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Why Sony is much more desperate to win the console wars than Microsoft

January 28th, 2014 at 11:38 AM
Sony Credit Rating Junk

One of the more underrated questions surrounding the latest round of console wars between Microsoft and Sony is, “Which company needs a win more badly?” Looking at the financial health of each company, the answer is pretty obvious: It’s Sony. While Microsoft still rakes in enormous piles of cash every quarter thanks to its enterprise software and services, Sony’s hardware business has come under considerable strain. Moody’s this week cut Sony’s credit rating to junk status and said that even a successful PlayStation 4 launch might not be enough to make the company consistently profitable.

“Sony’s profitability is likely to remain weak and volatile, as we expect the majority of its core consumer electronics businesses — such as TVs, mobile, digital cameras and personal computers — to continue to face significant downward earnings pressure,” Moody’s writes. “The primary reason is intense competition and the shrinkage in demand, the result in turn of cannibalization caused by the rapid penetration of smartphones.”

Of course, this story doesn’t just apply to Sony but to every company whose primary income comes from making consumer electronics hardware these days, including smartphone manufacturers. This is why Samsung is investing so much into its Tizen mobile platform so that it can have more value added to its products. And this is also why the PlayStation 4 is so crucially important to Sony since it’s the one platform that Sony has that gives it control over a software ecosystem.

That said, Moody’s doesn’t think that the PS4 alone will be enough to turn Sony around because it won’t deliver as much of a boost to the company’s gaming profits as the PlayStation 3 did when it was first launched.

In other words, while Microsoft has more than enough money to weather significant hardware losses from both the Xbox One and its Surface tablets, Sony needs the PlayStation 4 to be a world-beating hit more than ever.

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