With no clear end in sight for supply chain shortages, game-console makers are increasingly expanding to other areas.
The semiconductor crunch plaguing much of the electronics industry has taken a toll on the production of Microsoft Corp.'s Xbox, Sony Group Corp.'s PlayStation and Nintendo Co. Ltd.'s Switch video game consoles. While the companies are actively working to work around the shortages, they are also eyeing alternative ways to cash in on gaming revenue that is less reliant on hardware.
"While consoles will remain an essential part of the gaming business and are not going to be phased out anytime soon, the shortages have driven home the fact that it is crucial to expand to business models that are more diverse and services-oriented," said Michael Goodman, director of media strategies at Strategy Analytics.
Shortages stretch on
The shortages hit Sony the hardest in the March quarter, which logged the lowest quarterly sales figure to date for the PS5. Shipments of the console fell to 2 million from 3.3 million a year earlier, with total lifetime sales of 19.3 million as of March 31, missing Sony's original sales target for the most recent quarter.
In an email update to S&P Global Market Intelligence, Sony said the company has sold more than 20 million PS5 consoles globally as of June 3.
Sony's sales slump also drove a record decline for game consoles overall in the first quarter, with total shipments down 16.7% year over year to about 9.9 million units, according to estimates by Kagan, a media research group within S&P Global Market Intelligence.
"Supply and logistics constraints denied Sony a breakout holiday season in 2021, putting the PlayStation 5 into arrested development," said Kagan analyst Neil Barbour. "We anticipate that sales will surge in 2023 and 2024 as more units come to market, but Sony will likely fall short of the lifetime sales it reached with the PS4 after the slow start."
Component shortages and logistical impacts stemming from the COVID-19 pandemic and Russia's invasion of Ukraine were still weighing on the PS5, PlayStation head Jim Ryan said in a May financial presentation. To mitigate the challenges, Sony is sourcing multiple suppliers and negotiating optimal delivery routes, which Ryan said would lead to "production levels that we've never achieved before," starting in 2022.
"It sounds like Sony is ready to spend more on manufacturing, just to get more devices into the market and rope in more users into the PS5 ecosystem," said Serkan Toto, CEO of video game consulting firm Kantan Games. "They also need to increase the install base to make the PS5 more relevant for third-party game studios as a platform to develop for."
Microsoft fared better at producing Xbox consoles at a faster clip in the March quarter. Kagan estimates Xbox shipments grew 30.7% year over year to 1.8 million units. The increased supply for the consoles fueled a 14% year-over-year increase in the company's hardware revenue, with total gaming revenue growth of 6%.
Microsoft's stock rallied following the earnings beat and strong outlook for its business divisions, including gaming. The stock remained down for the year-to-date overall as of market close June 2, though still slightly ahead of the tech-heavy Nasdaq index.
"It is very likely that Microsoft leveraged its financial clout to get priority on chips needed to produce more consoles than its competitors," Goodman said.
Microsoft's total console shipments also benefited from the latest Xbox having two versions — the high-end Series X model and the lower-priced Series S model that uses different hardware.
"Right now, we're seeing greater supply worldwide for Xbox Series S, which we can more efficiently manufacture and ship due to its size and components," a Microsoft spokesperson told Market Intelligence. "We know it's still hard to find Xbox Series X at the moment, and we're working with our manufacturing and retail partners to keep up with the unprecedented demand."
Meanwhile, Nintendo reported a 3.6% year-over-year decline in total sales in the March quarter and projected the slump to widen to 20% in the year ahead due to ongoing supply issues.
"We will try to meet demand, depending on the current situation and any challenges related to shipping and supply chain management," Nintendo told S&P Global Market Intelligence.
Overall, Nintendo was not impacted as severely by the shortages as Sony, and it fared better on the Tokyo stock exchange than its larger competitor.
Enhancing subscription services
Microsoft has been leading the charge in evolving its gaming business with Game Pass. The subscription service, which also allows members to stream some game titles over the cloud, has been steadily growing its user base on the strength of an expanding library of high-profile titles.
"With Game Pass, Microsoft has the opportunity to appeal to hardcore gamers frustrated by a lack of hardware at retail as well as casual consumers who aren't interested in spending hundreds of dollars on gaming hardware," Kagan's Barbour said.
Sony has been making inroads with its own subscription gaming service PlayStation Plus, which will be revamped June 13 into a new three-tiered subscription offering that will also offer cloud streaming at its premium membership level. Nintendo has been gradually overhauling its Switch Online service as well, which includes an "expansion pack" add-on subscription that the company is frequently updating with new content.
Despite the Japanese companies' advancements in their respective game subscription services, Microsoft has an edge with Game Pass, which offers titles from all of the company's internal studios on the day of release. This greatly enhances the value of the service for consumers who have to buy new first-party releases for the PlayStation and Switch at full price.
"Microsoft is on another level as far as resources are concerned — they could even afford to offer Game Pass for as little as $1 per month to new customers," said Kantan Games' Toto. "Sony and Nintendo both need to charge $60 for their new first-party games to make their business model work."
Expanding live services
The gaming industry is also increasingly moving toward live service titles, which are designed to keep players engaged with a steady stream of new content added post-launch. These titles are typically free-to-play and are monetized via a variety of in-game purchases.
Microsoft would inherit a range of profitable live service titles if its pending acquisition of Activision Blizzard Inc. is completed. Sony is also looking to expand its roster, striking deals to acquire developers Bungie Inc. and Haven Entertainment Studios Inc. as it looks to move into the live service title arena.
By 2025, Sony expects to have 12 different live service games running and will grow its investment in this area to 55% from 12% in 2019, PlayStation chief Ryan said during Sony's investor call.
"Both Microsoft and Sony have sat on the sidelines for too long, observing the sheer amount of money games like Epic's Fortnite make on their own consoles," Goodman said. "By making aggressive moves into the live services space, they are hoping to tap into revenue streams that are far more profitable than relying on hardware."
Future devices
Even as they shift towards business models that are less reliant on hardware, the companies are not expected to phase out their devices anytime soon.
Sony is expected to launch its new virtual reality headset for the PS5, the PSVR2, in 2023. The device will have an initial lineup of more than 20 games, some of which the company showed off in an online showcase June 2.
"The PSVR2 shapes up to be a great device, but initial numbers will be modest just because of the supply chain constraints on the console and the headset itself," said Kantan Games' Toto.
Meanwhile, speculation continues regarding a potential new Nintendo Switch. Nintendo President Shuntaro Furukawa repeatedly shot down questions about such claims in 2021, but the executive was more circumspect during Nintendo's most recent earnings call, simply declining to comment.
"This is a strong indicator that Nintendo might finally be cooking up something this fiscal year," Toto said.