Summary
* Sony's strategy is no surprise
* Sony's needs to increase margins to offset continued loss on hardware sales
* Eliminating retail could boost margins 20-30 points
* Digital Delivery provides faster monetization of development costs
* In the long run, Sony needs retailers
* Powerful retailers will find a way to share in the revenue
Analysis
It should come as no surprise that Sony's latest hardware strategy is to eliminate the retailer. Considering the negative margins that Sony achieves on the PS3 sales, combined with the historically low attached rates of software to the system, Sony needs to find a way to improve gross margins. In eliminating the retailer, Sony can retain the 20-30 points of margin that traditionally retailers earn on software sales.
In addition, Sony can reduce the time to market on software releases. Currently, once development is finished on a product, it takes 30-45 days to manufacture and distribute to retailers. By supplying content directly to consumers via digital delivery, the time to market on a product is greatly reduced. They can also look at offering episodic content on a regular basis vs. depending on a two to three year development cycle before they can monetize their investment.
With all that said, I think it is slippery slope for Sony. At the end of the day, Sony needs the retailers to get their hardware in the hands of the consumer. At this time, retailers are making finite margins on video game hardware, often five points or less. As with Sony, the retailers provide the hardware in order to capture the higher margins that are driven through software and accessory sales. Ultimately, if Sony gives the impression to retail that they are being cut out of future residual sales of add-on products, at some point I would expect retailers to stop supporting the hardware.
If Sony maintains their strategy, I see some of the more powerful video game retailers, such as Best Buy, Gamestop, Wal-mart, Target and Toys R Us, requiring a revenue share on sales of downloadable content to consumers acquired through their bricks and mortar stores. This is not unprecedented as people like Best Buy have already required revenue sharing from many of their manufacturers who have instigated similar strategies.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
