(Bloomberg) – Sony Corp. has created one of the hottest gadgets of the year in the PlayStation 5, but its launch has been marred by scalpers buying up scarce supplies and threatening the long-term health of the company’s flagship product.
Scalpers, who buy devices at retail and then resell them at a higher price, have long been a challenge in the games industry. But the problem is particularly acute this year as the coronavirus has pushed production and spurred more console sales online – where scalpers are using advanced bots to run Microsoft Corp.’s PlayStation 5 and Xbox. to buy up.
Enraged gamers are calling out resellers for charging $ 1,300 or $ 1,400, nearly three times the retail price, on sites like eBay and Twitter. “This is a launch disaster,” said a Twitter post, pledging not to give in to extortionate prices. “Scalpers can keep them.”
The threat is that Sony’s struggles in the early weeks of launch could hurt its ability to draw gamers and developers to the new platform, undermining profits for years to come. A console’s debut would create a positive cycle of consumers rushing to buy the devices, while developers release games that take advantage of new graphics and processor capabilities, driving demand on both sides. Sony risks the opposite.
“The PlayStation 5 could miss a crucial opportunity to get into a good hardware software upward spiral,” said Kazunori Ito of Morningstar Research. “The platform’s peak is likely to be low and the platform’s total revenue earned won’t be as strong as we hoped.”
The company’s stock price rose 2.7% on Wednesday to its 19-year high amid unabated and growing enthusiasm for gaming stocks that rival Nintendo Co. increased by 6.6%.
Scalpers deploys bots that continuously monitor online stores for changes in inventory and stocks, then automatically place orders and check out in seconds when devices become available. The technique is based on well-known web crawling or scraping technology, but it is specifically tailored for e-commerce and can sometimes jump the front of the queues.
“A bot prevention action that we implemented just hours before the PlayStation 5 event on November 25, blocked more than 20 million bot attempts within the first 30 minutes alone,” wrote US retail giant Walmart Inc. Tuesday in a statement. The company is asking others in the retail industry to lobby lawmakers to address the bot problem.
Evidence of Sony’s problems is clear in what is known as the draw ratio, or the number of games sold for each console. A healthy ratio for a new console is about one, which means that every person who buys a machine will walk away with at least one game as well. The figure is important because the PlayStation 5 is sold at a loss, while games are lucrative.
So far, Sony appears to be selling about one game per three devices – compelling evidence that scalpers are hoarding consoles. Estimates for the first month of Japan’s Famitsu show Sony sold approximately 213,000 PlayStation 5 consoles in the country, while the top three titles sold less than 63,000, excluding digital downloads. Sony’s Spider-Man and Demon’s Souls were the top games, while the third was an outside software company. In comparison, Nintendo sold half a million Switch consoles domestically in the first four weeks, and the top three titles accounted for about the same number.
“Even when considering the purchase of digital download software, the percentage of PlayStation 5s sold that are actually in use is not that high, which means that current demand is constrained by profitable resellers,” said Ace Research Institute analyst Hideki Yasuda. The PS5 is compatible with the PlayStation 4 game and comes with Astro’s Playroom pre-installed, so players may not be forced to buy new titles right away.
Sony’s headaches are exacerbated by production struggles. The company has said it plans to sell more than 7.6 million PlayStation 5s by the end of March, beating the performance of the previous generation console.
But the pandemic has caused shortages in the industry’s supply chain, forcing companies from Sony to Apple Inc. are no longer able to increase their production. Major vendors, including MediaTek Inc., have said chip availability will be limited in the first half of 2021. Strong demand from electric vehicle manufacturers, among others, has consumed capacity for some parts used in the PS5, according to people familiar with its supply chain.
Of particular concern for Sony is that the production yields of the PS5’s main custom-designed processor remain inconsistent and have affected its ability to meet demand, said the people, who asked not to be mentioned because the details are private. The company may need to rely more on air freight to deliver consoles to retailers, further diminishing profits, they said.
“Air is at least 10 times more expensive than sea when the world is in a normal state, and the gap is probably widening now,” said Ace Research’s Yasuda.
Sony’s latest shipping forecast is still well above 7.6 million, although not as high as previously envisioned, one said.
Sony declined to comment specifically on production figures or scalpers.
“While we are not releasing details regarding production, nothing unexpected has happened since mass production of PlayStation 5 began and we have not changed the production number for PS5,” said a spokesman.
Inadequate delivery threatens to disrupt the cycle of a successful console launch, with new software titles driving interest in hardware in turn. A major Japanese publisher was shocked enough by the market’s early reaction that there were internal discussions on whether or not to postpone its PlayStation 5 games, one person familiar with the talks said.
Retailers take extreme measures to hinder scalpers. GameStop Corp. told his own staff only an hour before arrival this week about new console shipments to US stores so real customers could buy them. In Japan, Nojima Corp. employees manually review each purchase order to exclude scalpers. Still, resellers are estimated to have already made about $ 35 million from PlayStation and $ 24 million from the rival Xbox that launched at the same time.
Many customers blame Sony for not doing more to boost supply – and eliminating profit for scalpers.
“The real test for the PlayStation 5 is whether the hardware would continue to sell well, even if there was enough supply,” said game industry consultant Serkan Toto. “You need good games to convince gamers to switch to the PlayStation 5, you need more third-party publishers to release games on the PlayStation 5, and you need to ship more hardware.”
(Updates with stock quote and Walmart quote)
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