Sony Credit Rating Takes a Hit, Deemed 'Junk' by Moody's

Sony is off to a fast and impressive start in the next-generation game console wars, but the company also creates a wide range of products that go far beyond gaming. Unfortunately, Sony isn’t seeing the same kind of success in these areas, which has led credit rating company Moody’s to drop the company’s rating down to “Ba1.”

This change, down from “Baa3,” is only a drop of one level in the Moody’s rating scale, but it’s enough to qualify Sony for “Not Prime” status, known to some in the financial world as “Junk.”

Moody’s issued a statement today explaining the rationale behind its decision. Here’s an excerpt:

Of primary concern are the challenges facing the company’s TV and PC businesses, both of which face intense global competition, rapid changes in technology, and product obsolescence.

Neither the TV business nor the PC business are fun to be in right now. The TV market is fiercely competitive, with prices being as low as they’ve ever been and more companies in the mix. And PC sales have dwindling for a while; unfortunately for Sony, the company hasn’t shown it can adapt in any meaningful way.

That’s not to say Sony is failing in every vertical. Moody’s did mention some areas that the company continues to impress in:

The Music and Pictures segments are expected to remain profitable — after an expected one quarter seasonal loss in Pictures — and supportive of the company’s cash flow and profitability.

And of course, Sony always has its video game business to fall back on:

Profitability in the Games segment is expected to improve with the successful launch of PlayStation IV, but not to the extent seen with the profitability level in 2010.

Sony’s inability to bring games profitability up to 2010 levels is expected. At that point in time, Sony’s PlayStation 3 had been on the market for about four years and Sony had both lowered manufacturing costs and started moving more consoles. Sony just launched the PlayStation 4 back in November, and based on reports of its bill of materials (BOM), the console is being built and sold pretty close to break even, if not at a loss.

As the system becomes cheaper to build, profitability of the hardware itself should improve. Still, Sony’s games business is but one piece of the pie, and until Sony addresses its shortcomings in other areas, it’s tough to imagine that credit rating being upgraded.