto that and decided that rather than beat Sony at their game, they will just change the game.
Microsoft is betting on a future where there is no console, you just rent the access like Netflix. Microsoft doesn’t need to make games, if they become the service the games stream through.
Nintendo figured out that the strength of their franchises bypasses the need for 4k textures and expensive processors and so is benefitting greatly from being able to deliver their own titles in a conservative manner. They also accidentally courted the indie market, the one Sony deliberately alienated.
Despite Sony’s success in their corner of the field, the waves being made in the other parts of the field require Sony to respond. Rumours of a Sony handheld are exciting given the success of the Switch and Steamdeck, but Sony needs to figure out how to respond in a way that doesn’t upset people. This means the Sony handheld needs to do something people are actually wanting and needs to be affordable.
Conversely, Sony’s half-assed play at VR is worrying. It’s a market that not many people are playing in, and while they have the upper hand in offering a more consumer-friendly product, it's still a compromised product.
The price point and relatively small user base of VR mean it’s still a niche product with enthusiast users who don’t want to compromise. I think Sony’s best play here is to try and exit gracefully; VR's adoption by the average consumer isn't happening as quickly as they had envisioned and that money could be better used elsewhere.
Time for a New Strategy
Nintendo and Microsoft exist at two ends of the spectrum. Nintendo, a roughly 50-billion-dollar company, owns some of the most profitable franchises in existence. This combined with a conservative approach to game development means that as long as they play it safe, they have a path to be infinitely profitable.
Microsoft, on the other hand, literally has money to burn. Remember how quickly and easily they threw away all that investment in Mixr? They can take risks and absorb more failure. In fact, they have reached a position financially where they could, if they really wanted to, and the conditions were right, just outlast the competition. This is effectively what their play at Game Pass and streaming is, they are going to wait until their investments pay off in a decade.
Sony has neither of those luxuries. The stakes are just a little bit more real for them. The success of the PlayStation 4 and 5 are the result of executing their singular where they set up these narrative-rich single-player games and took the time to develop them properly. We cannot underestimate how that patience, something other big publishers lack, paid off here.
But it's a single strategy and while they pursued that approach, they alienated Indies, and left themselves not a lot of room to respond to the wider market changes.
Sony must correct their course and adopt the correct path with all three of these strategies to avoid being left behind by the competition.
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