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8 important takeaways from PlayStation's investor relations day

In an investor meeting this week, Sony Computer Entertainment CEO Andrew House outlined where the PlayStation business is going in the years ahead, and how SCE plans to keep its momentum going strong.

Kris Graft, Contributor

December 1, 2014

6 Min Read

Just over a year after the launch of PlayStation 4, Sony Computer Entertainment CEO Andrew House envisions a solid, expanding game business over the next few years. PlayStation 4's success (13.5 million units sold worldwide) comes at a time of disruption in the game business, as mobile games, an influx of PC games, and rival game consoles vie for players' attention, more so than ever. To launch a console to such a positive reception in this day and age is no easy task. In an investor meeting, House outlined where the PlayStation business is going in the years ahead, and how SCE plans on keeping the momentum going strong.

PlayStation 4's success is driving profits

House said SCE's profit will be largely driven by PS4 hardware sales, as well as a new model launch for Vita, which is cheaper to produce. Game software profits are lower than past years, due to the scaling back of major software launches. But House said profits increased in the company's network segment, as PS Plus and other media subscriptions have gained traction. Increased operating expenses will also impact profitability, as network infrastructure investments continue. The strong U.S. dollar is also negatively affecting SCE's profits. As for sales, SCE is targeting 1.4-1.6 trillion yen for the fiscal year 2017. Operating income margin is expected to rise to the 5-6 percent range from the current 2.7 percent. The financials, said House, would be achieved via increased sales and profit from an expanded PlayStation user base.

PlayStation's mid-term plan is to "retain and expand"

With a solid foundation established in PlayStation 4's first year, House plans on expanding and building upon that base. "Our goal is to expand the PlayStation ecosystem by delivering evolved and integrated network services," said House. This involves two broad initiatives: one is to "retain and expand" the base of PlayStation users, and the other is to increase the average revenue per paying user (ARPPU) by driving ancillary revenue from a wider userbase. House said the strategy for PlayStation's ecosystem evolution could be summed up in three words: "Bigger, stronger, and better": Bigger as in a larger engaged userbase; stronger as in pushing the appeal of proprietary PlayStation platforms; better as far as the diversity and quality of services. In the mid-term, House said, "We have the advantage of a stable platform, and a long lifecycle. The goal, therefore, [is to] increase the value of that platform to our end users over the course of that lifecycle." This strategy involves adding value to its consoles through feature upgrades over the life of PlayStation 4, releasing the virtual reality platform Project Morpheus, and "relentless efforts" on reducing hardware costs. House also said PlayStation plans on keeping a keen focus on targeting specific audiences throughout particular stages of the PS4 lifecycle. First came the "laser targeting" of what House called "core gamers" at the console's launch. Next come "casual and family" experiences to appeal to a much broader audience, he said.

PlayStation Now is a business for the future

Sony also plans on expanding its services such as the game streaming service PlayStation Now, which removes the barrier of buying an expensive console. Sony has a three-fold strategy for PS Now: Increase the "funnel" (i.e. increase PS Now-compatible devices), increase the amount of content, and "refine the consumer proposition" (which sounds like Sony will address pricing concerns about PS Now content). PS Now a "very small" contributor to the PlayStation business that will take time to scale, House noted. He said that the risk of PS Now cannibalizing other parts of PlayStation is small, and any risk would be offset by the expansion of the PlayStation user base.

There's a lot of growth opportunity in newer markets

House said PlayStation is looking to increase expansion into China and Latin America. China represents a new opportunity, said House, and the country de-regulated consoles sales. SCE sees big opportunity in Asia. He added that more mature markets such as Germany and the Middle East represent big growth opportunities for PlayStation. "In the Middle East, PlayStation 4 adoption has been four times that of any previous console that was launched," he said. Meanwhile, Germany has become PlayStation's No. 2 European market, as the country's large PC user base looks to console-based games and entertainment.

It's all about the ARPPU

House said SCE is now using ARPPU (average revenue per paying user) as a core metric for measuring its business. This is a significant sign that Sony is concentrating on digital growth, as the company is moving away from "hardware vs. software physical tie ratios," as House put it. Driving ARPPU means adjusting PlayStation's digital strategies. For example, House said PS Plus subscriptions grew four times over since the company made the subscription a requirement for online multiplayer. That's important growth for a model based on repeat business.

Sony's hoping players will buy non-game media, too

House noted how Sony is evolving its music services, such as the "Just for You" music curation feature for PlayStation players, television offerings through PlayStation Vue, and an expansion of third-party video services such as Netflix. Initiatives such as PlayStation Vue represent PlayStation's continued steps beyond games and into other media such as television. "We have very high hopes for PlayStation Vue," said House.

PlayStation Vita is still a relevant console (particularly in Japan)

House said in Japan, the Vita plays a different, more meaningful role for publishers. "I'm hearing certainly from publishers in Japan that they now see PlayStation Vita as a very stable, very attractive business for them," thanks to a growing user base and lower development costs. "I think you have to look at the [business and financial] prospects for Japanese publishers across both PlayStation 4 and PlayStation Vita," House said.

PlayStation is addressing instability in the game business

"I think you're right to say that in the past, the game business has shown considerable volatility," House told one investor during the presentation's Q&A section. But he said Sony's game business has become more careful and deliberate about how it operates. For example, compared to the PS3, the PlayStation 4 is easier to develop for, House said. "We were able to eliminate to a great degree that huge bottoming-out of the bottom line that we've seen in previous lifecycles," said House. He added that SCE intends on eliminating the "roller coaster" effect that the game business is known for, to invest in the network area of the PlayStation business and bring more stability to profitability. House said he's seeing "some increase" in game development costs for the most cutting-edge PS4 games, but thanks to new revenue streams, companies (including Sony's studios) can find new ways to make money from games. "There are sales of the original game, there are sales of add-on content, there are sales of in-game digital merchandising -- these have very small costs associated with them, but can provide stable revenue," he said.

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