PlayStation launches used to lose money — but with PS5, Sony is expecting its best year ever

If you look back at the history of profits for Sony’s PlayStation division, you can see a clear cycle. PlayStation makes the most money when a console is mature. This happens for a lot of reasons. Manufacturing costs come down, and more consoles in the market mean a larger audience that buys games. Sony Interactive Entertainment’s worst years for profits, meanwhile, are the transition years from one console generation to the other.

Sony’s game profits went into the red during the first year or two of the PlayStation, PS2, PS3, and PS4. For the PS3, it was more than a year or two. You can see those patterns in a useful chart from Niko Partners senior analyst Daniel Ahmad on Twitter.

Above: Chart provided by Daniel Ahmad/@ZhugeEx on Twitter.

Image Credit: Daniel Ahmad

So, shouldn’t we expect to see the same downward trend with Sony launching PlayStation 5 in November? Well, no. It appears that Sony has broken that cycle. The company’s outlook for its current fiscal year puts its profits at an all-time high for PlayStation.

And the key to this momentum has little to do with the PS5 itself. That system is a lot like the previous PlayStation consoles. It is a cutting-edge gaming device that Sony is selling at a loss due to high component costs. And it’s not like Sony stealth launched the PS5 without marketing — it’s spending as much on ads and publicity as ever.

But while the PS5 is a lot like Sony’s previous hardware, the games and services have completely transformed how the business makes money.

Games and services broke the cycle of profits and losses

The problem with console transitions for a company like Sony was never the hardware. The issue was growing sales momentum on an outgoing console and then carrying that over to the next-gen successor. But without contiguous experiences like online services, each new console was a reset that forced Sony to rebuild from zero.

Services like PlayStation Network and PlayStation Plus have changed that. They generate a steady stream of income that is bridging players from PS4 to PS5. At the same time, live-service games have grown in popularity. It’s more common for players to spend most of their time on console playing a single, persistent game for years. These players tend to spend a lot of money on one game. That engagement is also easier to maintain through the end of a generation because games like Fortnite and NBA 2K aren’t going to leave players behind if they’re on old hardware.

These services and transactions through PlayStation Network have high margins and are padding Sony’s earnings.

PS Plus has 47.4 million subscribers — and each of those members is paying either a monthly, quarterly, or annual fee.

“Revenue from PlayStation Plus, PlayStation Now, PSN advertising revenue, and other PSN services was $3.5 billion in 2020,” Ahmad wrote on Twitter. “[That] doesn’t include game sales or add-on content sales — just subscription revenue and network revenue.”

This underscores the importance of these services and why companies like Sony, Microsoft, and even Nintendo are so focused on them. They have the power to avoid losses during a console transition, and that also makes them the key to growth as the new hardware enters its prime years.