Sony Profits Fall Drastically

Sony Profits Fall Drastically

by October 26, 2000

After concentrating efforts on a hyping the PS2, Sony has announced that profits have dropped fifty seven percent:

Tokyo, Oct. 26 (Bloomberg) — Sony Corp., the world’s second largest maker of consumer electronics, said fiscal second-quarter profit fell 57 percent, dragged down by costs to develop its PlayStation 2 video-game console. Its U.S. shares fell.

Group net profit fell 57 percent to 19.8 billion yen ($183 million), or 21.7 yen per share, in the quarter ended Sept. 30, from 46.5 billion yen, or 113.0 yen, in the year-ago period. Analysts were expecting 26.6 billion yen in profit.

The cost of developing the PlayStation 2, which went on sale in the U.S. just hours ago, will lead to an operating loss in the games division in the year ending in March, Sony said. That’s overshadowing rising profit for other Sony products such as digital cameras and video recorders.

The entertainment business was in bad shape, said Masayoshi Morimoto, Sony’s corporate senior executive vice president. We want (investors) to evaluate it over the long run, as the PlayStation 2 is one of the important gateways to our future.

Sales rose 3.7 percent to 1.69 trillion yen from 1.63 trillion yen. The company left its group full-year earnings forecast unchanged at 10 billion yen.

Sony’s American depositary receipts, each representing one ordinary share, fell $3.43 to $91.63 in early trading, according to Instinet. The company issued its earnings after stock markets closed in Japan.

The company reported earnings after stock markets closed in Japan, where its shares fell 60 yen to 10,350 yen.

PlayStation 2

The PlayStation 2 is the successor to Sony’s best-selling game system, which in 1999 contributed 40 percent of the company’s operating profit. The basic unit retails for $300.

The new console, which debuted in Japan seven months ago, plays digital video-disc movies and offers advanced graphics. It’s key to Sony’s strategy to connect digital products to a larger network of programming, entertainment and financial services over the Internet.

Sony is still struggling to cover startup costs for the console. Most of the costs were for microchips used for the two main parts of the unit: the 128-megabit central processing unit dubbed the “Emotion Engine” and the graphic chips.

A dearth of releases of higher-margin game software titles for the machine and slowing demand for game titles for the original PlayStation machine are also hurting the company.

Software Sales

Sony makes its own games and also earns an $8 to $10 royalty on each unit of PlayStation 2 software sold by independent games publishers. Game-console makers typically sell the systems at a discount and profit from the software. Sony spends about $488 to make one PlayStation 2 unit, Sutro & Co. analyst James Lin estimates.

There’s a risk Sony might lower its annual profit forecast because of lagging software sales, said Motoharu Sone, an analyst at Tsubasa Research Institute Ltd.

The games unit had an operating loss of 2.8 billion yen in the three months, compared with profit of 28.1 billion yen in the year-earlier period. Sales fell 17 percent.

Sales of game software titles for PlayStation 2 totaled 3.4 million units in the quarter.

Sony maintained its worldwide shipment forecast for the PlayStation 2 console at 10 million units in the year to March 2001. It will start selling the machines in Europe on Nov. 24.

The company last month cut its initial shipment forecast for the new console in the U.S. to 500,000 from 1 million because of a shortage of microchips used to make them.