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How Sony is fighting its way out of its deepest crisis with the Playstation

Morita Akio founded the Tokyo Tsushin Kogyo K.K. company immediately after World War II, which later became Sony.

Morita Akio founded the Tokyo Tsushin Kogyo K.K. company immediately after World War II, which later became Sony.

Getty Images, Shutterstock, Sony

When the journalists left the darkened press room at the Los Angeles Convention Center on the evening of May 10, 1995, they had witnessed a historic moment in video game history. As part of the E3 games fair, the industry giants Sega and Nintendo as well as video game newcomer Sony invited the trade press to a keynote. It all started with Sega’s then US boss Tom Kalinske, who revealed details of the upcoming Sega “Saturn” console and announced a US retail price of 399 US dollars.

Then it was Sony’s turn. The journalists present expected details about the US launch of the first Sony console “Playstation” – and got them, but only one. US boss Steve Race stomped on the stage, looked briefly into the audience and said dryly into the microphone “Two Ninety Nine” – then he disappeared again.

The Walkman, a symbol of a way of life and Sony’s great success in the eighties and nineties, is taken down within a very short time. The CD, also a Sony invention and a guarantee of sales for years, is becoming obsolete. The Japanese are not involved in the development of the iPod or the MP3 digital music format.

Other branches are also overtaken by the rising competition left and right in the 2000s. When the tube of flat LCD televisions is supplanted, the Korean conglomerate Samsung sees its chance, overtakes Sony in 2006 in TV sales – and will remain number one for the next 14 years.

Sony’s joint venture with the telecommunications company Ericsson cannot withstand the dominance of Samsung and Apple in the smartphone market. The “Wall Street Journal” analyzed in 2005 that the interaction of hardware, software and services at Sony is not successful – also because the many different departments do not work well together.

Sony’s darkest years

While other branches struggle with problems, the Playstation remains a guarantee of success. When the Playstation 2 went on sale in 2000, the group sold over 150 million devices by the end of 2012, when production was halted – and created the most successful console of all time. Sony’s clever move: the Playstation 2 has a DVD player and in the early 2000s these are individually almost as expensive as the console. That makes them interesting even for non-gamers.

Inspired by the success, Sony put everything on one card in the development of the Playstation 3 – and miscalculates badly. The third generation is supposed to be the ultimate entertainment device, but Sony’s billions in investments in the development of the high-tech console including Blu-ray drive and its own chip are driving up the sales price and delaying the start. Microsoft released its Xbox 360 at the end of 2005 from 300 euros, Sony will not follow until the end of 2006 with prices from 500 euros. Sales are sluggish – only years later will the Playstation 3 catch up with the lead over the Xbox 360.

Microsoft is successfully putting on show for the marketing of the Xbox 360 - even the remaining Beatles Ringo Starr and Paul McCartney are back on stage together for Microsoft in 2009. Sony, on the other hand, has been chasing the Xbox 360 for years.

Microsoft is successfully putting on show for the marketing of the Xbox 360 – even the remaining Beatles Ringo Starr and Paul McCartney are back on stage together for Microsoft in 2009. Sony, on the other hand, has been chasing the Xbox 360 for years.

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Years that are going to be the hardest for Sony: shrinking market shares in the important TV and audio segments, stuttering Playstation sales, a severe economic crisis in Japan after the nuclear disaster in 2011. Then, in 2014, Sony posted losses for the fourth time in five years . “Sony continues to consistently part with products that no longer bring in any money – but there is no long-term strategy how the company wants to create a new lifestyle,” said a former Sony developer in 2014 in the “Wall Street Journal”.

At this point in time, Playstation sales still only account for around 11 percent of group sales, but the profit margins for games, especially for exclusive titles, are large – and can be scaled. Sony’s CEO at the time, Kazuo Hirai, previously head of Playstation, has no choice but to sell loss-making sectors such as Vaio computers and focus on the company’s few winners: image sensors for smartphones – and the Playstation.

The then Playstation boss

The then Playstation boss “Kaz” Hirai in 2000 with the Playstation 2. He later became CEO of Sony and played a key role in the company’s strategy change.

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Sony puts everything on the Playstation

When developing the Playstation 4, Sony focused on games. Expensive multimedia functions will be cut in order to put the console on the shelves at the end of 2013 at a price of 400 euros – 100 euros cheaper than the new Xbox from Microsoft. The success is enormous: The PS4 is sold out immediately, Sony cannot keep up with production in the first few weeks.

Staff will be handing out free pizza to waiting fans one night before the PS4 launch in London.

Staff will be handing out free pizza to waiting fans one night before the PS4 launch in London.

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In the years that followed, Sony aggressively expanded the Playstation brand: The Japanese bought game studios that would in future develop exclusively for Sony consoles – a high-margin profit driver. With Playstation Plus, Sony is pushing players into a monthly subscription for 9 euros if they want to play against each other online. As of August 2020, Playstation Plus has over 45 million members – this ensures predictable sales every month. In 2016, the share of total Sony sales was 16 percent, in 2018 it was 20 percent.

Most recently, the Playstation brought Sony safely through the Corona crisis and cushioned declines in other areas. In the first half of the 2020 financial year, sales in the games division jumped by almost a third, and operating profit rose from almost 600 million to almost 1 billion euros. In contrast, sales in the electronics division, which had recently recovered due to tough cost-cutting measures, plummeted by 31 percent. As a result, more than half of the total group revenues come from the Playstation. Sony is on the drip of its successful console.

A new pain?

The Playstation 5, which has been available since Thursday, initially seems to continue the success of its predecessors – in the USA, Sony sold as many pre-orders for the console in 12 hours as for the Playstation 4 in 12 weeks. Good news were it not for an old competitor threatening to revolutionize the video game market again: Microsoft is investing heavily in its Game Pass subscription service. Unlike the € 9 subscription from Sony, users get significantly more games for € 10, and million dollar Xbox blockbusters like Halo will be available from day one.

As with Netflix, thanks to cloud technology, the titles should in future be able to be used on a wide variety of devices such as smartphones, smart TVs or PCs. Microsoft’s customers only need a subscription – and no longer a console. A declaration of war on the Playstation – and the creeping end of stationary consoles?

“Cloud gaming is definitely a trend that will develop alongside the console and PC market,” says gaming expert and PwC partner Niklas Wilke to NewsABC.net. “But it will take some time until we have the technical infrastructure with high upload and download speeds across the board to a sufficient extent to be able to play graphics-intensive games really smoothly via a cloud.”

Wilke therefore does not believe that the cloud will replace the console in the next few years and that there will be another generation of consoles after the Playstation 5. “Especially people who grew up with stationary consoles and play intensely, they want the technology at home too.”

Sony does not want to leave its business to chance. The wounds of reacting too late to digitization at the time are too deep – and it would be too risky to abandon the cloud. In May 2020, the Japanese announced that they would be experimenting with the Azure cloud in the future. The data centers are owned by Microsoft.

Sony CEO Kenichiro Yoshida and Microsoft CEO Satya Nadella announce the partnership in the cloud area.

Sony CEO Kenichiro Yoshida and Microsoft CEO Satya Nadella announce the partnership in the cloud area.

Sony

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