Gaming Consoles Part 2: Sony - [Business Breakdowns, EP.202]
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This is Matt Russell, and this is the second episode of our multi-part series on the video game console market. If you've yet to listen to episode one, Sia Kamali is a founder and fund manager at Skycatcher. Join me to break down that video game console market and his thesis for why it's an inflecting opportunity. In this episode, we go micro, and Sia is back to break down Sony.

Now, given this episode is part of the series, I'd say it's not your traditional breakdown. We spend the majority of our time talking about Sony's opportunity in the gaming market and the growing anime market. So Sia and I spend a lot of time talking about the catalysts there and just some of the dynamics that are happening under the hood of this massive conglomerate. Now, please enjoy this episode on Sony. ♪

All right, Sia. We're going to get into the meat and bones of Sony here. It's a tech conglomerate. We're going to take the video game angle, I think, a lot through this conversation. But Sony is so much more than that, has this major history to it. Let's just start out with a framing of Sony, a sketch of the business in the best way that you would describe it today. Absolutely. So I think, Matt, the one-liner here is

Sony is this awakening global giant in video games and anime. And let me tell you a little bit why. It's a company of 120 billion enterprise value. It generates about 80 billion in revenue, 9 billion in earnings across six business segments.

And the most important one and the key to our thesis is this division called Sony Entertainment, which makes up three of the six divisions. And that represents about 60% of revenue and earnings. Now, a lot of people, they'll recognize Sony for its leadership and hardware and legacy media. And they're all really great. But I think when you think about the future of Sony and what we think is really underappreciated and undervalued by the market is that it has...

two generational consumer platforms in PlayStation and Crunchyroll. Now, both these platforms capture secular growth in key categories of video games and anime. So PlayStation is typically seen as a hardware business, very cyclical. But for us, we view this as really a critical distribution channel for games, and it functions as the app store, the content library, and storage.

And we think it's about to hit this magic window where lifetime value of the customers will grow three times over the next five years. And then the other part for Sony that has been really clear in the last 12 months is they're going to tap into the global growth of anime. In fact, they already own the largest streaming platform and Crunchyroll, which you can think of as the Netflix for anime.

This has reached over 115 million users and is entering this next stage of monetization. And so big picture, looking at Sony, this big conglomerate, we think PlayStation and Crunchyroll generate very high margin of software, high margin software earnings of about $2 billion today. But we think this will grow five times over in the next five years.

And will be really what drives this inflection for Sony, where you think of this as this industry-leading, digital-first, software-driven engagement entertainment platform.

The history here is so interesting. As you mentioned, whether it's the hardware of the PlayStation or going back in time to the Walkman, Sony, I always associated with various pieces of electronic hardware. Can you just bring us up to date? It sounds like we're seeing this shift towards more digital, more software-esque model. How did that take place? And any of the interesting anecdotes over the years that turned Sony into what it is today?

No, absolutely. So I think it's important to start looking at Sony from 2021. It's when it reorganized itself as a global consumer entertainment company. And it's also when it started its, quote, fourth midterm plan. And that plan, they called it Evolving Sony. That plan ended last year. And we're now entering this next phase, which Sony calls Beyond the Boundaries plan.

Now, this fifth midterm plan, which begins this year, it's all about Sony evolving its leadership into what they call creative entertainment, being able to connect the multi layers of physical and virtual realities. I think you sketched out the segments well for us. Could you put some numbers around just those various segments? I know they have the music, Sony pictures, any of the high level numbers just to frame those pieces of the business?

Absolutely. So look at the consumer entertainment business, which is 60% of the business, as one big group. This is the core, what we think is the most valuable part of Sony. Under PlayStation, you have a business that's called almost $30 billion in revenue. Today, it generates about $2 billion in operating profit. And we think this grows to $8 billion plus. And margins go from 7% to 19%.

And it is the number one console ecosystem today with over 116 million multi-active users and 70% of them purchasing games through the console itself. Then we go look at music. So their music business is number one in publishing. And in fact, you could look at this and say, this is an iconic asset because it captures over 5 million plus songs. And it's in a solid business where margins have been steady at 20 plus percent.

on that front. And that's roughly a $10 billion business that we're going to be conservative. Let's just assume that Kager's at the 8% because it's built on the back of streaming and royalties on that front. Then we look at Pictures. Pictures is about a $10 billion revenue business, but

Its operating profit is about $800 million, so very low margin. But within pictures, you have a historic business of box office movies, so like Spider-Man, Jumanji, Ghostbusters. And then you have this really gem of the asset called Crunchyroll, which is the third largest streaming platform in the world today. And we think this is going to grow revenue at 40 plus percent.

And ultimately take over pictures and maybe even they break it out as its own category on that front.

Now, when we get to the historical part of Sony, where this is a world we pretty much value very conservatively, and we're not trying to take a strong view. In the hardware business, this is when you're looking at TVs and just the traditional stuff that you know Sony for. Their image and censoring business is about a $10 million business, and that's high single-digit margins. They're a dominant leader in this category in terms of camera sensors, about 53% market share of the world.

And then there's a category which is the, they call entertainment technology and services. And this is a $16 billion business, but it has all the other different hardware devices in that buckets. And then last but not least is financial services where, yeah,

A bright spot to our thesis was this is something that they will spin off next year, and it shows a commitment from management team to really become a more leaner, focused consumer play.

Yeah, it's always interesting when you hear conglomerates start to make some type of focus on different categories. And it seems like that's happening here. But as you run through all of those different categories, there's still a lot of moving parts. I want to get into the Sony Pictures a little bit and that Crunchyroll theme. I do have to mention the book, The Big Picture on the Sony Pictures hack was one of the more interesting things that I've read

in recent years. And it's just been so interesting to see how they've dealt with all of the shifts in movies, with theaters, with streaming, and adjusted their business as such. But there's not much talk about Crunchyroll in there. And it's a name I'm familiar with, but I don't have too much detail on it. So you mentioned it's a massive anime audience. Just go into a little bit more detail in terms of what that looks like from a financial perspective and what the actual business is and business model is there.

Yeah, absolutely. So going back to this 2021, Sony went and consolidated the anime streaming platforms. They bought a few players and they rolled it up into this business called Crunchyroll. And with that, they basically own the market and live streaming of anime content. Now, let me take even a step further back. Anime is one of those categories that's been in secular growth.

But what's interesting is the tipping point of industry has grown outside of Japan for the first time in domestic Japan. And it's about a $30 billion industry. Most of it's in merchandise. But one of the things that's, I think, interesting is that you saw post-COVID behaviors around medium content become more nuanced.

And anime saw huge growth on that. When you think about this category, we estimate there's almost called 600, 700 million fans on its way to a billion plus. And it's people that you wouldn't necessarily expect, but it's also exciting to be this counter-cultural, but at the same time, pretty mainstream. It's more than just cartoons. It's adult cartoons, in that sense. Now let's get to the numbers for Crunchyroll. So Crunchyroll

Crunchyroll is the third largest streaming platform. It's got 150 million users. Now, it's got, of that 150, about 15 million are monthly paying subscribers. The rest are being monetized via ads. And so the thesis here is that over time, you're going to see users convert from the advertising model to the paid model. And with that, you see this Netflix story happening all over again.

Because imagine buried in this conglomerate called Sony, you have a business that's almost half the size of Netflix in terms of user base. But monetization-wise, it's early days. This is Netflix in 2011. We have a long way to go to get these paying subs up. So one of the key things that we're really tracking here is the growth of the paying subscribers on that front. And then if you think about, let's go back to this Netflix comparison.

In terms of Netflix average revenue per user, it's about $140 per monthly active user. For Crunchyroll, it's $9. So there's a long way for this to grow. And we also know that by tracking the behavior of Netflix, you can see anime content on Netflix picked up massively in the last few years. You may say, oh, this is competitive to Crunchyroll. Well, not necessarily, because one of the key things about Crunchyroll and anime is that

Most of the content being watched is licensed content. It comes from the manga. It's come from Japan itself. You can't just go and sell many of these relationships and exclusive licensed content on their side. And Netflix has tried into this category by doing their own originals and to some extent, but nowhere near the success of major anime IPs like Naruto or Dragon Ball Z, etc.,

It's very interesting because I think Sony was the poster child for not going down the path that Disney and Paramount and so many others went down where they chased the streaming app themselves to compete with Netflix idea. They were happy to license things, yet they do have this business inside the company.

that's doing just that. So there's some thoughtfulness around it and just interesting to hear. When you think about all of the business lines together, how much synergy do you think exists from operating these? And do you think there's a lot of cross-functionality? If there is a great IP title within the PlayStation universe, is that something that is very likely to get led into something that can happen at Sony Entertainment?

Is that part of the thesis at all or just anything around the culture with those synergies and that collaboration in mind? Yeah, I think one thing that you, and this is more unique to the Japanese gaming companies is they've all been building transmedia IP. What I mean by that is it's across, building IP across multiple channels. So whether it's games, books, movies, merch, that's something that you don't really see done anywhere else as well.

And so for Sony, they're in a unique decision where going back to this anime number of 30 billion, most of it's merchandise. And the video game part of it is not actually tapped into as much as we think. And if you look at the overlap of people who love anime and people who play video games, it's actually very high. And so you wonder yourself, why isn't there more monetization happening on the games front? Because that's actually a really great place to monetize.

Well, there is this company called Bandai Namco that is doing this, and they have a strong hold on top anime IP and games. And I think Sony is in a great place to start going down this path of building out anime content for games, but being able to say, we'll leverage our global presence of PlayStation, and then we'll leverage the fact that we have the platform that everyone is watching on.

And remember, part of that power of having a streaming platform is you see what people watch. You can then tailor your future content to that platform.

If we went down the rabbit hole and you had more hours to share, the rabbit hole of subgenres within anime is absolutely fascinating. And you'd be blown away of how much creative content there is because there's things you can do with that medium that you can't do with traditional. And in many ways, open up the world of philosophy and life and the challenge that we as humans face in storytelling.

So Sony is definitely thinking about this. They've talked about this. And I think we're also quite excited to see how they connect these dots. Are there unique or innovative ways that they're going about this collaboration or synergy across the platform? They are, Matt. So one of the most interesting moves Sony made this past August, they announced launching a layer two blockchain called Sonium. And Sonium

If I take a step back even further, about two years ago, Sony filed patents around the usage of NFTs to move digital assets across different ecosystems. And so I think when you think about the blockchain application of IP and the idea of owning digital assets, Sony is really, I must say, the best positioned person in the world to

execute it. And they've already started. They've already made a couple of moves. And I'm really excitedly looking to see how this evolves. And I think the other thing that you have to appreciate is Sony, their move here will be very much consumer-led. This is not going to be the iterations of what you've seen before, how you think of NFTs. But

Really, the idea of this is a public blockchain. You own these assets because the concept of owning a digital asset, it's quite novel, but it's something that I really think is one of the game changer aspects of enabling the video game industry to expand its total addressable market in a way that we cannot fathom today.

I mean, just imagine the scenario where in 20 years from now, your portfolio of assets is your home, your car, but also my sword and World of Warcraft that's worth $100,000. It's not too crazy, but I think it's when these big TAM expansions happen is usually when you have big outcomes and success.

We're really watching very closely what Sony is doing here because they obviously have IPs across music, film, anime, and video games. When you put the pieces together, I think you referenced it, you're looking at a $130 billion company in terms of enterprise value. What does it look like just from a consolidated margin standpoint? Any of the high-level metrics that are important to just frame what the business looks like today?

Overall, we think margins double from here, which sounds aggressive, but it's around 10%. It's low 9% to 10%, 80 billion in revenue. And we think if they can double this in the next four or five years...

One, you'll surprise everyone. But two, it's on the back of what I went back to our core thesis. It's on the back of PlayStation and Crunchyroll really hitting this next stride of software-driven businesses and software margins on that front. And I think if you look at Sony at that next stage, so today Sony's earnings are around $11 billion. And you think earnings are going to double from here and get to $20 billion plus.

Well, that's an easily double in terms of return from here. But let's go back to the argument I'm making earlier that I think the multiple should be much higher. Why is this trading at called single digit multiples? Shouldn't this trade on much higher multiple? And if that's the case, we have this multiple expansion part. And so one thing that we always think about in our investment process is we want the double kicker or what I say is the magic window. Our needs growth and multiple expansion is

And in that case, we see Sony as this $400 billion company, a triple from here, but it's because it's being recognized for its leadership and these categories. And it's really a one of one in both of these. I think the question just comes is why are the margins not reflecting that?

We're now entering this next stage where I think you'll see that. And it kind of follows the same playbook that management has laid out for everyone. They've been very good about communicating more so now than I think in previous iterations.

If I were to just dive into those numbers a little bit more on the doubling of the overall Sony margins, it's going to be driven by what is a higher margin business with PlayStation and I'm sure Crunchyroll versus as much the increase in the PlayStation margins themselves that are also going to increase because you need massive incremental margins to get to that true doubling of the overall doubling of margins. So remember, PlayStation ecosystem margins have been compressed significantly.

They're around 11%, 12%. 11%, okay. They should get much higher. And that's part of because of the last four years, this ecosystem has been weighed down by the hardware sales of PS5s and not doing as well as they expected. That changes, I think, next year when you have a console selling title and then you're also entering this next stage of

them leaning into live service games, which feeds more people to subscription. So PlayStation actually margins get to 20 plus percent. That's how we're getting at it to make it work.

And then you look at Crunchyroll and you say, look, so Crunchyroll is this early stage of a business where we think revenues today are around $1.1 billion. And I think Topline is going to grow at a 40% CAGR for five years. You're looking at a business that's close to $9 billion in revenue and with, let's say, Netflix-like margins. That's going to really get us there.

Where we're probably being the most aggressive or the most, let's say, non-consensus is looking at a country role through this lens of this Netflix playbook. But till today, I think...

because it's not broken out separately in its nice clean way, you have to do a bit of back of envelope math to figure it out. But we're not there yet, but that's representing that big of a part of the business, then it will make sense. And then people will say, oh, this is the tech giant who was able to go into streaming platforms in a way that was very niche, looks niche, but then super successfully because it's an area that necessarily it's hard for Netflix to compete with directly. Yeah.

That makes sense. For the Crunchyroll thesis, just in terms of that evolving and playing out over time, how much do you hear the company talk about it, if at all? And...

just the timeline for something like that, as you mentioned, substantial growth, but still at a billion, even with 40% revenue growth, showing up in an $80 billion revenue business, it's going to take some time before it feels like that really moves the needle. So what do you think the timeline looks like for that to really become a meaningful piece of the business? And are you hearing it from the management team that that could be a possibility or a focus for them?

Never known any management teams to give very loose guidance like that. Certainly not that. Yeah, I guess how much does Crunchyroll just come up in the conversation? They've definitely communicated we're going to focus on anime. I think the question just becomes is...

How big of an opportunity? What does it mean for the overall? Too soon. Yep. That's something that we're willing to step out and be a little bold and say, well, based on what I know today, let's be a little visionary because if you ever think about these big outsized returns, they never come from thinking in a linear way. You have to think directionally, am I right? And then more importantly, is there accelerating growth here? And we think

All those pieces are here. And it's a story that's not getting a lot of talk about, but next year will be an important year for it because there's a bunch of events happening in terms of anime next year.

Yep, that makes total sense. And yeah, just given the size and where it is today, it's hard for management to spend a lot of time on that when they have the rest of the business. What would you say are their key areas of focus when you hear them? Does it tend to align with the way that you see, especially in terms of the video game business, the console business, how much of the focus seems to be pointed in that direction, both from the management team, from investors versus other individuals

initiatives within the business. Sometimes these can be challenging because conglomerates can have problem childs or different focus areas when there are crown jewels sitting inside. So what does that look like for Sony? Yeah, I think if I didn't feel like they were not focused on the right things, we wouldn't be having this conversation.

I do feel like the management team really gets it from that, but you're also moving this big tanker 800 pound gorilla. And so what happens in the hardware segment, what happens in the chip segments? When you look at Sony, it was basically for us, it was building six different businesses in one and then seeing, okay, well, the ones that matter, the one that management teams want to go towards, it's clearly entertainment. They have clearly focused that.

And then where they've spent a lot of their messaging, which it's not fully grasped by us, this idea of creative entertainment technologies, because they are a leader in the picture sensors and obviously they have an investment and partnership in Epic Games.

They see this world where they've got this huge, unique position of capturing the physical world right through cameras. And at the same time, in tooling, at the same time, creating content. And then looking at their distribution channels, they own the gaming distribution channel for PlayStation. And now they already have this distribution channel through anime. So I think this next iteration is like, how do we connect these dots together?

So Sony Music, incredible assets. Like it's really a time capsule of human songs, the greatest songs. And great business too. But what's interesting is when they sign up new artists, a lot of artists say, look, we want to do a concert and a video game. And they've done it. They were the pioneer in terms of doing concerts in Fortnite. And I look at that and I say, what music publisher can give you that kind of access?

There's unique moats and there's unique relationships that Sony has. If you put it all together, you're like, wow, this is a real one-on-one and the mansion team sees it and gets it.

Thinking about the industry dynamics, the conglomerate dynamics, M&A is a key piece of this. It sounds like I'll put the spinoff in the M&A category just as a right sizing of the business. What does that look like just in terms of their historical impact?

activity, whether it's being an acquirer, whether it's being someone who divests a lot of assets. And then how do you think they exist within this world of M&A going forward? Because they do have so many interesting assets that could also be an acquirer of assets. Just a general thinking around Sony and M&A would be useful.

Yes, we were in this period of the fourth term where it's the evolving Sony part. So during this period, they've made a bunch of acquisitions. They bought a few game studios, probably the most notable one, you know, was Bungie, which has made a game called Destiny.

And then when you look at the divestiture parts, which will happen next year in financial services, this is all part of this Sony as a creative entertainment company and really focusing on IP. I think they get that and everything they're doing indicates that. Now, where things are getting interesting is for as an industry, obviously gaming IP is

let's say before COVID was looked at and said, oh, it's just games. It's not that big of a deal. Almost like it's for kids. It's a toy. But I think fast forward today and every media giant looks at gaming IP and says, wow, these are probably the best assets because not only are you monetizing in this software virtual world, but you've had things that come over to the world of media. So like The Last of Us is a Sony IP product.

One of the best series ever. Many people didn't even know that was built on a video game. But you're starting to see games cross over to general media and succeed really, really well. I think that opens up the door for potential. If you said, where does potential M&A go towards? It'll still be gaming studios, but it may be towards thinking about, okay,

When we look at these new markets, I touched on places like India and emerging markets, maybe the content they like is a little bit different. Do we need to buy stuff in a more nuanced way? And so between the giants, the Microsoft, the Netflixes, the Sony, Disney's of the world, I think they all recognize what's happening. And this is a question of

Who's going to be more aggressive here? But we've seen some very aggressive moves already. If you were a banker, you wanted to be a video game banker the last five years because you did the biggest deals.

Yes, there's been no shortage of activity or rumored activity, which usually where there's smoke, there's fire. In an example like The Last of Us, which again, was a very interesting development of something that started as a video game. Obviously, that's going to bring a lot of attention and there's marketing and different dynamics like that. Does that show up in the numbers at all? Do you have any sense for when something like that happens? How big of an impact can that be?

And even if it doesn't move the needle for an $80 billion business, I can understand, but they can still be meaningful nonetheless. Do you have any context for what that actually looked like? I think going back to your point, it's hard to know that moving needle, but I do think of this in a slightly different way is that if the competition is for new IP and creative people, which is ultimately what these companies, that is the most valuable asset in any game studio, right?

They'll see that and say, okay, I really like how you did that. I want to come work with you, Sony, instead of working with XYZ competitor. I think there's an intangible benefit where if I take a step back, we do a bunch of work on analysis, looking at number of employees, number of people building games and such like that for game companies. And where the creatives are and where they're going is actually a key part to our analysis.

And I think Sony treats creatives very well. I mean, like I can mention Last of Us, but there was Helldivers, which was a successful game. There's a bunch of titles that Sony comes out and lets these indie studios be indie, but then says leverage our reach so that you can come out and make a big noise in that front. They're in a unique position. And I think they recognize that because I think if you look at back just a Japanese company,

culture and the gaming companies, they all respect the creatives highly and let them do their thing. There are just some companies where in terms of monetization, you can do better because if you look at Korean game companies or Chinese game companies, they have figured out monetization and it's very aggressive. The Japanese game companies are not there yet, but it's changing. Yeah, there's a sliding scale just in terms of the intensity of that monetization.

On the expenses and more thinking about it through the capital expense line, the investment line, what's required for this type of business? When you look at Sony, how much does that swing over the years? As a shareholder, can you see those earnings coming back to you? How do they typically treat capital allocation from that standpoint?

Yeah. So the last phase that we were in, CapEx was rising. And we're now entering this next phase where management teams communicate that CapEx will start coming down with the revenues accelerating because a lot of the investments that they want to make have been made. And so I think we're going to enter a period where Sony has done selective buybacks. And this next phase could be one of those periods in that sense. And I think

That's what makes things interesting is if you just didn't know anything, I didn't care about the qualitative aspects and all this stuff. You just looked at the hard numbers. That's where we expect some change in behavior because you have left this investment phase and now you're going into this real return on capital phase. This is something that management team has communicated and we're excited to see how that plays out on that front.

Yeah, always interesting when there's a shift in terms of whether it's priorities or whether it's the end of a chapter from an investment standpoint, but when there's an opportunity to shift capital allocation. When you look at a conglomerate like this, how do you approach the valuation of this type of business? Okay, so this is a great question. Let's first just look at

our core thesis and break that down. So at a simple level, we try to do a sum of the parts and we say, okay, you've got these six different business units, but the one that we really care about is the entertainment business. And that's where we see the growth. And that's where we see really our edge view. And so we look at PlayStation, we look at Crunchyroll and we say, okay, collectively together,

In the next four or five years, you're going to be doing 10, 11 billion in earnings. And we're going to attach a higher multiple of over 20 times each, 20 times for that group, because they're great assets and they're growing fast. Then we look at the rest of Sony. So financial, hardware, music, picture, music. And we say, okay, let's just use consensus multiples,

continue to grow this in a normal way and don't get too cute because we have an edge view on key parts of it and the rest of it, we just want to keep it simple. So that's at a high level how we're looking at Sony is we've broken down the summit parts and then we're focusing on multiple expansion earnings on the things that we think is really going to change. And then you say, okay, holistically, let's take a step back.

And if I said, okay, Matt, what's a business that in four or five years will do 22, 23, 24 billion earnings with margins of 20%? What's that worth today? And if you actually did that search, it's in media entertainment. It's less than 10 companies and they're all 500 billion plus. If Sony achieves that, based on what I know today and how markets would value such assets, we can get to our triple or even more.

And then you take a step back on the two assets that we care about, Crunchyroll and PlayStation, they reach called 300 million plus fans. And then if you said, look, let's incorporate Sony music into this dynamic too. Yeah, Sony touches over a billion people. I mean, if you look at the top artists that they represent on the publishing side, half the time their artists are at the top of the list. And so...

I think that's worth something, but that reach of user base, well, my argument is that each of these assets have been at slightly different stages of monetization. The PS5 cycle for the first four years has been a lagger in that sense that margins are low, titles weren't as good.

And now we're about to into the next four years where you have a console selling game coming out. You have management team focusing on live service games. And then you have this thing called Crunchyroll, which is the last three, four years got consolidated. And now we're seeing quarter on quarter strong growth of paying subs. So in many ways, it's like you have this big asset that's super mature. They know what they're doing.

But then when you look at the monetization part, like, oh, you're actually early in some things here. And in that way, it's almost different than most stuff that you're used to looking at. When you think about the scale of numbers I'm talking about, you kind of say to yourself, man, this should be more profitable here.

The profit itself will come both from the revenue growth, but then some optimization of margins, whether it's operating leverage or just being more efficient. If you were worried about one of those things more than the other, what would it be? The revenue growth or the ability to achieve those margins that you think are possible? I'm more concerned probably around the cost side, not the revenue side.

And then it goes back down to just, we make estimates and we build operating models. We go beyond the financials. But it's hard to model out something that's so big and does give you good disclosure, but it's not like it's a single asset. There's still more disclosures that would help us get to understanding that. So it's really, you say where I spin my wheels is like, okay, what is the cost structure here?

Because you have over 100,000 employees plus globally on that front. And it's not like they've taken, as you've seen with big tech lately, big haircuts. They've done some layoffs, but it's definitely, if you pushed and you said, could you do more? Probably, right? But no, the revenue side, I don't lose sleep over that part of it.

Yeah, it's very interesting. And it certainly makes sense where you expect sometimes to see operating leverage. It's tricky. You have to make assumptions. But monitoring that and forecasting that is increasingly tough, especially within a business of this size. When you look back over history, were there periods of time where the margin profile of Sony was substantially higher? Was it in the mid-teens at any point? Was there a precedent to look at where...

where they have operated in that space. And where I'm going is sometimes you have companies that get stuck in their ways where they have a single way of operating, which could be tough to break out of, but not sure if there's any history here on that. Yeah, you can go back pretty far, Matt. And realistically, margins have always been low single digits and

We are now entering this next phase of, let's say, the mid-teens. The one part when the margins expanded was obviously post-COVID, where it really expanded. But I think every company that was in game saw that big boost. So if you ask me, it's like, if you look back in time, margins, there's been shares where it's like 4%, 5%, and then you get to 10%, and then you go back down 10%.

I'm really arguing this next stage is the new norm should be closer to that 20%. If we get there, then the multiple will take care of itself and people will look at this asset and say, wow, this is now running at a next level in terms of speed. Just thinking about the gaming business and PlayStation itself,

that thesis. I think we know Grand Theft Auto is important to the sale of the console. What other titles do you think really stand out? Are there other pieces of that business that you think are really important to monitor? And whether it's their crown jewels, or they're just important inflections, titles that really have your eye within that business?

Actually, I would just take a step back and say, when you look at the console market, the part that's not getting enough talk is the emerging market story, China and India. When you look at that market and you say, wow, there's only 20 million console gamers in China out of 600 million.

We can grow a lot there. And then you look at a market like India, where for the first time, PlayStation is dominant in India. There's no one even close there. But it's a $200 million market for them, which is a drop in the bucket. But for the first time, it grew 50% year over year. And it's less than a million people on consoles in India. And I said, wow, so gaming in India is about a $500 million market, $3 billion total, pretty much all mobile gaming.

In my mind, what's missing or what you need to think about that potentially surprise you over 10 years will be these markets that were not console markets come up.

But then it goes back to, well, it's because of the rise of the middle class in these countries. Now, China has its own different dynamics, which we can talk about. But the India story is very clear in my mind where that's going on that front. And then I do think Sony recognizes that because they have created a focused effort in investing in IP in India and supporting the local gaming market on that front.

Yeah, if you were to dive a layer deeper in terms of what was the issue or why there isn't a bigger console market there today, is it the cost and the pricing of the console or the titles? It's cost every merger market. Remember, you have to have a TV and you're going to spend a couple hundred dollars to buy a device to play a game.

No, that's too much of an ask. That's why console market was pretty much in North America and Europe on that front. And so console, if you think about it, it's the user-based part hasn't grown as fast, but I think that can change if the emerging market story picks up on that front. The other thing to remember is that within the developed markets, within the US, I think console grows because spend power of gamers increases materially.

So to give you some thought process about how that looks like, you have games that are just starting to incorporate live service game, live service in a way that they did in the past. We're still early innings of...

That model of in-game purchase is being explored. And then you also have a millennial gamer like myself where we're entering our 40s and our spending power is only getting higher. But with that, gaming is probably the most value for money in terms of time spent. And we're showing that love by going to watch shows like Last of Us and then buying merch.

It's an exciting time on that front of what it means for being a developed market gamer. Yeah, the world of IP is fascinating and it's interesting to see how the video game world has evolved around a lot of that IP, especially recently. When you think about the risks associated with Sony, what stands out the most to you, whether it's the thesis specifically or just Sony more broadly? There's a couple of ways you can look at the risk here. So,

I think at a conglomerate level, if the capital intensity of the other hardware segments, if that surprises us, then that's a risk. And you got to remember the chip sector, the image sensor business, but they're dominant and it's concentrated within a few customers. And that's a big business. That's $10 billion plus. So you do have this other part of the business that

It's very hard for us to forecast, and that would surprise us at the conglomerate level, because what if we're right about this, but then we're wrong about this? That's there. And then if you think about our gaming console thesis part, the biggest risk that I think many PlayDabble's advocate is the idea of streaming video games. So streaming it directly to your TV, you don't need a console for it.

And my answer to that risk and concern is really just saying, well, if you don't have the IPs, it doesn't really matter because the IP is the key part to the lock-in to these ecosystems. And then the console is more than just this thing that you play. It's actually where you store all your games. The one player that I think could really change the game literally is potentially Netflix because Netflix is installed on everyone's TV.

They have tried to get into games. They've obviously, it's being well-documented, but it's not there yet. And I think they're constantly evaluating that strategy because Netflix competes with sleep and they compete with video game time. So that's maybe the risk would be to our thesis, but a conglomerate and a console thesis level. And then how would you evaluate

management for Sony. I think it's one of those things that's evolving in Japan, well-documented. But where would you put Sony's management just into the category of decision-making and track record? Yeah. So I think since Mr. Yoshida took over as president, CEO in 2018, this is when you really started to see this focus and shift of Sony towards here.

And if you looked at kind of from 2018 onwards, you looked at every materials that they put out, you could even see that it's becoming more and more of a focused message because they see what they're really great at. And it's definitely on content. It's definitely on IP. But I think if you talk to anyone off the street, they'll just think of hardware and TVs and Walkmans if you're in the past.

And Manto team has put in a big effort around that. So I think they're doing a good job on that front. And where I think things get interesting is around the disclosure of a country role where people see, oh, buried in this conglomerate is this potentially massive business at Netflix scale. That gets kind of exciting. When you think about finding these undiscovered gems, there's a gem of a business there in that sense.

Yeah, fascinating. It's been an excellent pairing with your thesis. What would you say are the key lessons that stand out from studying Sony, from researching Sony, that you could potentially apply elsewhere as an investor that cross takeaways from Sony?

There's multiple ways you can win in public markets. And our favorite has always been margin expansion stories because it takes a little bit more work and effort than just, hey, here's this big TAM, here's revenue growth, and I buy. And I think a lot of growth and tech investors do that. But get down to the margin, get down to the bottom line. And can you see that expanding sustainably over a long period?

And if you get that right, that's the lesson that I try to replicate in all of our other investments out there. The other one, which is one that we've learned the hard way, has been when we invested in Japan, if you can't get the management team to see the vision that you see and communicate that,

that doesn't work really well. And in the case of Sony, they've actually been very good about that. And I think the efforts that they put out around saying we're going to focus on the anime and the communication that they've done around the PlayStation ecosystem further indicates that. To me, the lesson here, which hopefully we will see over time, is improving corporate disclosure,

and putting more of a light on this gem of a business and then allowing public investors like ourselves to break apart the pieces and say, okay, here's some of the parts that look like. Because if you just go look at it on your own, it's a pretty intimidating analysis when you have such a big business, 80 billion plus across six divisions. But yeah, I think that's the lesson learned here is continue to simplify that. And it's gotten better, but we're doing our part too. Yeah.

Yeah, that might be the answer for why conglomerates are less and less popular. It's just too complicated to sort through sometimes. But there might be some gems hidden within the business, in the overall business. Thank you very much, Sia, for sharing the knowledge both on the overview of the video game market, the thesis, and then on Sony itself. It's absolutely my pleasure. Thank you again for your time.

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