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Daniel Loeb: Streaming isn’t Netflix of Games; Sony’s Physical Console Still “Winning Model”

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Daniel Loeb: Streaming isn’t Netflix of Games; Sony’s Physical Console Still “Winning Model”

As part of a campaign to convince Sony it should break up its businesses into separate companies, Third Point founder, investment expert, and activist Daniel Loeb has compiled a report that details a full analysis of the game’s industry and where it’s headed moving forward. Some of the key takeaways include Loeb’s belief that Sony is best-position to succeed in the next generation, and notably, he also insists that cloud gaming isn’t all it’s cracked up to be.

Loeb’s report forms part of an appeal to shareholders, calling for company reforms as he labels Sony “one of the most undervalued large-cap businesses in the world.” He suggests the company should focus completely on its entertainment division, diverting revenue from its TV and cameras business to focus on gaming, music, and film and television.

Sony’s PlayStation division comprises the lion’s share of the entertainment division’s revenue, and so outlining to investors and shareholders how and why gaming will see continued success moving forward forms a key part of his report.

This includes explaining why streaming services and cloud gaming –the most talked about “threat” to traditional hardware– isn’t, in fact, as concerning as it’s being made out to be. Loeb references competition from Google Stadia and Microsoft’s xCloud, highlighting their shortcomings.

Here are some of the key areas of concern Loeb speaks of, as well as key takeaways according to his assumptions with supporting graphs and data:

  • A recent academic study demonstrated that game players report significantly lower “enjoyability” and “responsiveness” when playing a game with higher input latency – and the negative impact is linear as the amount of latency increases
  • In a recent consumer survey, only 10% of non‐gamers indicated that hardware cost was a primary reason they do not play console or PC games

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  • While the newly launched cloud gaming platforms are frequently compared to Netflix, the analogy is a weak one:
    – Unlike Netflix, the experience quality on cloud gaming services will be inferior relative to existing console gaming
    – And while we don’t yet know the price/value relationship of the new services, they are unlikely to offer an order‐of‐magnitude cost savings relative to console ownership
  • Console gaming today is fairly affordable for consumers (hardware cost + multiplayer subscription = $140 per year or $12 per
    month) – while we don’t yet know the price of the new cloud gaming services, it is unlikely to be dramatically cheaper

Loeb’s study goes on the outline which areas of the market are most important to tee up success in the next console generation:

  • In our view, the winning model will likely be a hybrid physical console + streaming service
  • Sony is the clear leader on every competitive vector except data center footprint
  • Microsoft is also well‐positioned, given its #2/#3 position in the console market and global Azure data center footprint
  • Google’s position is challenged given lack of game developer relationships, lack of must‐have games and no existing console
    installed base
  • The fact that PlayStation and Xbox will both run on the same Microsoft Azure infrastructure supports our argument that the infrastructure layer does not provide a competitive edge (to Microsoft)

Loeb’s report outlines the key obstacles streaming services such as Google Stadia will face moving forward, both in regards to technical challenges and market penetration:

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Notably, back in March when Sony shares dropped in price following news that Google was launching a gaming business, Third Point swooped in to purchase from investors unloading it. Clearly, Loeb and Third Point believe the Sony’s future is bright.

The Japanese company has acknowledged Loeb’s recommendations but have declined to specifically comment on his proposed reforms. They have, however, said they will add his input to future “constructive dialogue” with investors.

Elsewhere in Sony news, the company has recently outlined its plans for its next-generation console and streaming services.

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