According to a Bloomberg report, Sony Corporation (SNE - Free Report) has lowered production estimates for its upcoming PlayStation 5 (PS5) gaming console following issues with its custom-designed system-on-chip (“SOC”). The manufacturing snag for the much-awaited launch of the year has dented a body blow to the Japanese conglomerate as it aimed to capitalize on the uptick in pandemic-induced nesting activities — games, streaming video and home fitness. This, in turn, has left the door ajar for its rivals to score big in the imminent holiday season, with their gaming consoles up and running.
Low Production Yield
Despite an initial conservative estimate due to the outbreak, Sony raised its production estimates in July anticipating higher demand owing to the coronavirus restrictions, and expected to produce about 15 million PS5 units by March 2021. However, the firm is reportedly facing some manufacturing issues with its SOC with production yield as low as 50%. In other words, about half of the products were not up to the desired quality standards and were not fit to be shipped. Although the yields have started to improve, they are yet to reach an optimum level, forcing Sony to lower its production estimate by 4 million.
Plans Go Awry
Sony is scheduled to host a PS5 launch event this week, revealing pricing details and release date. At this juncture, the company could ill afford bad press that could cast serious aspersions on its ability to hold its fort in the gaming arena against stiff competition from its rivals. Moreover, in addition to lower hardware sales, it undermines the ability to attract more customer interests as a new device brings with it renewed excitement that often translates to higher subscriptions, driving top-line growth. With the holiday season just round the corner and people preferring to spend more time indoors to avoid risking exposure to the virus, Sony has perhaps lost a great opportunity to outplay its competitors.
Traditionally, Sony finalizes the pricing of a console, scheduled to be released in a particular year, in February and follows it up with a mass production in spring. With PS5, the company, however, chose to deviate from this pattern and preferred to wait for the launch of Xbox Series X by arch rival Microsoft Corporation (MSFT - Free Report) to avert being too overpriced. Notably, videogame companies often keep slender profit margins from hardware sales or even undercut the production costs to rake in more money through additional sale of lucrative gaming software and online subscription services. Sony is likely to employ this tactic for PS5 with its CEO even hinting that the business should be gauged by the number of active users and not by the quantum of hardware units sold.
Catch Up Game
Earlier this month, Microsoft revealed that its Xbox Series S will be launched on Nov 10, 2020 for $299, while Xbox Series X will hit the market shelves at a retail price of $499 on the same day. With aggressive pricing and pre-orders beginning Sep 22, the onus is on Sony to play a catch-up game.
Meanwhile, Nintendo Co. (NTDOY - Free Report) is reportedly working on an upgraded version of its Switch console and plans to ship it in 2021. With more computing power and 4K graphics, it has created quite a buzz in the gaming arena and aims to derail the hegemony of PS and Xbox models. Nintendo has particularly flourished during the pandemic with its social simulation game titled ‘Animal Crossing: New Horizons’ selling 22.4 million copies since its release in March. Sales of its Switch and Switch Lite consoles have also improved significantly during this period.
With rivals creating such significant inroads in the gaming domain, critics wonder whether Sony’s PS5 model could eventually help it regain its lost sheen.
Game on, Gamers….
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