PlayStation is benefiting from subscriptions and live services

PlayStation 4 is nearing the end of its life. The next PlayStation is coming soon as Sony Interactive Entertainment has already confirmed. That has led to declining revenue for the company’s gaming division. Only this generation is different than in the past, because the PS4’s revenue decline is just a minor dip. And Sony still expects its game & network services to have one of the best years in its history. And PS4’s resilient revenue is indicative of gaming’s future.

Sony is expecting its gaming division to generate revenue of $20.3 billion (2.2 trillion yen) during its current fiscal year ending March 31, 2020. That’s down from $21.3 billion during its fiscal 2018/19, and it’s also down from its previous forecast for fiscal 2019/20. The company notes that the PlayStation 4 hardware is selling slower than it expected even if it is still selling well. It’s also seeing lower-than-expected revenues from game software.

“We have revised downward our forecast for game software sales to be flat year-on-year due to a decrease in third-party game software sales,” reads Sony’s financial statement. “[That’s true] especially [for] free-to-play games.”

Like Microsoft, Sony is seeing a gradual decline in revenues from games like Fortnite. But when comparing PlayStation’s year-over-year revenues, the obvious biggest change is that God of War launched in April 2018. And 2019 hasn’t had anything nearly that big from Sony’s first party studios.

PlayStation’s unprecedented profitability

So with all of those factors working against PlayStation, you would expect revenues and operating income to drop. But Sony is still expecting to make an operating income of $2.58 billion for its current fiscal year. That’s behind fiscal 2018/19’s $2.86 billion in income, but it’s still historically high. This is even more impressive when you look back and see that the PlayStation division typically begins experiencing a profit loss at this point in the console cycle.

Check out this handy chart from Niko Partners analyst Daniel Ahmad:

Here is a look at Sony's Game and Network Services Operating Profit / Loss chart since 1995.

Last fiscal year was a record for Sony in terms of operating profit. This year (In Orange) is on track to do well too, due to strong network services performance + cost reductions. pic.twitter.com/lUM9Dd4nAd

— Daniel Ahmad (@ZhugeEX) July 30, 2019

You can see that as Sony transitioned from one generation to another in the past, it began to lose money. That happened in 1995 when it first launched the PlayStation. And that cycle repeated in 1999/2000, 2005/2006, and 2012/2013.

The PlayStation 4’s annual operating income grew year-over-year until now. But even now that it is declining, Sony still expects to have its second biggest year ever in terms of PlayStation profits.

Breaking the cycle

So what is happening? It’s all about the growth of the service model across every aspect of gaming.

“We expect network service sales to be above the previous fiscal year,” reads Sony’s financial statement.

PlayStation Plus has millions of subscribers. PlayStation Now is also growing with people subscribing to its $20-per-month features. PlayStation Vue, the company’s streaming television service, is also contributing. Digital game downloads made up more than 53% of all PS4 copies sold during the last quarter. That’s the first time the digital ratio has broken 50%, and that is increasing Sony’s profit margins.

And, of course, games-as-a-service are also contributing to this break in the traditional cycle. Players are returning to games longer and longer and spending money on microtransactions and season passes. Sony takes a cut of every sale made for items in Rainbow Six: Siege, Fortnite, Apex Legends, Overwatch, and more. And that is helping to spread out revenue over time instead of front loading every sale when games launch.

Sony has nearly 100 million PlayStation 4 owners in the world, and many of them have made the system their primary gaming console. And with services giving people a way to spend more money over time, that console business is healthier than ever for the company. And it is making it clear that, going forward, it is determined to maintain that momentum.

“The goals for this segment this fiscal year are preparing for the launch of the next-generation platform as well as maintaining and expanding the community we have built among users,” reads Sony’s financial statement. “As of the first quarter, we are on track to achieve these goals.”