Sony's new console economics

Hi, this is Takashi in Tokyo and Vlad in Hong Kong. Sony’s announcement of a $700 souped-up PlayStation 5 seems like a sign of confidence in [View in browser]( [Bloomberg]( Hi, this is Takashi in Tokyo and Vlad in Hong Kong. Sony’s announcement of a $700 souped-up PlayStation 5 seems like a sign of confidence in the future of consoles, but it may in fact be a harbinger of their impending demise. But first... Three things you need to know today: • Intel will make a custom [AI chip for Amazon Web Services]( • Microsoft raised its dividend and [unveiled a $60 billion buyback]( • The Goldman Sachs trading desk says [it’s time to buy the dip in AI]( The beginning of the end? The traditional game console business model is rapidly being deprecated by the rise of online and mobile gaming. Nintendo Co. foresaw it with its hybrid Switch, which works both at home with a TV and on the move, while Microsoft Corp.’s spending more time on building a cloud service than chasing Xbox exclusives. But Sony Group Corp., the leader of the trio, is perhaps most intriguing. The company offered a head-scratching peek at its future strategy when it [announced]( its priciest console to date with the upcoming PlayStation 5 Pro. The machine, which doesn’t even have a game disc drive built in, is supposed to deliver prettier graphics and better performance, which sound like nice-to-have improvements for an eyebrow-raising markup. But there is a certain logic to all this. Sony and its rivals traditionally relied on achieving scale to reduce costs and earn revenue from both hardware and software. By pricing the PS5 Pro about $200 above the competition, the Japanese company is signaling that it no longer wants to play that game. Instead, it's beefing up margins for now, as it explores ways to tap the global online gaming boom. Smartphones, tablets and smart TVs are all now capable of either playing beautiful, high-definition games or — as Microsoft sees the future — streaming them via the internet from massive data centers hundreds of miles away. Bloomberg Intelligence analyst Nathan Naidu [sees ads and subscriptions booming]( as the dominant way to monetize games this decade, with cloud gaming washing away the traditional console. Then there’s the issue of hardware costs. Since the first PlayStation in the mid-’90s, Sony has benefited from advances in chipmaking that helped make each console cheaper over time, allowing it to reach higher scale with price cuts. Chief Operating Officer Hiroki Totoki told us in February that that’s no longer the case — semiconductor fabrication is plateauing and the gains of yesteryear are over. So what is Sony to do when people stop buying dazzling graphics for their home entertainment and start leasing the experience? Focus on the most committed (and least rational?) consumers. Sony’s [reasoning]( is that the PS5 Pro is for “deeply engaged players and game creators.” The company isn’t trying to make the Pro edition its bestselling model, as evidenced by its experience with the earlier PS4 Pro, which accounted for only [15% of that generation’s lifetime sales]( per Niko Partners analyst Daniel Ahmad. It’s trying to maximize the profit per unit of a piece of hardware whose mass-market future is in doubt.  Instead of a midlife price cut for its console — aiming for maximum scale — the company opted for a midlife hardware upgrade and an eye-watering price. It’s a bold move that’s invited plenty of skepticism. “I wonder if the industry needs more machine specs when there are not enough games taking full advantage of the current consoles,” said Naoko Kino, who runs Tokyo-based consultancy Kyos Co. “It’s costly to make AAA games and, short of an unlikely future where games cost $100 or $200 a copy, I can’t see many making full use of increased power.” The reason why game consoles can’t be what they used to be — namely, a PC-like games machine for a fraction of the cost — also has to do with our constantly rising expectations. The moment a game like The Last of Us arrives, we take it in stride and expect the next narrative-driven adventure to be as rich, as beautiful, and voiced by similarly seasoned Hollywood actors. The PlayStation 5 Pro sets a new high mark for mainstream console pricing and signals a greater willingness to pass costs onto consumers. It seems to concede that the old way of doing business is done and leans in to the idea that a dedicated console has to now be exceptional to be interesting. If that means a never-before-seen price to deliver never-before-seen performance, so be it.—[Takashi Mochizuki](mailto:tmochizuki15@bloomberg.net) and [Vlad Savov](mailto:vsavov5@bloomberg.net) The big story Google’s new Pixel smartphones and Pixel Watch come with big bold promises of an AI revolution. Like everyone else this year, the reality of the software doesn’t live up to the hype, but look past the marketing spiel and you’ll find [the best iPhone and Apple Watch alternatives yet.]( One to watch Chinese-owned social media app TikTok takes its fight against a US ban to the next level in the American court system Monday. Doug Calidas, Harvard Belfer Center fellow and former Chief of Staff to Senator Amy Klobuchar, joins Caroline Hyde and Ed Ludlow to discuss what to expect. 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