Covid-19 accelerated the demand for consoles, but stock shortages hindered performance

In Sony’s 2022 Game and Network Services briefing, the company outlined the success of its core console business following the launch of the PlayStation 5 (PS5). The console is outperforming its predecessor, the PlayStation 4 (PS4), across most metrics and this is forecast to continue further into the console’s lifecycle. For example, Sony stated that 55% of North American consumers surveyed expressed interest in the PS5 one year after launch, up from 28% for the PS4 at the same point in its lifecycle. This rise in demand coincides with overall growth of the games market, which was accelerated during the height of the COVID-19 pandemic. Ampere Games consumer research showed that, across 12 global markets, the share of respondents self-identifying as gamers declined from Q4 2020 to Q4 2021, likely as people returned to work or education and other hobbies resumed post-lockdown. However, the share of gamers remains higher than levels seen pre-pandemic.

Despite the strong demand for the PS5, the console undersold the PS4 in its second year due to supply constraints. To date, large retailers struggle to maintain stock levels to meet the demand, with storefronts globally selling out of the console. However, Sony has forecast that the console will outsell its predecessor from the fourth year onward, with the gap closing rapidly from the end of the second year. This suggests that Sony is confident that hardware availability will increase towards the end of 2022, with more suppliers and delivery routes to mitigate the stock shortages.

The PlayStation 4 remains essential to Sony’s business due to strong digital monetisation 

That said, the older PS4 remains essential to the overall scale of PlayStation’s business as it accounts for a large share of digital monetisation, partly due to the supply constraints affecting the PS5. For example, the PS4 accounted for 65% of the PlayStation Store’s revenue in FY2021 and 69% of the total PlayStation Plus subscriber base in March 2022. It also boasts a stronger late lifecycle than the PlayStation 3 (PS3), with the average annual spend per active console rising from $68 on the PS3 in FY2014 to $151 on the PS4 in FY2021. Consequently, PlayStation will continue to support the console by publishing new releases on the platform until around 2025 and provide long-term support for digital storefronts and subscriptions.

PS5 users are more engaged with their console than previous generations across several significant metrics. The monthly active user retention rate was up 2% and monthly gameplay hours rose by six from the PS4 in March 2015 to the PS5 in March 2022. Likewise, monetisation has strongly improved, rising by 15% from the PS4 (November 2013 to March 2015) to PS5 (November 2020 to March 2022). However, the way users play games has changed considerably between generations: the rise in monetisation was driven by add-ons and subscriptions, while spending on premium full games dropped by 21%. This is indicative of changing attitudes in the games sector as console players become more receptive to microtransactions and other new methods of monetisation; Ampere Games consumer research found that 5% more gamers in the USA were willing to spend on in-game purchases in Q4 2021 than in Q4 2020.

Sony aims to harness the subscription opportunity with a revamp of PlayStation Plus 

Sony’s PlayStation Now is struggling to match the rapid growth of Microsoft’s Xbox Game Pass; Ampere Games subscription data shows that from 2020 to 2021, PlayStation Now’s subscriber volume grew by 27% but Xbox Game Pass grew by 48% and at a much bigger scale. In response to advancements in the subscription space, Sony restructured its PlayStation Plus and Now services. The integrated, three-tiered approach will see recently-published titles added to the Extra and Premium tiers, such as Demon’s Souls (Sony) and Spider-Man: Miles Morales (Sony), in contrast to Sony’s historical approach of adding catalogue content.

However, Sony said it will not add major new first-party titles to the service on launch day, as it would need to reduce spending on development to make it a viable business model. The traditional publishing strategy will differentiate PlayStation from its main competitor and allow the title to generate full game sales prior to its eventual inclusion in PlayStation Plus. Ampere Games consumer research found that 14% of churned PlayStation Now subscribers in the USA (Q4 2021) stated that they did not enjoy the games available and 14% stated it was not good value for money. The restructuring should help combat these issues, leading to improved retention rates and stronger average revenue per user.

The acquisition of Bungie is key to PlayStation’s longevity in live service games

Some of the most popular and profitable titles on the market today are live service or games-as-a-service (GaaS) titles: Fortnite (Epic Games), Tom Clancy’s Rainbow Six: Siege (Ubisoft), and Call of Duty: Warzone (Activision Blizzard). Despite this, PlayStation is yet to take full advantage of the model, with just one first-party game, MLB The Show 22 (Sony), published to date. However, Sony outlined its intent to pursue the business model further, projecting 12 live service franchises on the market by fiscal year 2025 and internal spending on GaaS content to overtake traditional gaming during the same period. The company acknowledges the unlikelihood that all 12 franchises will achieve commercial success, but if just a handful do, it will transform Sony’s business structure.

To fulfil the forecast the company has made several investments and acquisitions in recent months, most notably the acquisition of Bungie, publisher of the live service franchise Destiny. This will bolster Sony’s talent and expertise in GaaS, which it can then leverage to develop first-party IP in the space, greatly expanding the number of gamers playing and spending on its content.

Mobile and PC are key to expanding PlayStation’s audience

It is becoming increasingly uncommon for games to be exclusive to one platform or console. Many publishers opt to make titles available across platforms, with Microsoft pledging to publish all first-party content from the current console generation on PC. Until recently, Sony kept most of its first-party titles as console exclusives, but from 2020 onwards has published titles such as Death Stranding, Horizon Zero Dawn, Days Gone, and God of War on PC storefronts. The titles published on PC generated $80m in net sales in FY2021 and this is expected to rise to $300m in FY2022. Expanding onto PC leaves less space in the market for competitors and raises awareness of first-party franchises.

Brand awareness is particularly important for Sony as the company intends to spread its IP beyond games. For example, it recently confirmed that Horizon, God of War, and Gran Turismo TV series are in production. The company is in an especially strong position to derive additional value from its assets as it can leverage the expertise from its cross-sector subsidiaries and reciprocally use games as a platform to promote other business endeavours. For example, Sony’s 24KGoldn performed a virtual concert in Roblox (Roblox) to promote their latest album and the experience has amassed over 12m visits to date.

With 70% of US gamers in Q4 2021 stating that they use a smartphone for gaming (Ampere Games Consumer), it is not surprising that Sony is making an aggressive push into the mobile games sector. The space also presents an opportunity to grow in emerging, mobile-first markets such as Latin America and Southeast Asia. Using expertise from industry partners, the company intends to extend existing franchises to mobile. Interestingly, Sony has not made a mobile-focused acquisition in recent months, it has only acquired developers/publishers that cover multiple platforms or console. Therefore, we can expect to see a mobile-focused acquisition soon. However, Sony does own Aniplex, publisher of the free-to-play mobile game: Fate/Grand Order. The title has consistently re-entered the top 10 grossing mobile games (according to Sensor Tower) since it was first published in 2015. Suggesting Sony does have the capacity to create mobile-first content internally. Despite Sony’s clear intent to diversify, it has made little reference to serving audiences on other devices through multi-screen distribution via cloud gaming/streaming, a strategy heavily backed by Microsoft. This suggests that mobile-based content will be native for the time being.