With Sony's Credit Downgraded, Vita Could be Doing Things Better

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Kaz Hirai, who was recently named the new CEO and president of Sony, accepted the job knowing he would be walking into a difficult position. Sony is not in the greatest of positions right now, and Hirai was not shy in admitting it. "I thought turning around the PlayStation business was going to be the toughest challenge of my career, but I guess not," he told the Wall Street Journal last month. "It's one issue after another. I feel like 'Holy s***, now what?'"

The latest such issue has to do with Sony's credit rating. A week after Hirai was officially confirmed as Howard Stringer's successor, Standard & Poor's Ratings Services lowered the long-term credit rating of Sony from an A- to BBB+, placing it just two grades above junk bonds (but still well below the AA+ rating the United States was cut to in August). The downgrade follows similar moves by both Moody's Investors Service and Fitch Ratings, as well as a poor third quarter performance Sony reported the details of last week. In addition to revealing a substantial loss for the quarter ended December 31, 2011, Sony projected a loss of $2.87 billion for the full fiscal year. Needless to say that is not good, with S&P deeming the outlook "negative" for Sony's long-term corporate credit rating.

"The likelihood of a strong recovery in Sony's earnings is low, due to a massive erosion of prices, falling demand, and harsh competition in Sony's mainstay businesses," the S&P report continued. It is noted that the ratings could be lowered even further if Sony's earnings do not show signs of recovery in the next year. As it stands, its rating being lowered means having to pay more to investors when borrowing or refinancing loans.

Unlike in the past, it is not the PlayStation business causing the problems. The PlayStation 3 price drop was blamed in part for the company's Q3 losses, though its impact cannot even begin to compare to the hit Sony took when it launched the system. As the PS3 was sold at a loss initially, the fiscal year ended March 31, 2007 saw the PlayStation business post a $1.97 billion loss. Since then it has managed to become profitable, a shift Hirai is often given credit for as the former head of Sony Computer Entertainment.

These days it is Sony's television business which continues to drag the company down, having posted frequent losses since the 2004 fiscal year. S&P's recommendation for turning things around is to worry less about market share and more about profits by lowering costs. It is not optimistic the TV business will become profitable even in the fiscal year after next; if that proves to be the case, it puts additional pressure on other aspects of Sony's business, SCE included.

 

With the Vita's launch just two weeks away -- it's currently only available in Japan but releases in North America and Europe on February 22 -- Sony needs to avoid allowing it to have a slow, 3DS-style start. Nintendo was forced to slash the price of 3DS by $80 to ensure hardware was selling well enough that there would be a sufficient install base to sell software to. While the move has resulted in Nintendo suffering its first annual loss in 30 years, the company was flush with cash thanks in large part to the resounding success of Wii and DS.

One key difference between the position Nintendo was in last year and Sony is in now, besides Nintendo not having a TV business or anything of the sort weighing it down, is the fact that 3DS was being sold at a profit. Following the price drop, that was no longer the case -- hence the annual loss. After announcing the pricing for Vita at last year's E3, Sony stated it would sell the new handheld at a loss for the foreseeable future, with the goal being to make hardware profitable within three years. Taking even more of a loss on each system sold by dropping the price, as some believe Sony will be forced to do should early sales prove to be weak, is not an attractive option. While Sony has never been in the business of turning a quick profit on hardware sales when launching a videogame system, increasing its losses at a time like this is not the way to go.

When it comes to Vita, Sony will be relying on software and accessory sales to offset the losses it will sustain on hardware. Considering that, it's all the more puzzling that Sony has decided not tobring the UMD Passport program to North America, which allows PSP owners in Japan to convert their UMD games into digital versions playable on Vita for a fee. (Instead, the only PSP games Vita owners are able to play are those they own or purchase digitally.)

While it's a moot issue for some, there are those who would have appreciated the ability to do so and it could have potentially increased the likelihood that those sitting on the fence would buy the system. Converting UMD games to digital copies would also require the purchase of Vita's expensive proprietary memory cards, sales of which are sure to be very lucrative for Sony. By not allowing UMD games to be converted, Sony is losing out on the money it charges for the digital version and potentially hurting interest in the system. If nothing else, just like the insignificant discount on digital versions of retail Vita games, the lack of a UMD conversion program lessens the demand for memory cards at a time Sony needs to sell as many high-margin items as it can. 

Source: http://www.1up.com/news/sony-credit-downgraded-vita-better