Sony moves a step closer to junk; outlook "negative"
by Vladimir Cole 
{ Oct 11th 2006 at 10:27AM }
Fitch Ratings (a company that assesses the risk level of debt) announced today that they have downgraded several types of Sony debt to "BBB+" (the debt is still three notches above the dreaded "junk" moniker, however). Fitch also slapped a "negative" outlook on the debt, indicating that future debt downgrades are possible as "Sony's financial profile [continues] to weaken in the next one to two years."
Reasons for the downgrade include:
- Sony's "game segment will likely incur large losses over the next three to five years"
- "Sony can no longer price its products at a material premium to its competition"
- Delay of the PS3 in Europe
- The big Sony battery recall
- The "PS3 is likely to face more severe competition than [the PS2 did]"
- "Sony has also been showing weaker financial results and credit metrics compared to its rivals in recent years"
Why does this downgrade matter? Lower-rated bonds make it more expensive for Sony to borrow money, increasing the cost for the company to finance operations. Higher borrowing costs also make it tougher for the company to drop prices on the expensive PS3 to a more palatable level in line with the Xbox 360 and Nintendo Wii. It's also, like, totally embarrassing to have your bonds downgraded.
We'll proffer the standard rebuttal, to save the SDF some typing: "OMG FITCH are such Xbots! GTFO! Fitch FTL!"
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Reader Comments (Page 1 of 2)
TeddyN @ Oct 11th 2006 10:34AM
Imperial Overstretch.
It happened to Rome.
It happened to Britain.
It's happening to Sony!
DocWho @ Oct 11th 2006 10:38AM
Next to pointless..... the kiddies here do not own $ony stocks.
gamerx @ Oct 11th 2006 10:40AM
to quote KAZ, "599 US DOLLA" bahaha
cubbiechris @ Oct 11th 2006 10:39AM
Man, it's good to side with Microsoft!
sirpilf @ Oct 11th 2006 12:01PM
i dont think all those reasons work because dreamcast and gamecube both were $100 cheaper. PS2 costed more then a cube but cube was better hardware.
and the last bullet, i think this is mostly because of sony's other divisions, but the game division has always done well.
darryl @ Oct 11th 2006 10:42AM
Awesome!
E.J. @ Oct 11th 2006 10:44AM
You hear that, VC? It's the sound of Sony Fans crying out for your blood.
But in all seriousness, this should really worry Sony investors because of the timing. You'd think that having all the PS3 pre-orders snatched up so quickly would bring some faith in the company's financial image. Now it's going to be harder on production of Sony products (not just the PS3) to be produced especially with the crucial holiday season on the horizon.
Sony will have to cut back production now on televisions, laptops, and other electronics to shift capital to PS3 production. At least they'd better, if they know what's good for them.
Capital restructuring FTW!
DBX00 @ Oct 11th 2006 10:46AM
Has the Sony hatred really come down to business points. Can we no longer find fault with the actually console and upcoming games that we have to start talking about the financial ratings of the Companies bonds. You do realize GM and Ford have terrible bond ratings, but they're still the number one and two car manufacturers in the world. I don't care about their current bond or stock prices because as soon as good sales numbers and software sales role in the door, everyone on Wall Street will change their tone and drive the price back up. At which point, they'll make money on appreciation, just like they are making money from shorting the stock after focusing on rumors to drive the price down. It's the game Wall Street plays and plays well. Analyst don't know anymore about the PS3 then any other gamer, but they just simply have access to influence a larger market. Don't be fooled by wall street and let's focus on the console's offerings.
Dasgooch @ Oct 11th 2006 10:50AM
Whether you own stock is irrelivant. This is showing the real strength of Sony right now, not what fanboys think it is. Mounting loses from the li-ion battery fiasco, Cell development costs, blu-ray, PS3 subsidy, home electronics losing market share. Sounds about ripe to me. It seems like the only thing they are not taking a loss on right now is the PS2 which is nearing the end of its life cycle. Looks like Sony is going to have to pull a miracle out of their collective arses to turn this ship around.
wii the people @ Oct 11th 2006 10:50AM
Wow. Sometimes "I told you so" just isn't enough.
DocWho @ Oct 11th 2006 10:49AM
"Capital restructuring FTW!"
Business 101 FTL.
James @ Oct 11th 2006 10:51AM
Finally, they caught on. This is what happens when you do not pay attention to your customer's demands. You lose sales! If they don't change their business practice now, they are either (1) going broke or (2) taken out of the competition because they can't afford the loans.
Come on, Sony. All you have to do is find a business strategy that actually works. I know you can do it. Just go for it.
DocWho @ Oct 11th 2006 10:54AM
$ony is not losing sales. Where does one even get that idea?
Once again you rabid retards force me to defend $ony.
Do we need to go into the fact the $ony will actually be saving money by only selling so many P$3's early on?
Grant it, $ony may be feeling pressure. But I need not say nobody is predicting their demise from the industry.
Again, story = non-story.
GamerZero @ Oct 11th 2006 10:55AM
I would give SONY a dollar but I can't as
I have 5 children,an alcoholic father,
a serious crack habit and a 360 to support!
Firegirl @ Oct 11th 2006 11:01AM
So, I guess we should never expect a decent price cut for the PS3. They are going to lose tons of money as it is with this new console. They are in way over their heads, bummer.
Brock @ Oct 11th 2006 11:02AM
So you're telling me that joystiq posted this in the interest of it's readers because their target "medium" owns stock in Sony corp. Just wondering, how many of you all own stock in Sony? Oh wait, that's right, %99 of us buy their products for pleasure, not investments. My PS2 isn't going to be worth less money now.
LaughingTarget @ Oct 11th 2006 11:12AM
It doesn't matter if they own Sony stock or bond, thoug I feel sorry for anyone that does own Sony stock, their cut of the assets comes from the intangible goodwill and patents stuff, meaning anyone with Sony stock is technically worthless given the level of debt in the company.
This means a LOT to people. As stated, Sony's astronomically high debt will make it harder and harder to secure new sources of income. Japanese companies are traditionally debt driven, and this is what caused the recession in Japan during the 90's. For comparison, US companies were getting away from debt financing during the same period and our economy exploded. Take rival Microsoft for example, their entire real debt (not the unearned income account) amounts to a whopping $81 million. Bill can pay off Microsoft's entire debt account from his own wallet and never notice the difference. Japan is starting to pick up equity financing, but Sony is far too slow on the uptake.
Sony's entire operations are funded on debt, and the most dangerous kind, short term. Every year, they have to refinance a major chunk of their short term debt at higher rates, and every year, they keep adding more onto that pile.
http://finance.google.com/finance?fstype=ci&cid=33095
Go there, click annual data, and take a look at two parts. Look under Financing Cash Flow Items and Issuance of Debt.
Before I explain what each of those two mean, it is important to mention that the Cash Flow statements are not rolling accounts. This means that the items you see in each given year are not the totals, but the additions of all the previous years combined. Black is cash inflow, red is cash outflow.
Financing Cash Flow Items is short term debt. These are notes and loans taken from banks and other sources that need to be paid off within the current fiscal year. Right now, Sony has $26.762 billion that needs to be paid off on or before March 1, 2007. For reference, Sony had a banner year last year and only pulled in a $1 billion profit. This means that Sony is going to, yet again, have to refinance the whole banana at higher rates and take out even MORE loans to cover the expenses and interest costs.
Issuance of Debt - These are long term bonds that Sony has to pay out an interest payment twice a year on. These, by themselves, aren't as bad as the short term loans and notes, but are what could bring Sony down if the short term debt is not brought under control. Bonds have restrictive coventants on them. A covenant states that the issuing company, Sony in this case, has to maintain certain levels of debt and bond ratings. If the company fails to maintain those levels, then the entire bond issuance is callable by bond holders at a pre-set premium (higher than the face value), meaning Sony has to pay off all bond holders immediately and without argument, something Sony is in no position to do without significant liquidation of fixed assets (such as the Playstation division, which Microsoft would gladly take off Sony's hands).
What does this mean to gamers? As Sony continues to pile on the debt, they become less and less able to loss lead their products. This means that Sony will either hold the PS3 at $600 for a very long time (well beyond December 2007) or, if their debt becomes bad enough, will have to raise the price of the PS3 to avoid breaching covenants on their bonds. Getting downgraded only makes it harder to get debt under control. As a company's credit rating drops, their borrowing rates increase significantly. A AAA bond rating averages around .54% yearly interest, while a BBB+ rating, Sony's level, averages around 27% (last time I checked). This means that had Sony has to pay 27% yearly interest on any new bond issuances (higher if investors think Sony is going to backslide even more), leaving even less leway to drop prices on anything.
Don't be surprised that by this time next year, the PS3 is still $600 and stand-alone BluRay devices go for $200 and the 360 premium is selling for $300. Sony's overly ambitious and fiscally irresponsible PS3 project may ultimately destroy their entire division. $600 is sustainable this year, but not next year, and all indicators show that Sony is in no position to drop any prices and will need to reach a point where they are selling every PS3 for a profit to avoid imploding.
Fish @ Oct 11th 2006 11:12AM
Ok, so they may need to tighten the belt. No biggie, maybe if they reduced production costs of their new console that may save a penny or two.
This, is the prelude of "DISC READ ERROR 2.0" or maybe it won't be a sequel, it could take a new direction. "CELL PROCESSOR MELTED THROUGH YOUR TABLE. SORRY. PLEASE BRING TABLE TO NEAREST SONY SERVICE CENTER"
Methane47 @ Oct 11th 2006 11:10AM
Considering that Playstation makes just a portion of Sony revenue. I find it really hard to think that Fitch Ratings is a good analyst since half of the reasons reported are attributed to the Playstation name..
Another thing to note is that Sony stock has been dropping for weeks. And it slowed this weed and today It's up (in just about 2 hours) 2% ... I hope you guys are prepared for the Sony stock explosion. By March sony stock will be hovering at around $140-$150 per share.
GhostBox @ Oct 11th 2006 11:09AM
Well we all knew they were in financial trouble. None of this is suprising.
Fuzz @ Oct 11th 2006 11:14AM
DocWho-(and whover else this applies to)
English 101.
$ is meant to indicate a dollar value. It precedes numbers. It is not a substitue for the letter S. Its not witty, clever, sneaky, or humorous. It degrades your point. Whether it is used in Microsoft, Sony, or whatever other company you are trying to "mock", it makes you look like an idiot.
James @ Oct 11th 2006 11:12AM
@ Comment 12 (DocWho)
I'll explain what I mean by that.
For Sony to continue to be competitive, it must maintain a sizeable market share. To achieve this, it must make sales to generate revenues which run a business, conduct advertising to get its products known, and promote its brand to help with its public relations and customer loyalty.
Now then, examine these facts:
1) Sony is releasing very few models. This means that even if they are priced at a great level, market share will be rather limited. This has a severe impact on the number of units it can generate in succeeding years due to customer loyalty. Even then, they are not taking advantage of all markets. And to think they will save money from operations from doing this is an absurd thought as operations accounts for at least 80% of ALL revenues of a business.
2) When was the last time you heard positive things about the PS3 that was outside the bounds of the product itself? I rest my case. This leads to a dramatic shift in differentiation of said products. Instead of being known as a quality item, it will be known as a product that will more than likely break. And no customer in their right mind would spend $600 a month on new PS3s.
3) With its previous products on retrenchment (it's life cycle is going out), it will have little financial backing to help it through this "phase" of the life cycle. The PS3 is only just coming out will need to cover its first costs. However, where will it get its cash? Loans? Yeah, right. Ever wonder why it is called a junk bond?
4) Despite its fan loyalty in Japan, it does not have as much loyalty from other nations. This means they have a massive threat of outside entrants from Japan moving in and taking over their market share in Japan because of a lack of products. This is the principle of competition. Prime example of this would be Microsoft moving in on the Japanese market.
Now tell me, how is it that they are not losing sales?
pandlcg @ Oct 11th 2006 11:55AM
Bond rating are generally slower than investors. Bond investors and stock investors usually have this type of information built into their price before it hits.
E.J. @ Oct 11th 2006 11:11AM
@8. "Capital restructuring FTW!"
Business 101 FTL.
Posted at 10:49AM on Oct 11th 2006 by DocWho 0 stars
You are exactly right. Sony should've taken Business 101 at a better business school. Their business decisions are making them lose money, faith, and customers.
Lee @ Oct 11th 2006 11:31AM
Fish: "CELL PROCESSOR MELTED THROUGH YOUR TABLE. SORRY. PLEASE BRING TABLE TO NEAREST SONY SERVICE CENTER"
I hope to see that on a weekly web comic round-up soon.
Pierce @ Oct 11th 2006 11:14AM
Im not really sure why people dont think finances affect their choice of console.
It doesnt matter to us if we plan on not buying any consoles and we dont own any stock.
but the second you come to a GAMING site about a company who makes GAMING CONSOLES the finances IS news.
Look at Sega ..they coulnt cut it so they cut their losses. you cant just keep piling money into something and hope for a return 5 years later.
and to the guy higher up in the comments. Ford isnt the second biggest anymore. Toyota is. and if market trends continue im sure they will be #1 soon. you cant keep bucking your consumers in the face and expect to remain #1. sony is learning this ...for their sakes hopefully not too late.
Fish @ Oct 11th 2006 11:13AM
LaughingTarget,
How does Sony's financial outlook compare to Microsoft's and Nintendo's? I would look it up, but I can't decipher it as you can :P
TRUTH @ Oct 11th 2006 11:13AM
@ DocWho
lol....no!
Now that fact is that the PS3 is not going to sell as much as the PS2 did.
Q: Why do think they expect the PS3 to last 10 years?
A: That is how long it will take to turn a profit.
Wii already has more support on the naive side of the world. They won't open there eyes to see that the 360 is a good gaming console.
Anyways Sony is hurting worst than you think.
lothar @ Oct 11th 2006 11:15AM
They're selling the PS3 for loss, lowering the price of the system will only cause more of a loss to their profits. They need titles to start gaining profits with the PS3, the long development time for cell based games is going to hurt them as well as the developers waiting it out before starting to develop PS3 games.
MosquitoControl @ Oct 11th 2006 11:15AM
Does anyone REALLY want to compare Sony favorably to GM and Ford?
Two companies constantly in talks of takeovers. Two companies constantly being rumored to fold. Two companies in serious economic disrepair. Two companies spending more than they gross. One of those companies is in serious talks to go private instead of public.
They're floundering, and their product line clearly reflects this. I can't believe someone would say terrible bond ratings are no big deal because Ford and GM have them. Compare Ford and GMs recent offerings to the more reputable car companies. Now imagine if Ford and GM were profitable enough to take the chances those companies could...
Intangible 360 @ Oct 11th 2006 11:17AM
I never thought I'd be looking at Sony as the underdog.
Dathos @ Oct 11th 2006 11:17AM
Although I don't like the playstation consoles I love most of sony's other ventures- like who owns an iPod? I hope they stay a float as I'd miss their products a lot since they have a sense of style which is missing in many other companies.
pandlcg @ Oct 11th 2006 12:06PM
I've always found that bond rating changes are slower to change than stock and bond investors. Meaning that rating changes are usually seen in advance by the market and the price change happens before the rating change. Getting downgraded is never good, but a BBB+ is still a solid rating.
fahmi @ Oct 11th 2006 11:34AM
dear methane,
Playstation division is the only profitable division in Sony. Sad but true, other Sony powerhouse divisions, such as audio and television, are in shamble. That's why not long ago, they discontinued SO many products because they're not profitable anymore.
sorry to tell you that, you're a moron. do some research first before spouting sh** from your mouth.
DocWho @ Oct 11th 2006 11:19AM
"4) Despite its fan loyalty in Japan, it does not have as much loyalty from other nations."
How is that even a fact? It's not.
$ony's P$2 outsold the competition 2 to 1 in North America. Where do you pull this crap??
Night Elve @ Oct 11th 2006 11:23AM
@ 1.
"1. Imperial Overstretch.
It happened to Rome.
It happened to Britain.
It's happening to Sony!"
And certainly will happen to USA.
James @ Oct 11th 2006 11:25AM
@ Comment 26 (Lothar)
This comment is so true. I so forgot about that.
This brings up an odd point, though. What are the most notable games coming out for the PS3, anyway?
*cricket chirps*
Umm... ouch.
Seriously though, does the PS3 have any good games coming out for it at all?
LaughingTarget @ Oct 11th 2006 11:27AM
Fish -
Microsoft is easily one of the healthiest companies on the planet right now. They are capable of running their entire business independant of outside assistance. This means that Microsoft take on any project it wants without ever having to think of a loan or a bond issue. These people almost seem to grow cash. Microsoft is so cash laden that this time last year they gave out $36 BILLION in a divident, or roughly $132 a share. I so wish I had shares of Microsoft at that time, even a peasly $100. I'd fall over backwards to get a $13,200 dividend check in the mail. Unlike Sony with the PS3, which the company is staking its entire existence on, the 360 is merely a side project plaything for Microsoft. $4 billion loss? No big deal, Microsoft pulled in $26 billion in profits over the same period. Microsoft is a completely self-sufficient organization that is in no danger of losing its power. Their most significant competition comes from Apple, yet they're far too expensive and boutique to ever break into the lucrative business and government markets, let alone the mid to low range PC markets.
Nintendo is a bit tougher to discern since they don't play on the US stock exchange. However, from what I can find (Japan has lax reporting guidelines compared to the USA, which is the toughest in the world), they're also doing rediculously well. The DS, which sells for a profit, is going nuts and their internal games division is as profitable as ever. Nintendo is also a traditionally debt financed company, but they only really have to take out debt when financing large R&D projects, which only come once a year and usually pay off in the first year and a half. Nintendo has strong operations that also seem to print money out of nowhere, and are in a better position than Sony to persist in the video game business, despite being outsold by 5-1 by the PS2 on their Gamecube venture.
jojo29 @ Oct 11th 2006 6:05PM
" the 360 is merely a side project plaything for Microsoft. $4 billion loss? "
Which is the reason i DON'T like MS. It's just another market for ONE rich man to make money and try to monopolize.
Fish @ Oct 11th 2006 11:35AM
Thanks LaughingTarget! Very informative and well written.
32_Footsteps @ Oct 11th 2006 11:35AM
Well, I'm not the whiz LT is at deciphering the numbers, but based on what I can see, Microsoft has an obscene amount of liquid assets for when they do need to pay off debt, but it's a moot point because over the last 12 months they've posted a nearly $2 billion profit. If MS doesn't have a top-tier bond rating, I'll eat my hat. In other words, as long predicted, Microsoft has the resources to simply outlast Sony in the console market.
Nintendo is a bit more dicey; I can't find har-and-fast numbers similar to what LT found for Sony. However, they recently upgraded slaes projections by 20% and their stock has been healthy of late, so my personal guess is that Nintendo's finances are reasonably clear, if not as stellar as Microsoft's.
fahmi @ Oct 11th 2006 8:21PM
MosquitoControl,
To add to your arguments, Ford has been purchased by european automative company. I think either Volvo or Mercedes. Can't remember.
ninja @ Oct 11th 2006 11:40AM
Good to side with Microsoft? Have you even seen the stock market figures? Check it out, Sony is high 30s (about 38) while Microsoft sits around high 20s (about 27).
Sony stock is still worth more smart guy.
nintendofanboyandproud @ Oct 11th 2006 11:37AM
No matter how the fanboys spin it, this is not good news for sony, i.e., bad news.
Is it possible that they will go down like some kind of historical 'unsinkable' ship?
Well, the iceburg has certainly been hit. And those ps3s sure are heavy.
Methane47 @ Oct 11th 2006 11:50AM
Really Fahmi? Are you backing that statement up with some kind of quote or something? Or are you just pulling it out of that large hole in your back?
Sony Pictures (That's Movies because I can tell you have never heard of it) Is about to break their record year since 2002. They are the highest grossing movie production house this year, Also sporting the most movies of 27 this year. And that is just ONE division of Sony.
But i guess doing my research according to the word of Fahmi includes repeating what other people tell me... Good job you. You get the big one.
Also in OTHER news just from looking at the frickin news.. you would know.. Sony Ericson tripled net profits this year. Also Sony Stock is up 3%... But I guess you should already know that since you know.. you do your homework..
I wonder if analysts are going to sing the praises of sony going up 3% today like a couple days ago where they bashed sony for dropping 2.5
Ducky @ Oct 11th 2006 11:51AM
Hey Ninja,
Maybe you should take some economic courses. Just because the stock price is higher doesn't mean its worth more.
For example Microsoft's stock could have been $50 yesterday but had a 2-1 stock split. There is now twice as many shares and the price is only $25 a share.
If that happened Does that mean that overnight Microsoft became worth less then Sony? Of course not.
Thus just looking at a stock price means nothing.
Now go take some finance and econ courses.
MosquitoControl @ Oct 11th 2006 11:53AM
ninja, that doesn't mean anything. Berkshire Hathaway stock is worth $99,200. Does this mean the company is worth thousands of times more than Microsoft?
Of course not, don't be stupid.
There are many, many, many factors that lead to stock price. Price alone is not indicative of company worth or health.
Doc - yes, Sony outsold the competition last generation. Nintendo used to outsell the competition significantly, too. Last generation has little bearing (but definitely some) on this generation.
Fahmi - yes, Sony used to lose money across the board. That's changed, a bit. The company is healthier on average than it was two years ago. However, the gaming division is weaker, which brings the entire company down as a whole.
gamerx @ Oct 11th 2006 11:56AM
@ #28 DocWho,
Total worldwide sales(NOT shipments) of Game Boy Advance as of June 30, 2006 = 114.65 million units. And this figure is EXCLUDING GBA Micro sales.
Every gamer knows Nintendo hardware quality is 1st rate. Nobody can say the same for Sony products. So you can imagine how many PS2s people had to replace because of poor hardware quality. And we all know Sony's definition of the word "sold". Incase you dont, Sony always quotes SHIPPED numbers as opposed to SOLD numbers. Even right now they're bragging about "selling" 22 million PSP systems ahahahahah!
And dont give me this BS about Nintendo redesigning their products a million times to boost sales. Let me break it down for you:
Game Boy Advance - PS2 Phat
Game Boy Advance SP - PS2 slim
"What is rare in the technology world is a product line than can maintain its dominance. If you do that for five years, it's called amazing. if you succeed for a decade, it's called unprecedented. but if you do it for 15 years, you can only call it one thing: Game Boy."
Above quote from, “Reggie Fils-Aime Speech From the Eighth Annual Ziff Davis Electronic Gaming Summit”, PGNX Media.
Now STFU.
Yazzer @ Oct 11th 2006 11:56AM
The Playstation brand could be in trouble, I was a PS fanboy, but ended up buying a 360 (thanks in part to negative blogging).
What % of Sony is Playstation?
The overall "Sony" brand appears to still be very strong.
Sony Gets "A+" in Brand Trust Survey, Nintendo gets "B" and Microsoft "C" (Forrester Research)
http://www.gamers.com/index.php?run=news&news_id=5741
Aren't they still very strong in these areas?
- VAIO
- TVs (although they are late to the HD area)
- Digital Still Cameras
- Digital Video Cameras
- a few others
How many Sony products do you have in your house? I would say the average home has more than 1.
lothar @ Oct 11th 2006 11:59AM
LaughingTarget,
Thank you for the very informative financial posts. Its good to see posts like yours vs the brainless "OMFG teh bluray i$ FTW" idiots.
I didn't know about their dividend payouts for last year, geez holding 4 shares of Microsoft stock would of given me enough money to buy a 360, that's insane. It makes my $2 - $10 dividend checks from my other stocks just look silly.
Sone and bluray, its been talked about before but hear me out. BluRay stand alone players are $1000, HD-DVD is half the price at the same if not better performance. The argument that their getting their format in the doors of x amount of homes just doesn't seem right to me. Here is something to consider, how many homes have HD sets, of those how many homes have multiple HD sets. The typical household has the kids gaming system setup up on the 2nd set vs the primary tv (which would be the first set to get upgraded to HD). Considering that aspect of the scenario and the and low HD install base of households, why is someone who has a next gen console connected to standard set going to purchase a movie on a format that costs almost twice as much as the standard DVD format? Its assumed that just because the PS3 can play bluray movies people are going to go out and buy them, this may not be the case. Yes some of the adult gamers might have an HD set but I'd be willing to be the majority of gamers are not going to have HD.
@ DocWho,
Change your name your making one of the smartest television characters look completely stupid.