SIG Analysts Examine PSP Profit Margins

The Susquehanna Interest Group's latest Video Game Journal, produced by financial analysts looking at the video game market includes an analysis of the PlayStation Portable, in terms of expectations of its future growth as well as the possibility of offsetting next-generation development costs by taking advantage of the PSP's potential margins. The report compares the margin of high-end PSP games, which retail for a $50 price point, to those on the PlayStation 2, whose games carry a similar price point. Looking at sales for November 2004, which are more established than 2005's holiday season, gives the SIG analysts figures of average revenue of $17.5 million and average profit of $7.1 million for PlayStation 2 titles released in that month. Comparatively, the average PSP game released in March 2005, the month of the system's launch, had an average revenue of $8.6 million and average profit of $5.7 million. "While PSP titles produce less absolute gross profits," said the journal, "the titles have a much higher margin since they require lower development costs and lower royalties to Sony." Furthermore, according to the report, "We acknowledge that longer development cycles result in higher development costs, which are reflected in the development costs of console titles. However, development costs do not fully account for the opportunity cost in committing to a longer development cycle. If a console title takes two years to develop, and a PSP title takes one year to develop, a publisher could theoretically create two PSP games and generate greater profit in the time it takes to create one console game." The report concludes by suggesting that in order to make up lost revenue during the transition between console generations, publishers rely on higher margins of PSP development and "port most of their PS2 titles onto the PSP platform."