Analyst: PlayStation Network Fiasco Will Be Costly, Change Industry Forever

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You have to sympathize with Sony. Rebuilding the PlayStation Network ground up with a gun to the head was never in the cards. And like any company suffering a sudden, mammoth, shocking customer data breach, it couldn’t have imagined events playing out quite like this.

That’s what caused this mess in the first place, of course. Sony really didn’t think something like this was possible, so when it happened, it did the only thing it could: take the network completely offline. And then it had to be careful what was said publicly, probably to avoid (for as long as possible) spooking “persons of interest” almost surely under investigation.

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What are the long term implications? Where does the company go from here? I spoke with Wedbush Morgan analyst Michael Pachter this morning to get his take, which ranged from empathy with the company’s plight to financial impact guessing to the way he expects the debacle’s lessons to imprint indelibly on the industry.

In the hierarchy of Sony failures, the most egregious is the customer information data breach. Pachter doesn’t think we’ll ever know precisely when Sony knew (not without a paper trail to prove it) but believes they knew there was one early on.

“My guess is that they…couldn’t determine the extent of the breach until the last couple of days, and I have faith that they got a message out to gamers within a reasonable time after they figured it out,” he said in an email. “Of course the brand will be damaged, and of course they have an issue with customer trust–it’s incumbent upon them to fix the problem and assure their customers that it won’t happen again, and they must do whatever they can to rebuild that trust.”

Part of rebuilding could involve giving away freebies like software downloads or offering free PlayStation Plus memberships (the company’s premium tier service), says Pachter, though adding “the most important thing is to demonstrate that they have fixed the problem and that their security is well above the industry standard.”

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Of equal importance: Weighing the financial impact on the company given assumptions about damage to the brand. While the numbers below would seem dear to anyone not an $88 billion a year revenue company, Pachter says they’re hardly back-snapping.

“The financial hit is relatively small, probably $10 million a week in lost revenue, $3 million a week in lost profit, plus whatever they have to give away to restore trust,” he says. “It is pretty unlikely that there will be widespread identity theft or fraudulent card use, but they’ll have to compensate any affected customers.”

Pachter guesses the highest cost will be in public relations expense “just to restore confidence,” and that all-in, it’ll “probably [be] less than $50 million.”

But what PSN members probably want to know most is when, as in “when will Sony relaunch the network?” Pachter thinks soon.

“They can’t afford to be down longer than another week, because they will start to appear incompetent,” says Pachter, adding “The email I received suggested that was the outside limit for downtime, and I believe them.”

Speaking to the broader impact on the industry, Pachter says it’s that “any gaming network must be secure, period.”

“That raises the costs of being in the business, and ultimately, probably means that free gaming networks can’t exist,” he says. “I feel bad for Sony, think that they probably did the best they could, and I truly believe that a determined hacker can get through any security barrier. They’re [Sony] the unfortunate victim of such a determined hacker, and the hack has the consequence of inconveniencing millions of consumers.”