Sony's gaming margin has been called into question after PS5 sales cuts sent shares plummeting

Sony announced this week that it now expects to sell 21 million PS5 units in the fiscal year ending in March, compared to a previous forecast of 25 million units.

The company's shares fell after the announcement, with about $10 billion wiped off the stock's value since the expected cut, according to CNBC calculations using FactSet data.

But analysts were keeping an eye on another key metric — operating margin in the gaming business — which came in at just under 6% for the December quarter, according to CNBC calculations. In contrast, Sony's operating margin was more than 9% in the December quarter of 2022.

“The reduction in shipping forecasts for PS5…is not what is disappointing…what is disappointing is the low level” of operating margin, Atul Goyal, an equity analyst at Jefferies, said in a note to clients on Wednesday.

He added that before the January-March quarter of 2022, margins in the gaming unit were around 12% to 13% in the previous four years.

Sony's single-digit profit margin in Q4 exists “despite various tailwinds that should have pushed margins towards 20%,” Goyal said, adding that the situation is “very disappointing.”

These tailwinds include first-party game sales, which are increasingly in the form of digital downloads, as well as the high-margin PS Plus subscription service, which requires a margin of about 50%, according to Goyal.

“Their revenues from digital sales, add-on content, and digital downloads are at all-time highs… However, their margins are at their lowest levels in a decade. This is unacceptable,” Goyal said in an email to CNBC.

Goyal noted that the current margin for Sony's gaming business is “nearly the lowest in a decade.”

The analyst wondered how the gaming division's operating margin remained so low, with all these high-margin products.

Serkan Toto, CEO and founder of Tokyo-based gaming consultancy Kantan Games, said he believes hardware production costs have already come down, given that the PlayStation 5 is more than three years old, and Sony will have better economies of scale by then.

One reason margins have been shrinking recently is that software production costs are rising, Toto said.

Spiderman 2, released last year by Sony-owned Insomniac Games, cost about $300 million to produce, according to gaming website Kotaku, citing an internal presentation leaked after a ransomware spate. Hacked Company.

“These budgets appear to have had a significant impact on the margins of the Games over time,” Toto said.

Sony and Insomniac Group did not immediately respond to CNBC's requests for comment.