PlayStation releases used to be a loss – but with the PS5, Sony expects its best year ever

If you look back at Sony’s PlayStation division profit history, you will see a clear cycle. The PlayStation makes more money when a console is mature. This happens for several reasons. Manufacturing costs fall and more consoles on the market mean a larger audience that buys games. Meanwhile, Sony Interactive Entertainment’s worst earnings years are the years of transition from one console generation to the next.

Sony’s gaming profits fell to the red during the first or two years of PlayStation, PS2, PS3 and PS4. For the PS3, it was more than a year or two. You can see these patterns at a useful chart by senior analyst Daniel Ahmad of Niko Partners on Twitter.

Above: Graphic provided by Daniel Ahmad / @ ZhugeEx on Twitter.

So, shouldn’t we expect to see the same downward trend with the launch of the PlayStation 5 by Sony in November? Well no. It seems that Sony broke that cycle. The company’s outlook for the current fiscal year puts its profits at the highest levels ever for the PlayStation.

And the key to that boost has little to do with the PS5 itself. This system is very similar to previous PlayStation consoles. It is a high-end gaming device that Sony is selling at a loss due to high component costs. And it’s not as if Sony Stealth launched the PS5 without marketing – it’s spending as much on ads and advertising as ever.

But while the PS5 is very similar to Sony’s previous hardware, games and services have completely transformed the way the business makes money.

Games and services broke the profit and loss cycle

The problem with console transitions for a company like Sony was never the hardware. The problem was to increase sales momentum on an old console and then take that to the next generation’s successor. But without contiguous experiences as online services, each new console was a reset that forced Sony to rebuild from scratch.

Services like PlayStation Network and PlayStation Plus have changed that. They generate a steady stream of income that connects PS4 players to PS5. At the same time, live service games have grown in popularity. It is more common for players to spend most of their time on the console, playing a single persistent game for years. These players tend to spend a lot of money on a game. This involvement is also easier to maintain until the end of a generation because games like Fortnite and NBA 2K will not leave players behind if they are on old hardware.

These services and transactions through PlayStation Network have high margins and are increasing Sony’s earnings.

PS Plus has 47.4 million subscribers – each of which is paying a monthly, quarterly or annual fee.

“Revenue from PlayStation Plus, PlayStation Now, PSN advertising revenue and other PSN services was $ 3.5 billion in 2020,” Ahmad wrote on Twitter. “[That] does not include sales of games or sales of supplemental content – only subscription revenue and network revenue. “

This highlights the importance of these services and why companies like Sony, Microsoft and even Nintendo are so focused on them. They have the power to prevent losses during the console’s transition, and this also makes them the key to growth as new hardware enters its early years.