Sony Loses a Billion

In press releases last week, both Microsoft and Sony touted total platform revenues for 2009 -- including first-party hardware and software sales and third-party games, plus accessories -- based on figures provided by the NPD Group.

We have combined those figures with analogous figures obtained in 2007 and 2008 to obtain a better picture of how fortunes of these platform stakeholders have shifted over time.

As the figure above shows, the total revenue for each stakeholder's platforms dropped. For Microsoft, whose only platform is the Xbox 360, this is the second decline in a row.

We will show later that Microsoft sold more hardware and software on its platform in 2009 than it did in 2008, so we expect that Xbox 360 hardware price cuts drove most of that drop in revenue. Similarly, the Wii price cut no doubt explains most of the fall in Nintendo's revenue, which also includes DS hardware, software, and accessory numbers.

The truly alarming figure here is the $1.3 billion drop in Sony's revenues from its line of PlayStation systems.

According to comments made by Wedbush's Pachter, we estimate that PlayStation 2 software revenues dropped by around $700 million in 2009, compared to 2008. That decline alone would explain more than half of Sony's loss. The PlayStation 2 hardware also received a price cut in 2009, which could have contributed another $150 million in lost revenue.

Another $225 million or more have come from the annual loss of 1.3 million PSP system sales. According to Creutz of Cowen & Company, the handheld software segment shed $200 million in annual revenue from 2008 to 2009, and we estimate at least half of that loss can be attributed to declining PSP software sales.

Without more precise figures, we cannot illuminate the situation further. However, the general outline is clear: The PlayStation 3 platform -- albeit the subject of a recent price cut -- is still growing (more on this later), but the contraction in Sony's legacy and handheld segments has overwhelmed those gains.

Sony cannot revive the PlayStation 2, and that system's revenue contribution is on a terminal trajectory. (To use Pachter's terms, the PlayStation 2 will “cease being relevant in 2010.”) We furthermore remain skeptical that Sony can reverse the fortunes of the PSP, at least at retail.

By mid-2010 we should know more about whether Sony will continue to back the PSP platform, and in particular the premium PSP Go model. We would not be surprised to hear of a successor to the PSP in 2010, especially if it provides backward compatibility to first-generation PSP software and network integration comparable to modern mobile devices.

Console Hardware Fortunes

Sony essentially relaunched its PlayStation 3 platform with the introduction of the PS3 Slim in August 2009. In September we suggested that Sony should be able to sell between 2.0 million and 2.5 million systems in the last quarter of the year, with the system coming in toward the low end of that range.

In fact, Sony hit the upper end with sales of 2.39 million systems in all of October, November, and December 2009. It's been a long time coming, but it now appears that Sony actually has a price/value combination that can reach a much wider consumer market.

During the same October – December period Sony's prime competitor, Microsoft, sold nearly the same number of Xbox 360 systems (2.38 million). For the sake of comparison, 2.65 million units of Xbox 360 hardware were sold in the final quarter of 2008.

The decline in final quarter sales comes in spite of Microsoft's modest shifts in model and price positioning.

The Xbox 360 Pro model was eliminated in August and the Elite model was simultaneously reduced in price to $300 while the Arcade remained at $200.

Here's a look at sales for each year since 2005 across all models of console hardware:

We feel that the pressure is now on Microsoft to avoid losing too much momentum. The last two years have shown that Sony means to be extremely aggressive with cutting its costs and the PlayStation 3 will eventually drop to $250 or lower.

Microsoft could conceivably afford a modest price cut of its entry-level Arcade model to $175. Combined with its strong library of software – both old and new – Microsoft could justifiably tout the value of its system over the competition during the period when Sony is unlikely to announce any further price cuts.

While the Wii experienced a drop in hardware sales from 2008 to 2009, we are actually optimistic about Wii hardware sales in the coming months. The key here is timing. Recall that as of the end of September 2009, the system's year-to-date (YTD) sales were 22% behind those of the same period in 2008. By year's end the Wii was only behind its 2008 total by 5.7%.

The takeaway here is that the right kind of price cuts can shift the playing field dramatically. After its price cut the Wii went from 22% behind to only 5.7%. Sony's Slim moved PS3 hardware sales from a 32% deficit at the end of July to a 22% gain by year's end.

Software: Wii Overtakes Xbox 360

When we examined software sales at the end of September 2009, we noted that year-to-date Wii software sales were essentially flat at that point when compared to the same period in 2008. With the figures for the full year now in, and further illuminating comments from Michael Pachter of Wedbush Securities, we now estimate that Wii software sales grew by a modest 1.0 – 1.5% in 2009.

While the Wii had been showing year-over-year declines in both October and November, we expect that December sales more than made up for those misses. By our estimates, well over 30 million units of Wii software were sold in the final month of 2009.

In fact, Nintendo's utter software dominance becomes manifest when we combine our software sales estimates for all platform stakeholders, including Microsoft and Sony, during the last quarter of 2009.

With Sony claiming an estimated 22% (across three platforms) and Microsoft 20% (with only the Xbox 360), the remaining 58% of all software units we estimate were sold for Nintendo's console and handheld.

Perhaps the bigger story that we perceive in our estimates is that Nintendo Wii has finally overtaken Microsoft's Xbox 360 in life-to-date sales.

Recall that the Xbox 360 launched a year prior to both the Wii and PlayStation 3. With that headstart Microsoft has often touted its strong record in selling a high number of units of software per system owner (also known as a tie ratio). According to Microsoft's latest press release on Xbox 360 sales, the system now has a tie ratio of 8.8, suggesting LTD software sales of 164 million units after 50 months on the market.

While the Nintendo Wii has historically had a lower tie ratio, even when sales were launch-aligned, the system's extraordinary hardware sales have yielded similarly strong overall software sales. According to our estimates, the Wii has now sold in excess of 175 million units of software in a mere 38 months.

After 38 months on the market (December 2008), the Xbox 360 had achieved software sales of around 112 million units.

The diagram below makes clear just how the Wii has achieved this feat. With annual software unit sales tens of millions of units above the competition, it was merely a matter of time before the Wii surpassed Microsoft's console.

Again, going by our own estimates, we believe the PlayStation 3 is closing in on LTD sales of 75 million units of software. This suggests total Wii software sales exceeded PS3 sales by 100 million units in the same period of time.

As Michael Pachter is fond of saying, strong hardware sales can drive software sales. Both the PlayStation 3 and Wii experienced accelerating hardware sales at the end of 2009, and both also saw increasing software sales. Should robust Wii and PS3 hardware sales continue through the beginning of 2010, we fully expect the software sales to follow.

Furthermore, the Xbox 360 has a dedicated hardware base who are enthusiastic about buying software. Therefore, Xbox 360 software sales should be strong through much of 2010.

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The most interesting fact here (imo) is that the increased ps3 sales (in hardware and software) is completely offset by abysmal PSP and falling PS2 sales, and therefore resulting in a revenue loss.

X360 sold more software in 2007 than PS3 in 2009!!

Very interesting stuff.

So wat this saying in PS3 only lost 1billion? not the billions upon that was claimed they did?

revenue loss is not the same as net loss, and this is US only btw

i dont want to read that, im not going to... buts the summarized statement in OP?

No, that's not what this article is saying.

i thought it was pretty clear the article is about revenue, but i fixed to for you =P

Bottom line is that the gains in PS3 revenue is being lost and more by the decline in PS2 and PSP sales.

No, it's saying that in the US market alone, Sony's overall revenue declined by over a billion dollars in 2009. If their costs didn't decline by the same amount, that means they've made further loss this year (I shudder to think of it).