MoneyWatch Tech

Sony Earnings: Smartphones Ate Its Videogame Business

By Erik Sherman

Updated on: May 13, 2010 / 12:41 PM EDT / MoneyWatch

Sony (SNE) released its fiscal 2009 year-end numbers yesterday. The general news was that losses narrowed and there was actually an operating profit. But Sony's gaming division went the other way, and a big reason is the advance of the smartphone.

In terms of dollars, the Networked Products & Services division, which includes both game consoles and VAIO PCs, saw a year-over-year 10.2 percent decrease in sales. Although the operating loss improved by 4.9 percent over last year, it was still $893 million. Sony points to decreased sales in both gaming and PCs. On the console front, PlayStation 3 (PS3) unit sales were up, but both PlayStation 2 (PS2) and PlayStation Portable (PSP) hardware sales were down -- the latter by nearly 30 percent. Additionally, PS2 software sales were also down significantly.

It's not a huge surprise that the PS2 is sinking. After all, the PS3 was supposed to be its replacement - albeit at a higher price -- so of course there would be significant cannibalism. But there's no new model of the PSP. It, too, has been around for years, but that's not its biggest problem. Look at the following graph that I put together based on Sony's reported hardware unit movements by quarter (click on the graph to get a larger version):

I've included a trend line for PSP unit sales. Notice how the downturn begins around the time of the Apple (AAPL) iPhone 3G release, accelerates when the iPhone 3GS came out, and then shifted to a full nose dive as handsets running Google (GOOG) Android ramped up.

You could argue about the relative wisdom of introducing the PS3 when its cost was so high that each unit produced a hefty net loss to Sony. As the company has lowered PS3 prices, the losses have mounted even as manufacturing costs dropped. Sony also understands the importance of the game console as a door into the home, and it does make money on software sales, so the business calculations don't rest completely on the hardware.

But Sony has yet to create the successor to the PSP -- and now it's basically too late. One of the most popular categories of apps on smartphones has been game titles. The power of smartphones, and their capabilities, will only increase, especially as Apple readies the iPhone 4GS, Motorola and HTC plan awaited new Android models, and HP clearly has plans for its acquisition of Palm.

This analysis has made me reconsider my previous argument that Apple expanded the video gaming audience rather than taking market share. Now I'm not so sure. I do suspect that smartphones have added additional gamers, but it seems that they may have reduced among many the interest in buying a PSP. Sony does plan new mobile computing devices, but it will likely be too little, too late for products that will have to catch up to what handset vendors already provide.

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Image: courtesy of Sony.