Sony profits down 94 percent, Nintendo profits up and away

Exactly a week after Sony Corp. cut their profit forecast for the current fiscal year by 62 percent, the company announced today that profits for the quarter from July until September took a staggering plunge of 94 percent.

The main reasons are bigger losses within Sony Computer Entertainment (mainly due to a reduced price for the 20 GB version of the PlayStation3 in Japan), the console´s delay in Europe (in turn due to manufacturing difficulties) and the recall of faulty laptop batteries, as Associated Press reports (highlights added):

The battery recall has shaken consumer confidence in Sony's technological competitiveness and cast a shadow over its brand image as a top class manufacturer, which has in the past enabled it to charge a premium for its products.

Compounding difficulties at Sony, the maker of Bravia brand liquid crystal display (LCD) TVs and Cyber-shot digital cameras, is a bloating loss at its video game division.

Sony said last week that losses at its game unit will likely balloon to 200 billion yen in the year to next March 31 because of sluggish sales of PlayStation Portable handheld players and a price cut for a model of the PlayStation 3 game console in Japan. (...) The stock lost 5 percent in the July-September quarter, while the sub-index rose 3 percent.

After seemingly bottoming out at the beginning of the month, shares in Sony Corp. (as traded in Frankfurt over the last six months) continue their downward trend.

Source: Kreissparkasse Cologne

Notice how the 200-day average (red graph) has now turned negative.

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Also today, Nintendo reported that its profits more than tripled in the first half of the fiscal year. The company is continuing to expect a 60 percent growth in profits, as Reuters reports (highlights added):

The Kyoto-based game maker earlier this month revised up its earnings forecasts for both the April-September first half and full year to March 2007. It also raised its DS sales forecast for the year to March by 3 million units to 20 million.

In contrast, Sony last week cut its shipment target for rival PlayStation Portable (PSP) handheld game machine by 3 million units to 9 million.

Nintendo now hopes it can repeat the success of the DS with its new game console, the Wii, which like the DS has been developed to appeal to non-gamers with simple yet innovative games rather than please hard-core gamers with sophisticated graphics. (...) The stock gained 38 percent in the six months to September, while the Nikkei fell 5.5 percent.

While the meteoric rise of Nintendo shares (as traded in Frankfurt over the last six months) seemed to have temporarily halted at the beginning of October (just when Sony shares were up), the 200-day average (red graph) shows an unusually solid upward trend.

Source: Kreissparkasse Cologne

Comparing those two graphs, it is important to point out that they are not the mirror image of one another. While Sony shares have a large and often irratic fluctuation, Nintendo stock has avoided any major upsets. Its 200-day average is almost a straight line going up.


The analysts´ favourite

Undoubtedly, Nintendo has the confidence of the business community - and justifiably so. Taking home consoles and handhelds together, the company is the undisputed market leader. And even when isolating the home console market, Nintendo, albeit a close third in a race of three, is the only company that will be raking in profits from day one of selling its next-generation console.

Sony, on the other hand, really has had extremely bad luck with its PlayStation3. Grave management errors and surprisingly bad PR added to that. And as far as profits are concerned, the company may reap the rewards of the significant investments into the console no earlier than 2008, if at all.

Should you care?

Of course, gamers do not care about company shares and profits. Share value is an important factor (remember that the overheating issue cost Sony around a billion Dollars in value). This, in turn, is able to influence aspects like marketing and even hardware production.

But what matters far more to the success of a console are games. And the commitment of third party partners, as well as the resources for Sony´s own studios, are unlikely to be influenced by even such a significant loss in share value. The reason is that the production process of games, like that of movies, is measured in years rather than months.

Consequences with a lag

While a publisher like Electronic Arts may be tempted to change its next-generation console priorities in the face of such news (and they undoubtedly are, I believe), such a change in strategy would only become visible to consumers and analysts alike in a year´s time, at the earliest.

And this, ultimately, is why I am so keen on keeping an eye on the stock market. Because while the console´s launch may be largely unaffected by Sony Corp.´s stock market woes, the subsequent reactions by its partners will materialize in late 2007 or early 2008. Only then will we learn just how the big players like EA or Ubisoft reacted to today´s news.

Sources: Associated Press, Reuters, Kreissparkasse Cologne, Kreissparkasse Cologne, Reuters
Image source: CHIP Hospitality
Thanks to: Joystiq