Why Japan no longer matters to PlayStation as Sony heads West

Sony shook up its gaming division early this morning, and it is moving the center of the PlayStation brand to the West.

In April, Sony will officially incorporate Sony Computer Entertainment and Sony Network Entertainment International into a single business unit called Sony Interactive Entertainment LLC. This new corporation still reports to Sony in Japan, but it will have its headquarters in San Mateo, California, with “key global business operations” also in Tokyo and London.

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This is a major shift for the PlayStation division, and it signifies that Sony wants to redouble its efforts to generate as much revenue as possible from the core audience that has rushed to the PlayStation 4 this generation. Console gaming is a $30 billion business globally, according to Newzoo, and it’s also one of the few sectors (along with insurance) where Sony has a clear path to profitability.

And refocusing on the West makes a ton of sense for Sony when you consider that Japan is just not that into console games anymore.

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2m PS4's in Japan versus 35m globally says it all…. https://t.co/YliW6w9vPV

— David Gibson (@gibbogame) January 26, 2016

Macquarie Securities analyst David Gibson points out that Sony has sold approximately 36 million PS4s worldwide, but only 2 million of that total comes from Japan. Now, Sony is matching the shrinking interest of Japanese gamers. This is not to say that SIE will abandon Japan, but it is more likely going to consider that region in a secondary or even tertiary way.

Gaming analyst Serkan Toto agrees with Gibson.

“I think this is a reaction to the fact that only just over 2 million of the 36 million PS4s shipped worldwide were sold in Japan,” he confirmed. “That ratio is much worse than in previous life cycles. That’s a very disappointing performance in Sony’s home market, especially given the fact that absolutely nobody buys the Xbox One here and the Wii U didn’t do well in Japan either.”

Japan is now a mobile gaming-first market. It is essentially tied for second with the United States for spending on iOS and Android behind only a surging Chinese player base. To put that in perspective, Japan has a population two-fifths the size of the U.S., which means that it has an average revenue per player several times larger than any other country when it comes to mobile spending. This leads to an environment where gamers in Japan are ignoring consoles to spend their free time and cash on their smartphones.

“Gaming on smart devices is projected to continue to grow over the next years in Japan, further absorbing console sales,” said Toto. “The PS4 was available in this country for almost 2 years now and isn’t taking off. So what’s the point for Sony to keep focusing on Japan?”

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Meanwhile, PlayStation 4 is one of the fastest-selling console systems ever despite its chilly reception in Japan. That’s primarily thanks to the U.S. and Europe, and Sony wants to fuel that enthusiasm. With that goal in mind, Sony Interactive Entertainment has kept Andrew House as chief executive officer and has appointed former Sony Computer Entertainment America boss (that unit is now absorbed into SIE) Shawn Layden as the head of Sony Worldwide Studios.

“I think this is both an affirmation of the importance of the North American market to Sony’s games business and of Andy House’s leadership,” IDC research director Lewis Ward told GamesBeat.

This is now a leaner operation, and it will likely find a way to deliver exactly the kinds of experiences that PlayStation fans want in a more timely manner.

“Before this, PlayStation and Sony Network Entertainment was organized into three or four separate companies before,” Wedbush Securities analyst Michael Pachter told GamesBeat.

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Those four divisions — Sony Computer Entertainment (Japan), Sony Computer Entertainment America, Sony Computer Entertainment Europe, and Sony Network Entertainment International — can now pool their resources.

Cowen and Company analyst Doug Creutz thinks this will save Sony money — although we have had no word from Sony whether this move will involved layoffs. And this also gets Sony’s formerly disparate parts will now work in harmony.

“It is probably about cost savings,” he said. “And it ensures they all march in the same direction.”

Finally, Ward points out that Sony doesn’t need to have separate divisions for physical and digital entertainment any more.

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“The future of gaming is digital, and it makes little sense not to have Sony’s packaged and digital games and services ‘arms’ operating in tight concert,” he told GamesBeat.

The researcher predicts that by 2019, consumers will spend half of their gaming money on digital downloads. Sony can start streamlining for that outcome now to better be in a position to take advantage of that.