By now, we all know that rumors about the death of the console were greatly exaggerated. This narrative held sway pretty strongly for about a decade, fueled by the introduction of various smart devices (smartphones, smart TVs, etc.) and some rather optimistic notions about 5G and internet speeds in general.
The logic was simple: the world was becoming filled with devices that could be played on, and with the ability to stream games in real-time without the need for a device, selling consumers an expensive dedicated gaming console seemed like an increasingly difficult prospect. Even as each successive generation of console hardware boomed, a few confident prophets were telling us that a decline into irrelevance was inevitable for this sector.
Ultimately, the people who predicted the end of consoles were wrong (at least so far) for one very simple reason: they didn't understand the appeal of consoles in the first place.
If you posit that a console is simply a device dedicated to playing video games, then yes, the continued existence and even health of this sector in a world of high-end smartphones, iPads, laptops, and other devices quite capable of running decent-quality games is a mystery. However, this positing undersells the value of console hardware: the effort and engineering that goes into building a dedicated device that is fun and enjoyable to play video games on, thousands of decisions small and large that make the experience smooth, fluid, and enjoyable, and that many consumers value enormously even if they couldn’t specify precisely what those differences are.
It also completely misunderstands what a console actually is: not a commoditized and forgotten piece of hardware, but the hub of an ecosystem of software, services, development studios, licensing and marketing that turns something like PlayStation into a business, a brand, not just a curved box of microprocessors.
The old narrative of the console's impending death came to mind this week as I looked at Sony's latest financial results, because these numbers would definitely have provided fuel for that mill in years past.
In financial terms, of course, everything looks pretty healthy: the headline numbers in terms of revenue and operating profit, both for the company in general and the gaming division in particular, suggest that Sony is currently well-run and largely successful. But anyone looking for evidence that consoles are in decline would turn to the hardware sales page, and there they would find that Sony missed its PS5 sales target for the quarter, as console hardware unit sales actually fell by a rather significant 27% compared to the same quarter last year.
With the increases we're expecting for PS5 in the coming year, the minor hiccups in hardware numbers will likely be forgotten soon.
In theory, we’re long past the era where year-over-year comparisons felt crazy because they were being compared to a pandemic-era baseline, so these numbers could mean something significant. On the other hand, they might not, because we’re still in the midst of the pandemic’s sales repercussions; the first quarter of last year was the point where post-pandemic PS5 supply finally started to catch up with demand, so sales were strong as pent-up demand for the console spread across the system.
Still, the headline unit sales figures aren't great, not just because of the year-over-year comparison, but because this also means that Sony has missed its own targets for the quarter by a decent margin.
Those numbers suggest a small chink in what has so far been a fairly unassailable sales story for the PS5, but it's important to put it into perspective; the PS5 is still outselling the PS4 in launch numbers as far as I can tell, even after pandemic shortages.
Additionally, there are two giant events on the horizon for PS5 that will have a huge impact on sales, both in terms of driving demand down the road, and curbing early demand. First, there’s the launch of the PS5 Pro, which we’re expecting later this year but could still be delayed until early 2025; and then there’s the one the entire industry is looking forward to, the release of Grand Theft Auto 6 next year. Both of these events are hugely important for the console, and while they’ll almost certainly boost sales in a major way when they finally happen, right now the anticipation of those events is probably depressing hardware sales. GTA 6 will likely be the point at which many PS4 holdouts finally upgrade their hardware (even as a multi-platform title, GTA releases have historically had an outsized positive impact on PlayStation relative to other platforms). It's possible that some people are explicitly waiting for that moment, perhaps anticipating bundles or other deals, or perhaps simply working on the logic of “I'm buying a PS5 for GTA 6, so I don't need to get one yet.”
Rumours of a PS5 Pro coming later this year are also a clear drag on sales of the current model. Even people who aren’t specifically planning on buying a Pro model will want to avoid buyer’s remorse, preferring to wait and see what the new hardware actually looks like before committing to buying the existing model. Each of these developments may be depressing sales right now, but they will pay off with a massive sales boost when they happen next year – these unit sales are delayed, not cancelled. The healthy state of the console market continues, and I’d argue that elsewhere in Sony’s financial reports we can see some details that highlight precisely why consoles are in such good shape, and how the diversification of business models around consoles has set them up to remain central to the industry for years to come.
Let's start with another number that doesn't look great at first glance: software sales are down in terms of units, down by almost three million units year-on-year to 53.6 million. Software revenue, however, is up 20%. The drop in unit sales isn't that significant in itself: this figure isn't expected to be constant given the different games being released from quarter to quarter, and this change is within the expected range. However, the implication that Sony is making significantly more money per unit sold is definitely important.
Some of the reasons for this are laid out in the report, while others are not. One key reason is missing from these numbers: the shift to $70 pricing is nearly complete, and it has become the default price for most major new releases. This move may not be popular – though it is more than justified by the inflation that has occurred since game prices were last raised – but it is pretty much a done deal at this point, and will add a few percentage points to revenue for new games at launch.
Another reason for the increase is more apparent in the numbers: sales of add-on content are up 37% year-over-year. That’s a figure that covers a wide range of different transaction types. Some sales of Elden Ring’s Shadow of the Erdtree add-on will be included in this figure, for example, alongside free transactions in Genshin Impact, battle passes for Fortnite and Overwatch, and so on. For one, that diversity makes it a little tricky to parse out exactly what’s going on in that category – it would be really nice to know from an analytical perspective how much of that year-over-year increase is due to Shadow of the Erdtree. Looking more broadly, though, the diversity of transaction types within that category is a testament to how broad and strong a business Sony has built around its store.
This isn't simply a business that goes up or down depending on whether a blockbuster game is released in a given quarter; it's able to easily withstand a temporary dip in one category or another. Being able to significantly increase software revenue in a quarter when unit sales fell is exactly the kind of performance this diversification is intended to deliver, as other aspects of the business continue to provide growth even when one area is suffering slightly.
With the boosts we’re expecting for the PS5 business in the coming year, the minor hiccups in the hardware numbers will likely soon be forgotten. More importantly, Sony is proving it’s capable of growing its headline numbers even in a worryingly slow year for PlayStation like 2024 – something that only makes sense when you consider the entirety of this diverse and complex business, and not just the PS5’s position as a consumer hardware product.
It's the PlayStation business as a whole, not just chips in a curved box, that is well positioned to meet whatever challenges the next few years may bring.