Thread by @ZhugeEX

With the PS5 launching in select markets today, I thought I’d do a quick thread with my thoughts on PS5 and PlayStation’s overall strategy going forward.

This is from my pov as an analyst.

1/

Sony is focusing on 3 key areas this gen:

Premium hardware at an affordable price
Exclusive content from first party & partners
Network services + Ecosystem

The PS5 is very much the center of the PlayStation ecosystem, with network services helping to bridge a smooth transition

The PS5 very much feels like a next gen console and has the innovation to match

DualSense increases the immersion of playing games

Custom SSD enables faster load times & unique game design

Its dual SKU strategy doesn’t compromise on power

The new UI feels snappy & responsive

Console manufacturers have traditionally utilised the razor and blades model, which is to say they sell hardware at a loss and recoup that loss through software sales.

The PS5 will certainly be sold at a loss on day one, but long term I expect the hardware to be profitable.

The PS4 was able to pitch itself as the premium console offering, maintaining its $299 price point and reaching 100m sales

Sony will aim to replicate this with PS5, turning a profit on hardware over time by focusing on communicating the value of the overall PlayStation ecosystem

Sony will look to balance its premium hardware pitch with a competitive and affordable pricing strategy.

This is where its dual SKU strategy plays well. The disc based SKU at $499 price matches the Series X, while the digital SKU is $100 cheaper without compromising on specs.

A $100 difference is quite steep, especially when Sony only saves $30 or so by removing the disc drive, but the move does make sense over the long term as I explained in this thread.

Disc = Profitable on its own
Digital = Razor and blades model

https://twitter.com/ZhugeEX/status/1306339823070965761

In terms of games, Sony’s strategy revolves around:

- Ensuring third party developers can thrive on PlayStation

- Creating unique first party titles to increase the overall appeal of the system

- Working with partners to secure additional exclusive games and content

As I noted earlier today, Sony has been building up its first party development capabilities for years, and now has multiple studios that are capable of creating hits, including new IP.

Sony now has seven studios capable of releasing 5m+ sellers.

https://twitter.com/ZhugeEX/status/1326847700214673408?s=20

Sony’s first party does not directly compete with most third party developers, instead it aims to play a supplemental role with its releases and create boutique titles that fill a gap in the market.

They appeal to enthusiasts and early adopters to grow the install base

Sony already has a strong lineup of games announced for PS5 from its first and second party studios, including multiple launch games.

Enthusiasts buy the console because of these games + anticipated titles and can influence friends to pick up a PS5 down the line too.

I think Sony has a compelling lineup of exclusive games for PS5, including third party titles such as FF16.

It is also supplementing this with its PlayStation Advantage program which adds exclusive content or early access to third party games on PlayStation.E.g. COD perks

The PS5 first year lineup of exclusive content helps differentiate the PlayStation platform and provides a compelling reason for why many will jump in this holiday and through 2021.

Sony has a breadth of exclusive titles in year 1, from family friendly titles to core games.

In terms of network services:

PlayStation has focused on building up a digital ecosystem to both increase profit margins and retain users over the long term.

Its increased investment in network infrastructure will also ensure a smooth transition for PS4 users moving to PS5.

Sony has been focusing on creating a platform that supports and incentivises digital game downloads, add on content and value added services such as PS+ which include bonuses such as cloud saves and free games each month.

PS+ subs are over 45m, PSN users over 107m

This digital ecosystem now accounts for 70%+ of Sony’s gaming revenue.

The growth in network services revenue has increased profits and helped end the cyclical profit / loss nature of the console industry.

Gamers have content tied up in this ecosystem.

Sony’s strategy is to smoothly transition players from PS4 to PS5. It is this integration with network services that allows Sony to execute this strategy

PS4 players can transfer their digital games library, friends list, achievements + other digital content to PS5 with ease.

Sony is also aiming to bring new players into its digital ecosystem with key initiatives.

1. PS+ Collection (Gives players a day one games library)
2. Perks for PS5 games (3 months free GTA Online / COD perks)

PS+ Collection isn’t Game Pass, but it’s as good as it gets.

Sony will continue to invest in network services over this generation to grow its digital ecosystem and lock more players to it

Not only is it higher margin for the company, it also has a network effect with new buyers choosing a PS5 because their friends are tied to PlayStation

At the end of the day, the key differentiator between PlayStation and Xbox is:

The PS5 is the center of the PlayStation ecosystem, supported by exclusive games and content.

For Xbox, Game Pass is becoming the entry point to its ecosystem, with multiple devices to choose from.

Sony’s key advantages going into next gen are

- Global user base of 107m+ active users, seamless transition to PS5

- Exclusive games & content from first party / third party

- Increased value through the PS+ / Collection

- Dual SKU strategy without compromising on specs

Overall, I believe Sony is well positioned and the PS5 will sell faster than the PS4 in its first year.

Demand will certainly outstrip supply in the first few months, as many shift their purchases earlier due to spend moving from real world activities to stay at home activities.