Four Reasons Why Sony Shareholders Should Be Scared

Market research outfit NPD reported June video-game-industry sales data last night, and the numbers weren't pretty. As is befitting a consumer recession, software sales were down 29%; hardware dropped an incredible 38%.

Some media outlets attribute the weakness to tough year-over-year comparisons, but some basic math kills that hypothesis.

One of the simplest, but most useful tricks I learned as a young slave and Excel jockey was this: If a year-over-year comparison looks unfair, go back 2 years. I did just that, and discovered that last month's software sales grew by just 14% (7% annualized growth), while hardware sales actually fell 4.5%.

Isn't this a growth industry?

Yes, it is, but video game consoles are just too darn expensive. The Nintendo (NTDOY) Wii, the Microsoft (MSFT) Xbox 360, and the Sony (SNE) PlayStation 3 have sucked in plenty of hardcore gamers, Guitar Hero freaks, and other folks intrigued by the Wii's motion controls.

But there are over 100 million next-generation consoles out there worldwide, and prices need to come down significantly to bring in another 100 million.

Sony's obviously facing the most pressure. Here's why:

1. Thanks to a resurgent Nintendo and a hyper-aggressive Microsoft, the overpriced PS3 isn't performing nearly as well as last generation's PS2. That snazzy Blu-ray drive might have seemed like a great idea when the economy was booming, but its high cost is clearly a liability when people are worrying about how they're going to put food on the table.

People are actually gaming more these days, according to Nielsen. But they're being more careful with their money, buying used games, and trying out rental services.

We're in a new age. Frugal is hot. The American Express (AXP) Black Card is most definitely not.

2. Industry players like Activision (ATVI) CEO Bobby Kotick have been vocal in calling for a PS3 price cut, but Sony's standing firm for now. The company already loses money on each PS3 produced, and a price cut would just add to those losses.

Not to mention that, if the dollar falls significantly against the yen, there isn't much hope for profitability in the US, period.

So they're damned if they do, damned if they don't.

3. If I were a Sony shareholder, I'd be very scared right now. In good years, the games unit has accounted for over 60% of Sony's operating profit. Those days appear to be long gone. And I don't know about you, but I'm not very excited about the premium-priced, mass-quantity consumer electronics business right now.

4. Could it get worse? Yes.

What if Microsoft drops the hammer and institutes a $50 across-the-board price cut on the various Xbox 360 SKUs? It has the balance sheet to eat it.

Microsoft isn’t afraid to lose money. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear.

And it absolutely will not stop, ever -- until you are dead.