PlayStation punctured: Sony's games business deflates again

Rumours have abounded, in recent weeks, of an imminent redesign for the PS3 - a third physical iteration of the hardware which would boast an even slimmer profile and an even lower price point. At this stage its existence is such a poorly-kept secret (or such a spectacularly executed hoax) that it seems a complete certainty that it'll appear at Gamescom later this month.

That certainty, by the way, is an illustration of the importance of keeping secrets in this business. Sony's desire would have been to unveil a new super-slim PS3 model to a surprised audience, creating a buzz around the platform which would be conveyed to consumers in subsequent media reports - Sony blows away Gamescom with new PS3 redesign and price point! Now, we've all seen the machine laid bare all over the Internet prior to the announcement, and there's been endless speculation over how low the price can go.

"Vita, PS3 and PSP this year don't match the sales of PSP and PS3 alone last year, and that's a miserable situation to be in"

If Sony doesn't reveal it at Gamescom, it'll be a huge disappointment; if it does reveal it, it'll earn little more than an expansive shrug, since we've already seen it all. A failure of secrecy has transformed a potentially hugely positive announcement into one which has little upside, in media terms, but a huge potential downside if it doesn't happen or doesn't match expectations. Now, secrecy is a tough thing to maintain in a high-profile consumer electronics or entertainment business - even the notoriously secretive Apple has had pretty convincing pictures of the upcoming new iPhone splashed all over the web - but Sony is particularly bad at it. As a journalist, it may seem churlish to complain about a company failing to plug its leaks, but for Sony's own sake, learning to keep its lips sealed and its prototypes in a locked cupboard would do no harm at all.

It's not just from a media perspective that Sony needs new hardware at Gamescom, though. In fact, even if there hadn't been any leaks, we'd all be looking to Gamescom for something pretty dramatic - because after the shockingly awful quarter the PlayStation business just had, Sony needs to show us that it's still in the game.

In the three months to June 30th, Sony's PlayStation business posted an operating loss - ¥3.5 billion, or £28 million - reversing the fortunes of the same quarter last year, in which it posted a similarly sized operating profit of ¥4.1 billion (£33.5 million). That's a perturbing development for a division which has generally been seen as a bright spot in Sony's gloomy catalogue of ailing businesses - but it's less worrying, in terms of the overall picture, than the decline in revenue which created that operating loss. Compared with the same quarter last year (in which, let's not forget, PlayStation Vita had yet to hit the shelves, so there should theoretically have been depressed demand as consumers waited for a new product), revenue from PlayStation products was down 14.5 per cent. Granted, the still strengthening Yen hasn't helped that figure - in real terms, once you account for currency fluctuations, the decline in sales is more like 10 per cent.

That's still rather awful. The June quarter isn't exactly peak season, of course, but year to year comparisons are reasonable to make, and losing 10 per cent of your sales in a single year is a painful thing to do. It's even more painful when you consider that the year in question saw the launch of a successor to your actually rather successful handheld console. Sony somewhat optimistically notes that sales of Vita have made up for some of the revenue lost through declining PSP and PS3 sales; the reality is that Vita, PS3 and PSP this year don't match the sales of PSP and PS3 alone last year, and that's a miserable situation to be in.

"Despite Sony's attempt to claim that the Vita's sales are making up for falling sales elsewhere, the absolute root of the problem clearly lies with the firm's newest launch"

There are a few factors to be borne in mind before we all pile in to criticise Sony's performance. Firstly, although the company itself posits the 10 per cent figure as a constant currency estimate for its declining sales, such figures can't reflect the real impact of currency fluctuations on the PlayStation business. What the strong Yen has done, more than anything else, is seriously restrict Sony's ability to manoeuvre in the console space. The Yen's strength is far beyond anything that would have been predicted in Sony's most pessimistic financial models a few years ago - it long ago soared through the valuation at which the Bank of Japan might have been expected to step in decisively, revealing the BoJ to be practically powerless in the face of global financial conditions - meaning that Sony is sailing much, much closer to the wind than it anticipated in terms of profit margins. Planned price cuts or other such alterations to the PlayStation strategy have no doubt been shelved or pushed back as a consequence.

What has been the ultimate impact of that? Impossible to estimate - but worth bearing in mind as we observe Sony's problems. Equally, we should recall a second factor, namely that no one year is really directly comparable to another in the games business. The business operates on a cyclical basis - an annual cycle which favours the December quarter, a five- or six-year console replacement cycle (whose prolonging is arguably causing some of the pain for the console business right now), a 12 to 24 month refresh cycle on major franchises. Those cycles interlock to influence business results, but are also uneven, with peaks and troughs created by quiet periods or major title releases. Sony's decline may in part be a trough rather than a trend - but note the "in part". It might not be as bad as it looks. It's still bad.

As usual, there's some odd mucking around with numbers going on within Sony's financial report. The company has combined sales numbers for the PS3 and the ageing PS2, as well as numbers for the PSP and the Vita, in a cack-handed effort at obfuscating actual sales. Some halfwit in Tokyo presumably thinks this is an ingenious way of distracting people from the reality of the figures; to him, and his bosses, I suggest a crash course in "how the Internet works" may be required, since the fact is that such a blatant attempt to hide your figures only focuses vastly more unwanted attention on them. Even so, it's not hard to see that the figures are bad - the combined sales of Vita and PSP, in particular, don't even add up to the individual sales registered by the PSP in last year's quarter.

Overall, despite Sony's attempt to claim that the Vita's sales are making up for falling sales elsewhere, the absolute root of the problem clearly lies with the firm's newest launch. PS3 has been a solid performer in the past few years; it's late in its lifespan, meaning there is plenty of scope to drive it forward through price cutting or redesigned hardware. Besides, it's got a huge installed base already, meaning that it's well-established as a platform for developers. Vita, however, is an utter flop - a label I didn't want to apply hastily, but can it really be denied at this stage, even by the console's most dedicated fans? It's clear that if Sony wants to reverse that situation, it's going to have to accept deeper losses through a steep price cut, as well as significantly ramping up its software efforts.

Mobile gaming and smartphone advocates will nod sagely and a little triumphantly at that, but the fact is that Vita's failure wasn't written in the stars. The 3DS XL is off to a good start and the 3DS platform overall has now managed almost 20 million sales; the market for dedicated handheld hardware is not dead. Smartphones and tablets have made it harder to sell people handheld devices, but by no means impossible. Vita's problems are not with the basic concept of a dedicated games machine, but with the execution - the pricing, the marketing, the functionality, the software, perhaps even the hardware itself. Some of those things can be fixed, but it'll be painful and expensive to do so. Whether Sony has the wherewithal to do so, and to do so quickly, will be an important pointer for what kind of future this embattled company has in the console business as a whole.