Is The Gaming Business Enough To Boost Sony's Bottom-Line?

Sony (SNE ) recent quarter results were not at all in line with its turnaround strategy, and the company suffered losses to an extent of $197 million, a 24.5% year-over-year increase. It has introduced many new products, including the most hyped PlayStation 4 and new smart-phones, in order to revamp its product portfolio across different segments.

The hype surrounding the launch of the PlayStation 4, or PS4, definitely lived up to its expectation with sales of over 1 million consoles in just 24 hours of its launch in the U.S. and Canada. On September 9, Sony announced that it would launch the PS4 in Japan on February 22, 2014. It will launch the PS4 with a price tag of $400 or $441 with the camera accessory.

Sony's competitor, Nintendo (OTCPK:NTDOY), launched Wii U in December 2012 and attained sales of 638,339 units in the first month of its launch in Japan. Wii U sales spiraled downward after its launch, selling only 300,000 units in the third quarter, as compared to sales of 1.2 million Xbox 360 consoles in the same time period, due to its inability to release more games and services in comparison to the original Wii. However, in week ranging from Oct 28 to Nov 3, the company sold a staggering 38,802 units of Wii U as compared to mere 2,598 units in previous week, a 1400% increase. This massive increase was due to the launch of Wii U Party on October 31 in Japan. Wii U Party is a video game where people can play board games and mini-games on the TV, along with tabletop games using the Wii U GamePad Controller. I believe the launch of the new party game will help to revive sales of Wii U, which has had a dismal performance since its launch. Now the launch of PS4 and Xbox One could pose further challenge for Wii U, which is expected to sell 25 million units in its lifetime.

On the other hand, looking at the sales figure of Sony's newly launched PS4 in the U.S. and Canada, it should be easy for the PS4 to surpass the initial sales of PS3 units after its launch in Japan. This is because PS3 had limited availability in the first few months and the global console gaming market has expanded in the past seven years, which will aid sales of PS4 in the coming years. After registering a decline of around 2% year over year in 2012, the console gaming market is expected to grow 2% in 2013 and 5% year over year in 2014 in Asia-Pacific. The gaming industry has seen a transition; consoles are no longer used just for gaming activities but also for a variety of online services.

Sony has a big advantage in PS4 when it comes to costs, as its Bills of Material, or BOM, cost per retail price is much less than PS3. PS4's BOM cost comes out to be $381, 95% of its retail price. On the other hand, PS3 BOM cost was $805, around 134% of its retail price of $599 at the time of its launch. PS4 is even more economical than revised version of PS3, which had BOM cost of $336 as compared to its retail price of $299. The costs reduced significantly for the PS4 with integration of the GPU and CPU, which were two discrete IC's earlier. The low BOM cost of PS4 will allow Sony to break even or attain profitability as the hardware costs decline in the coming years. Overall, I believe Sony is poised to increase its market share with the continuing shift to the broad medium of gaming including mobile and other portable devices.

More than just a portable device

Sony also launched the new Wi-Fi version of its PS Vita console and set-top box, which connects to a TV. Apart from playing games on the PSP and PSone, users can also access a range of other entertainment services. It supports Japan specific video services such as Hulu, Tsutaya TV, and apps such as Live Tweet and eBook reader. It launched PS Vita TV in Japan on November 14 and it costs around $97.

With the launch of PS Vita TV, Sony intends to take on Apple's (AAPL) device Apple TV in the set-top segment. Apple TV has a dominant position with 56% share in all the all-streaming devices sold worldwide. Apple TV allows users to connect to the TV to access iTunes content directly from Macs and Windows PCs to stream HD videos, play music, and view photos. Users can also stream and play games on Apple TV. On November 19, Apple TV added Yahoo! Screen and PBS on its set top box. Yahoo! Screen has small videos, such as "Saturday Night Live," "The Colbert Report," and "The Daily Show" with Jon Stewart and PBS will offer full episodes and videos. In the past few months, Apple TV has added more channels and features such as Hulu Plus, HBO Go, and Watch ESPN. This shows Apple's commitment to add more content, which will help it compete against Roku. U.S. TV-connected households are expected to increase from 26.8 million in 2012 to 41.3 million households in 2014. The high demand for internet connected TV has given a huge opportunity for set-top devices to expand their base and bring more revenue for the company. Although PS Vita TV hasn't officially launched in U.S., Japan imported versions are available on Amazon & eBay.

PS Vita TV posted disappointing sales in the second week after its launch. Sony managed to sell only 7,868 units in the second week as compared to a 42,172 units in the first week. This is a massive fall in sales, which can be due to two reasons i.e. either the product was sold out or it lost its appeal after the first week. I can rule out the first case since the product is still in stock on Amazon. However, it is possible that users prefer PS Vita over PS Vita TV. This is because portable devices are more popular in Japan, where people can carry devices and play at their own convenience. However, installations of the PS4 may increase demand for the PS Vita TV, as Vita TV allows connecting to the PS4 for remote play.

Bottom-line

There is no doubt that Sony is poised to benefit from the high sales of PS4 as well as its PlayStation Network platform, but the question is whether or not it's enough to offset the decline in the electronics business segment. This segment has been struggling due to shrinking market demand. The competition in mobile devices, imaging, and home entertainment is getting more intense, which is hurting the company's top-line. The record high sales of PS4 give me optimism that the company could rebound from its losses. I recommend a buy for this stock.

Source: Is The Gaming Business Enough To Boost Sony's Bottom-Line?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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