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PS4 R&D costs, currency exchange rates, and cost of PSP Vita price cut are all to blame for decline, Sony says

After a lean profit in Q2, Sony Corp. (TYO:6758) saw its market momentum slow in Q3 (fiscal Q2 2013), despite some of its units performing strongly.

Overshadowing the entire earnings report was the ongoing struggles of Japan's currency -- the Yen.  Japan has actually seen deflation in recent years.  As its currency has strengthened, local firms like Sony have struggled to afford overseas expenses and to sustain profitability.  The Yen saw welcome mild deflation in Q3, but was still deflated enough to be a burden on Sony.

Sony, as whole earned [PDF] ¥1.7755T ($18.117B USD @ Sept. 30 exchange rates).  This is up 10 percent from ¥1.6047T ($16.374B USD).  On a constant-currency basis, revenue actually fell 9 percent on a year-to-year basis.

Sony's operating profit plunged 51 percent from ¥30.3B ($309.18M USD) to ¥14.8B ($151.02M USD).  Pre-tax income fell 69.6 percent and Sony posted a net loss (post-taxes) of ¥19.3B ($196.94M USD), up nearly a quarter from ¥15.5B ($158.16M USD) in the quarter a year ago.

Yen wideThe yen experienced welcome weakening, but overall is still too deflated. [Image Source: Daniels Trading]

TV unit struggles and a fading camera business were among the weakest spots on the earnings report.  Camera revenue dropped 6.9 percent and led to a $23M USD loss.  Sony managed to grow its TV business revenue 18.7 percent, but lost $123M USD, mostly related to a $95M USD restructuring expense for the LCD unit.

Cyber-shot RX100 II

Sony saw sales of its PlayStation 2 and 3 consoles decline to 2 million units (versus 3.5 million in Q3 2012). This is understandable as PS2 is nearing end of sales, and the PS3 will soon be relegated to a legacy spot.

Somewhat more troubling is a fall in sales of the PlayStation Portable (PSP) Vita handheld (and previous generation PSPs) from 800,000 to 1.6 million units.  That sales drop forced Sony to cut its handheld's price to $199.99 USD, a second cut from the handheld's original launch price of $299 USD.  Overall Sony is struggling to sell customers on its mobile gaming platform, as mobile gaming in general is increasingly cannibalized by smartphone gaming.  Sony refreshed the platform on Oct. 10, with a thinner lighter variant of the handheld, which it hopes will boost sales.

The game unit only lost $8M USD, despite the decline in sales as it saw relatively strong software sales (the primary point of profit making for console makers).  Sony writes that it's been spending a fair amount on research and development for the PlayStation 4, which cut earnings:

In the Game segment, operating loss significantly increased year-on-year primarily due to an increase in research and development expenses related to the upcoming introduction of the PlayStation 4 and the impact of a strategic price reduction for the PS Vita.

Sony is expected to post a small loss on every console, due to its $399 USD price.  By contrast Microsoft Corp.'s (MSFT) Xbox One is expected to be profitable from day one at $499 USD -- but may suffer sales-wise from its higher price point.

Sony's music label continues to be mildly profitable, but its "Pictures" movie and television languished with a $181M USD operating loss, a reversal of its profitable 2012.  A major source of this money loss was White House Down, which bombed hard at the box office.

White House Down
Sony couldn't diffuse the bomb that was White House Down. [Image Source: Sony]

Probably the best piece of news for Sony on its earning report comes from its Android smartphone unit, which trimmed losses to only $9M USD.  That's a remarkable turnaround from the unit's loss of $295M USD in Q3 2012, and comes in part thanks to a 4 percent year-to-year growth (on a constant currency basis, 39.3 percent on a floating currency basis) in sales.

Sony is finding a way to differentiate its Android smartphones above the pack.  While its recently released Xperia Z1 isn't the only Android smartphone to pack a Qualcomm Inc. (QCOM) Snapdragon 800, it sports arguably the best camera of any high-end Android with a 20.7 megapixel resolution and large, crisp optics.  Better still, the phone is very rugged, with Sony claiming it to exhibit enhanced "waterproof/dustproof/shatter resistant" performance over last year's Xperia Z.  

Xperia Z1
Xperia Z1 ultra
The Xperia Z1

The 6.4-inch, 1080p Xperia Z Ultra also drew some consumer interest.

Source: Sony [PDF]

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Proprietary crap?
By Dr. Kenneth Noisewater on 11/1/2013 12:04:13 PM , Rating: 2
Do their cameras and phones still take proprietary crap memory, or proper SD or CF?

Cuz Sony hasn't been on my radar for any electronics for a long time due to their proprietary bullshit and exorbitant prices.

RE: Proprietary crap?
By sdsdv10 on 11/1/2013 1:22:14 PM , Rating: 3
I have a Sony Cyber-shot RX100 camera and it uses a standard SD memory card.

RE: Proprietary crap?
By VeauX on 11/1/2013 1:54:01 PM , Rating: 2
I have an alpha 57 DLSR and it supports SD/SDHC/SDXC memory cards (and memorystick but whatever... I don't plan to use it).
Pretty good camera btw.

RE: Proprietary crap?
By marvdmartian on 11/4/2013 8:20:13 AM , Rating: 2
Yup, that's what's killed it for me, too. Once Sony decided that they were going to have their own type of flash memory, which offered no advantages over more common (SD or CF) types of flash memory, AND charge a premium for it, they lost my business. Same went for companies that used niche flash memory, like the QD cards.

RE: Proprietary crap?
By piroroadkill on 11/5/2013 7:16:37 AM , Rating: 1
You're ultra-misinformed.

Sony has one of the most open Android policies on the market.

Their high end handsets still have microSD slots.

Infact, they haven't used memory stick slots in their phones since the mid 2000s.

RE: Proprietary crap?
By LRonaldHubbs on 11/4/2013 1:11:02 PM , Rating: 2
Sony phones now use standard microSD and micro USB. It seems that this change happened when they bought out Ericsson's share of the mobile business and went exclusively into the smartphone space.

RE: Proprietary crap?
By piroroadkill on 11/5/2013 7:17:11 AM , Rating: 2
Nope, there are plenty of Sony Ericsson handsets with microUSB and microSD slots.

The real issue of the PS4
By CaedenV on 11/1/2013 2:48:02 PM , Rating: 2
It seems to me that the company is banking on the PS4 to bankroll the entire company like the PS3 did. But there is no way that is going to happen.

The PS3 was born into a world where tablets and smartphones did not exist yet, and where a PC game rig cost you a minimum $2000. It was an amazing value in what it could do for $500, and with only a single direct competitor in the x360 there was more than large enough of a market for both to exist side-by-side, and almost everyone I know owns both systems.

The PS4 is coming into a much different world. Gaming PCs (at least for 1080p gaming) only sets you back ~$750 today while offering higher quality gaming. If you factor in the $50/yr membership/network fees then this is already cheaper than a PS4 over the console's lifespan. On the other hand there are phones and tablets, which today are not a huge threat to consoles as they are a very different market. But fast forward 4-5 years and we will have tablets that can play at or above console quality (with phones following right behind), and perfectly capable of connecting to a controller and TV.
A bit further down the road then steambox will have broken out of it's humble beginnings and will be a serious console competitor as well, but will be kept up to date with new reference versions every year or two. Plus there are streaming game services which are growing past their birth-pains, plus unconventional devices like Shield and Oyua.

Don't get me wrong. Sony will have a very successful launch of the PS4. But it is a joke to think that the PS4 is going to be a serious competitor in 3-5 years... much less the full 8 years of it's supposed life-cycle. I mean, 1080p/60fps has been standard in PC gaming for some 5 years now, and the PS4 is promising 900p/30fps. That is a bad joke in a world where you can already pick up an (admittedly crappy) 4KTV for $1500 or less.

These consoles are already behind the times, and are facing much more competition than they did 8 years ago from all sides. Even if they do extremely well at launch, they are not going to keep Sony from bankruptcy for another 8 years like the PS3 did. Sony either needs to get it's collective butt together to become a healthy company again, or it needs to find a new cash-cow, but the PS4 is not going to be it's savior.

RE: The real issue of the PS4
By The Von Matrices on 11/1/2013 5:39:40 PM , Rating: 2
This would be a good argument... if Sony also didn't make smartphones and tablets. Sony is a huge and diverse company, and it won't fail just because one division begins to decline. If that happens then the company will sell or spin off that division and focus on more profitable ones.

Gaming PCs are arguable; sure they are good value, but I have no reason to believe that they will become any more popular than they already are. The truth is that superior graphics aren't the main seller of hardware; if it was then no one would be using their XBOX 360 or PS3 at the moment. There are many other reasons to have a PS4 or XBOX One even when their hardware is surpassed by a comparably priced gaming PC. One important point is that you can buy a console and be assured that it will play the latest games in 5 years; you can't be sure that your gaming PC will play the newest game in five years with no upgrades.

You have your vendors confused as well, Microsoft is promoting scaled 900p/30; Sony still believes in and is enforcing 1080p/60. And if you think the Steambox is going to succeed because there will be more frequent hardware upgrades, then you need to look at the leaked information regarding the PS4 lifecycle; it seems as if Sony is taking this route as well.

RE: The real issue of the PS4
By talonvor on 11/1/2013 5:53:06 PM , Rating: 2
The problem is that every single PS4 is being sold for a $55 loss. They expect to sell millions of them and regardless of how popular it is, they are still losing money on each and every unit sold.

By The Von Matrices on 11/1/2013 8:32:04 PM , Rating: 2
However, the article said that:

The game unit... saw relatively strong software sales (the primary point of profit making for console makers).

The fundamental money maker (software) seems to be selling well. I don't see why Sony selling the hardware for a loss will hurt them if the continue making money on software like they are now.

RE: The real issue of the PS4
By CaedenV on 11/2/2013 1:44:01 AM , Rating: 2
PS3 sold for something like a $200 loss per unit when it was new. PS2, PS1, Xbox, and x360 also all sold for losses when they were new (though I can't remember how much at the moment). The idea is that you sell the hardware at a small loss, but then you soak users in yearly subscription/network fees, and because you have total control of the store you set the prices higher.

RE: The real issue of the PS4
By ritualm on 11/2/2013 8:27:53 PM , Rating: 2
The problem is that every single PS4 is being sold for a $55 loss. They expect to sell millions of them and regardless of how popular it is, they are still losing money on each and every unit sold.

Because both Sony and MS figured out it's immensely more profitable to sell the console hardware at a loss, then laugh all the way to the bank with sales of games, DLC's and services.

Inkjet printer makers work on the same principle. They typically sell the printers themselves at a loss, why? Because a tiny cartridge full of generic inkjet ink is worth more per gallon than a bottle of 100-year-old whiskey. Then add authentication chips (i.e. Epson carts) so the user can't refill them without specialized equipment...

RE: The real issue of the PS4
By CaedenV on 11/2/2013 1:04:15 AM , Rating: 2
just my point, Sony has several divisions, most of which are run in the red most of the time. It is the game and media divisions which tend to keep them afloat, but the game division is not going to be as robust this time around.

XB1 will mostly run at 720p, and will only hit 900p on some games. PS4 will typically eek out 1080/30, but high end AAA titles are expected to be 900p. There is no way either platform is going to hit a consistent 60fps with next gen games. Either way, 90% of the TVs out there only have a 30fps input, so I am not going to gripe about that as it wouldn't make a difference, but the fact that nither platform can push out 1080p consistently is just sad.

You are quite wrong about PC gaming as well. Everyone talks about PC gaming as if the hardware somehow gets slower with time, but that is obviously not the case. If you want to play at console quality then hardware you buy today will be just as relevant 5 years from now. The difference is that you are not forced into being limited to console quality... and if you want to go higher, then you can go higher than most budgets will allow (my own included). My 2 year old rig will have no problems playing next gen games... just not next gen games with full settings. But you know what? Console's cannot either.
I totally get the convenience of owning a console. I was a huge fan of Nintendo systems back in the day, and got tons of use out of my old PS2. There is in fact something to be said about the convienence of plugging in power and video cables, pressing the power button, and having a system work. But computers have largely caught up on that as well. If I take my rig somewhere (granted it does not happen much), then I plug in my HDMI and power cords, and done. wireless keys, mouse, internet, and controller, just like a console. The software end has also improved much over the years. I avoided modding Skyrim for quite some time due to painful memories of screwing up other games... but then I came to realize that all you need to do is literally hop on steam workshop, click a silly 'subscribe' button, and it is done. Things are getting stupidly simple for those who just want to sit down and play a game on the PC, while things are getting more and more complicated on consoles. There is really very little difference anymore.
PC gaming has had a huge resurgence lately. Steam had some big news last week posting that they have a larger and faster growing user base than xbox live. I am not personally sold on the steambox, but I think that will be hugely attractive for non-tech gamers who want a game system, but do not want to build it themselves, and also don't want to pay ridiculous boutique prices.

My understanding of the PS4 lifecycle is that they are slowly going to move to a streaming game platform, where (for a subscription fee +games of course) you can play legacy titles on the PS4 and possibly other platforms. As this grows and matures then they will offer newer titles, and eventually everything would move to this service (so much for not requiring an internet connection lol). That is all well and good, but I still don't understand why a console owner has to pay a subscription fee, plus purchase games, for the privilege of running under-powered hardware. There comes a point where the inconvenience of PC gaming really isn't so bad.

very nice phones!
By luv2liv on 11/1/2013 10:51:04 AM , Rating: 2
i would buy their waterproof phones without hesitation! im surprised others are not making durable stylish phones.

as for PS4, same crap as PS3. or maybe im getting old and havent been playing games.

psvita and proprietary memory stick can go to hell. history repeating itself all over.

RE: very nice phones!
By CZroe on 11/1/2013 11:53:13 AM , Rating: 3
Their first waterproof tablets... weren't. They were recalled for this. Hell, even my Sony-Ericsson MBW-150 Bluetooth watch, which I bought to control my phone while riding the motorcycle, showed condensation inside on the first cold ride days after I bought it. It wouldn't go away either. It reappeared even after clearing it (opening and sealing with heat/dehumidifier). Yes, it was supposed to be submersible and water-resistant too.

RE: very nice phones!
By Solandri on 11/1/2013 4:27:19 PM , Rating: 2
Waterproof does not mean airtight. Because of the surface tension of water, and because submerging increases external pressure, you can make something which is waterproof but where air (and water vapor) can still enter. Breathable waterproof fabrics like Goretex are a good example. The gaps in the fabric are small enough for the surface tension of liquid water to prevent it from passing through, while individual water molecules in the form of vapor can squeeze through.

Optics which are airtight are generally advertised as fogproof and nitrogen purged. They evacuate all the air (and moisture) from inside, and fill it with nitrogen with an airtight seal. No water vapor = no condensation (on the inside at least).

Jason Mick....
By Samus on 11/2/13, Rating: 0
"What would I do? I'd shut it down and give the money back to the shareholders." -- Michael Dell, after being asked what to do with Apple Computer in 1997

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