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David Gibson, CFA, is a senior investment advisor at Astris Advisory Japan. He specializes in the gaming and internet sectors.
One of Japan’s best-known brands is about to launch a decisive product that will influence the company’s trajectory for years to come. Sony’s PlayStation 5 game console is coming to the market soon and the signals are looking good.
It has the potential to surpass the resounding success of its predecessor, the PS4, which has an installed base of more than 112 million units. Today’s robust gaming industry, combined with a long-awaited launch title, is likely to produce a hit.
Full details on the PS5 are not yet available, except for some of the specs. There will be two varieties and from Sony’s guidance it is a reasonable assumption that the retail prices will be $ 399 for digital only and $ 449 with Ultra HD Blu-ray. Those figures would mean a loss of more than $ 200 per unit, but the economics of PS Plus subscriptions, online play, and gaming should offset those costs over the next-gen cycle.
The PS5 will go head-to-head with Microsoft’s latest Xbox Series X, with both launching this holiday season. But the Xbox comes a long way back. It’s boosting your Game Pass subscription alongside its new xCloud streaming service for $ 10- $ 15 per month. Sony is likely reviewing its PS Now service to make it more competitive and differentiates itself by its stronger titles.
For now, game streaming remains limited by download speeds, download limits, and specific hardware. A Netflix-style model is every gamer’s dream, but it remains elusive under current industry practices that require a $ 60 upfront purchase for each title providing an interactive experience of more than 20 hours. PS6 may even be a cloud experience add-on for existing PS4 and PS5 consoles.
For this generation, it is still the power of games that drives consumer adoption. This is where Sony will go ahead with Marvel’s Spider-Man: Miles Morales as the launch title for PS5, while Halo Infinite for Xbox is delayed until next year. Game publishers in Japan have traditionally waited until a new console has an installed base of over 20 million before releasing a new AAA title. That is not the case for the next cycle. Capcom, Square Enix Holdings and others will release major titles on PS5, also for PS4, within the first six months of their launch. While blockbuster titles already cost $ 100 million or more, it will be worth a 20% increase for the PS5 versions.
It is the power of games that drives consumer adoption. (A screenshot from Marvel’s Spider-Man)
Sony has tricks up its sleeve. You’ve already highlighted the PS5’s super-fast loading times, but few gameplay videos have been released so far. The benefits of what it calls its 3D audio have not been proven by the market, and the controller has some new features. My forecast is for Sony to sell 5 million PS5 units in fiscal 2020 ending in March of the following year, down from the 6.5 million for PS4 in the equivalent period of its launch year. The key reason for that differential is the limited supply of parts.
The CPU and GPU architecture of the PS5 and Xbox Series X is similar and based on PC gaming specifications. This was also the case with PS4 and Xbox One, both released in 2013, so what we are seeing is an evolution rather than a revolution. Game engines like Unreal Engine 4 are being updated to Unreal Engine 5 to allow for an easy migration to PS5 and Xbox Series X development. This will mean more PS5 titles available in the early years than we’ve seen during the release periods. of previous consoles, despite the greater complexity and resolution of the new games. More options means more consumption.
The new gaming cycle is likely to be stronger than before, as PS5 pushes sustained consumption to record highs. Google Trends data indicates that during June of this year, US consumer interest in PS5 was 15% higher than on PS4 in June 2013 prior to its launch.
The digital purchase of second-hand games and items represents a unique opportunity for PlayStation. Sony would benefit from its own digital marketplace where verified users could sell, trade, or give away items at market-driven prices. Sony would get significant platform fees from an expanded digital gaming ecosystem and drive greater loyalty and usage.
As it stands, during the last quarter, online spending on PlayStation soared from 20% of transactions to 74% in a shift driven by stay-at-home demand. Over time, 40% of PS4 users have subscribed to PS Plus to play online and try one or two free games per month. That user base has transformed Sony’s gaming economy and network services revenue and accounts for 50-100% of quarterly operating profit. The 45 million users of PS Plus are also a crucial beachhead for the launch of PS5.
Fueled by its huge installed base of PS4s and solid game titles of its own, Sony is in for a winner with PS5. Incremental services like cloud streaming can ensure that PlayStation is competitive and increases your subscription revenue. The evolution of the console means more gaming options for consumers. Increased demand driven by the continuing COVID-19 environment in the home is likely to propel the console cycle to new heights of home entertainment consumption.
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