TEXT-Fitch: PlayStation 4 unlikely to be Sony's Saviour

Thu Feb 21, 2013 1:02am EST

HONG KONG/SYDNEY, February 21 (Fitch) Fitch Ratings says Sony Corporation's (Sony, BB-/Negative) next generation console, PlayStation 4, is unlikely to deliver sufficient cash flow to turn around the company's credit profile. In the console market the PlayStation will continue to face tough competition from Microsoft Corporation's (AA+/Stable) Xbox brand as both companies attempt to provide a media hub for living room internet entertainment and Nintendo's Wii products will continue to appeal to a wide range of users. In the broader games market, PC products will remain key competition for hard-core gamers, while smartphones and tablets will continue to grow in appeal for casual and mobile gamers.

In line with expectations, PlayStation 4 will feature a more powerful processor and graphics chip. In addition, PlayStation 4 places greater emphasis on social networking features and remote capability. However, the key to the product's success will be price, timing, content and how it compares with the yet-to-be-announced next generation Xbox. None of these details are currently available. However, product developments are unlikely to lead to a substantial long-term expansion in the console games market which has become relatively mature. Operating profit from Sony's Game segment declined to just JPY3bn for the first nine months in the financial year to March 2013 from JPY29bn in FYE12 and from a peak of JPY113bn in FYE03.

The competitive nature of the market may also constrain profitability; Sony lost money on each PlayStation 3 sold for 3.5 years after launch, until production costs were reduced. However, software and subscription income generated related, compensating income streams. For its turnaround strategy, Sony will concentrate investment and development in digital imaging, game and mobile. However, Fitch believes that profitability of all three segments will be under pressure in the next few quarters, and that meaningful recovery will be slow.

For its Game segment, Sony drastically cut its FYE13 annual sales volume target for PlayStation Portable and PlayStation Vita successively to seven million units in February 2013, from previous targets of 10 million in November 2012 and 12 million in August 2012. It further announced a price cut in PlayStation Vita in Japan. Its Mobile Products & Communications segment is making a substantial loss and the Imaging Products & Solutions segment may see further deterioration in profitability due to significant competition from smartphones.

Excluding Sony Financial Holdings (SFH), Fitch continues to expect operating EBIT margins to be negative or minimal and funds flow from operations (FFO)-adjusted leverage to be above 4x for FYE13 and FYE14. Fitch may downgrade the rating if Sony's EBIT loss sustains and FFO-adjusted leverage rises above 4.5x (both excluding SFH). However, Fitch will consider revising the Outlook to Stable if EBIT margins improve to over 1% and FFO-adjusted leverage is sustained below 4x, both excluding SFH.