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.