Quantcast
Why reports of the decline of the PS3 have been grossly exaggerated.

Forums - Sales Discussion - Why reports of the decline of the PS3 have been grossly exaggerated.

Squilliam said:

A large part of it is this: The built the TVs/Stereos etc at the high commodity prices and now they've built up an inventory which was expensive to manufacture comparitively and must now sell them with a lower revenue per unit and at a lower rate due to economic conditions.

 

Sure, but it's a big mistake to discount a ~20% drop in overseas revenue due to the currency movements, when a lot of expenses are fixed (employee salaries, etc). Obviously drops in sales volume and price points don't help as you said.

 



My Mario Kart Wii friend code: 2707-1866-0957

Around the Network
Smashchu2 said:

But how can SCE afford such outlanding expenses such as a price cut in these harsh times?

If we assume everythings in U.S dollars for a moment, and that Sony sells 10,000,000 PS3s with a price cut. At $400, they would have recieved $4,000,000,000 of revenue whilst at $350 it would be $3,500,000,000. A shortfall of about $500,000,000 (Im assuming the same number sold because I don't want to complicate things)

Note that says revenue. Not profit. Profit is cost-revenue. The PS3 obviously had a high cost (especially in the begining), so the profits will be lower. This does not include the cost of labor and running a facility. Since it is selling at a slow rate, these cost will be more of a hurt on the company.

One reason  to lower the price is to move them. Labor and facility cost will be less of a strain if money is coming in faster. It's a matter of movving consoles they can, then not selling enough.

Killzone 2, Uncharted 2, MAG, Gran Turismo 5, God of War III, the agency.

If you could think of a reason these games will sell fewer than 15,000,000 combined on a userbase approaching the 30,000,000 mark please raise your hand and tell me. Now thats out of the way, if you assume a publisher cut of $38 per game that gives you a total revenue of: $570,000,000 minimum.

http://vgchartz.com/worldtotals.php?name=&console=PS3&publisher=&sort=Total

Look at the sales of those games. Now look at the sales of the games you mentioned. Besides Resistance, most of those games will only make ~1million. It might break 15million on two games a lone, but the truth is that the games may very well not. The games must sell 2.5 million each, and many might not make that, while the ones that sell over might not be enough to over pass the number. It might not make it. Plus, remeber that is only 15million in sales. These are all games with HIGH cost. Killzone has been in development for up to 4 years. These games may just cconver their development cost.

So the PS3 needs a price cut to stimulate sales, fact. The PS3 can afford a pricecut because this is likely to be the biggest year for sales for SCE on the PS3 for a while and even with a crappy exchange rate one can easily subsidise the other.

With Grand Theft Auto and Metal Gear Solid out of the way, I doubt Sony will have a strong year for a while.

Grand Theft Auto was a multiplat, so it doesn't count.

I think Killzone 2, Uncharted 2, MAG, God of War III, The Agency and especially Gran Turismo 5 will have a much larger impact than MGS4.

 



(Former) Lead Moderator and (Eternal) VGC Detective

gamrReview - Arthur Kabrick | My All-Time Top 50 | 2013 Metascores

                                        

NJ5 said:

Sure, but it's a big mistake to discount a ~20% drop in overseas revenue due to the currency movements, when a lot of expenses are fixed (employee salaries, etc). Obviously drops in sales volume and price points don't help as you said.

 

Their Fixed costs remain the same, their income would have dropped by 25% (reduced demand and currency fluxuations) and the new variable costs only come into effect for new production not existing inventory in the supply chain. Thats the reason why so many of them are struggling, its because the factors which reduce their variable cost only effect new production and the factors that reduce income effect their current inventory.

I would suggest they have a lot of inventory, though im not sure how their relationship with retailers works. Does shipped = sold or is there a right of return or a credit arangement?

Lastly the losses Panasonic may be facing are probably more on the book than really effecting their cash position. In times like these they won't spend as much on now capital for their business and much of the losses are probably depreciation on assets without the nescessary capital expenditure to replace them.

 



Tease.

@Squilliam: On second thought, I don't understand why stocked inventory is important for this debate. That stock was built in the past so its production cost was already written off (or converted into an asset valued at the price they'll sell it for). In conclusion, its cost of production doesn't affect future earnings. Price and currency drops do, though, as they reduce the asset's value.

 



My Mario Kart Wii friend code: 2707-1866-0957

NJ5 said:

@Squilliam: On second thought, I don't understand why stocked inventory is important for this debate. That stock was built in the past so its production cost was already written off (or converted into an asset valued at the price they'll sell it for). In conclusion, its cost of production doesn't affect future earnings. Price and currency drops do, though, as they reduce the asset's value.

 

Because theres often a 6 month lag between production and sale for goods such as TVs and Stereos etc. A higher cost of production and lower earnings due to currency fluxuations are a bad combination. The cost hasn't been accounted for because inventory is considered an asset rather than an expense. When an asset reduces in value, such as depreciations or a writedown its considered an expense.

A TV produced this week will cost a lot less, as the LCD prices, material prices, shipping prices etc are all dropping.

 



Tease.

Around the Network
Squilliam said:
NJ5 said:

@Squilliam: On second thought, I don't understand why stocked inventory is important for this debate. That stock was built in the past so its production cost was already written off (or converted into an asset valued at the price they'll sell it for). In conclusion, its cost of production doesn't affect future earnings. Price and currency drops do, though, as they reduce the asset's value.

 

Because theres often a 6 month lag between production and sale for goods such as TVs and Stereos etc. A higher cost of production and lower earnings due to currency fluxuations are a bad combination. The cost hasn't been accounted for because inventory is considered an asset rather than an expense. When an asset reduces in value, such as depreciations or a writedown its considered an expense.

A TV produced this week will cost a lot less, as the LCD prices, material prices, shipping prices etc are all dropping.

 

That doesn't really change my point.

Scenario 1

In January, a company builds a TV at a cost of $600, and converts it to an inventory asset valued at $700, expecting to sell it later for that price. That's a net increase of $100 in the company's value.

Later in June, the company sells this TV for $700 in cash and decreases its inventory value by $700 (since it's gone). The company's value doesn't change during this month.

Scenario 2 (differences bolded)

In January, a company builds a TV at a cost of $500, and converts it to an inventory asset valued at $700, expecting to sell it later for that price. That's a net increase of $200 in the company's value.

Later in June, the company sells this TV for $600 in cash (due to a slowing economy, currency losses or whatever) and decreases its inventory value by $700. The company's value decreases by $100.

In both scenarios, June's earnings are unaffected by how much production used to cost in January. The only reason why June's earnings are different in the two scenarios is the lower sales price.

Therefore, the future earnings of Panasonic aren't negatively affected by the formerly high cost of raw materials. Their forecast of negative profits is therefore due to lower sales volume/price and currency losses, which was my original point.

 



My Mario Kart Wii friend code: 2707-1866-0957

2009 is the make or break year for the triple.

Sony is going to get ass-raped in NPD this month, deservingly. Hopefully by KZ2's launch they price cut.



Legend11 said:

It's only natural to feel pity for the underdog but Sony in my opinion deserves none for the PS3. 

Did you just call Sony the underdog in the console war? They're trailing everybody, but let's be clear - they were NOT the underdogs.  If anything, 360 and Wii were underdogs. Everyone kept saying "Wait till the PS3 comes out"



NJ5 said:
Squilliam said:
NJ5 said:

@Squilliam: On second thought, I don't understand why stocked inventory is important for this debate. That stock was built in the past so its production cost was already written off (or converted into an asset valued at the price they'll sell it for). In conclusion, its cost of production doesn't affect future earnings. Price and currency drops do, though, as they reduce the asset's value.

 

Because theres often a 6 month lag between production and sale for goods such as TVs and Stereos etc. A higher cost of production and lower earnings due to currency fluxuations are a bad combination. The cost hasn't been accounted for because inventory is considered an asset rather than an expense. When an asset reduces in value, such as depreciations or a writedown its considered an expense.

A TV produced this week will cost a lot less, as the LCD prices, material prices, shipping prices etc are all dropping.

 

That doesn't really change my point.

Scenario 1

In January, a company builds a TV at a cost of $600, and converts it to an inventory asset valued at $700, expecting to sell it later for that price. That's a net increase of $100 in the company's value.

Later in June, the company sells this TV for $700 in cash and decreases its inventory value by $700 (since it's gone). The company's value doesn't change during this month.

Scenario 2 (differences bolded)

In January, a company builds a TV at a cost of $500, and converts it to an inventory asset valued at $700, expecting to sell it later for that price. That's a net increase of $200 in the company's value.

Later in June, the company sells this TV for $600 in cash (due to a slowing economy, currency losses or whatever) and decreases its inventory value by $700. The company's value decreases by $100.

In both scenarios, June's earnings are unaffected by how much production used to cost in January. The only reason why June's earnings are different in the two scenarios is the lower sales price.

Therefore, the future earnings of Panasonic aren't negatively affected by the formerly high cost of raw materials. Their forecast of negative profits is therefore due to lower sales volume/price and currency losses, which was my original point.

 

I think you're forgetting that come April 1 2009 that TV sitting in the inventory must be depreciated at a rate of ~40%. The TV which was once worth $700 is now worth $420 or a loss of $280. So either they move the stock now by cutting the price or they are forced to take a larger hit later in the form of depreciation. Also they cannot begin to produce new TVs until the old stock is cleared and they've recieved the cash back for them. So whether they take the loss now or depreciate it later the loss is still going on their books.

And the production costs do effect things, for example next year a TV produced in February will cost less than a TV produced at the same time the previous year and will be better suited to the current market conditions.

 



Tease.

I think SONY will do just fine...



4 ≈ One