Why Sony Stock Dropped 12% in March

What happened

Shares of Sony (NYSE: SNE) lost 11.98% in value last month, according to data provided by S&P Global Market Intelligence.

It's been a shaky couple of months for the electronics giant after it posted disappointing operating results for the last quarter in February. The situation didn't get any better in March, as Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google announced plans to launch a cloud gaming subscription service later this year. Investors quickly interpreted that announcement to be the death knell of console makers like Sony.

So what

It's almost a foregone conclusion that gaming will eventually go the way of movies and music by allowing gamers to play unlimited games for a monthly subscription fee. With several companies investing in some form of cloud gaming service, including NVIDIA, Electronic Arts, Tencent, and Microsoft, it's clear the future of gaming is going the way of other entertainment industries that have adopted streaming as the gateway to the consumer.

The launch of cloud gaming services could hurt Sony, which relies on selling pricey PlayStation hardware and then making a profit from sales of games. Sony's game and network services segment generates 30% of the company's operating income.

The entrance into cloud gaming by a major brand like Google presents a significant threat to Sony. Stadia is offering a way to play the latest games on powerful graphics processors set up at Google's data centers and streamed back to the gamer over the cloud. All you need is a high-speed internet connection and access to Google's Chrome browser. No PlayStation required.

Now what

The risk to Sony is clear. However, Sony can shield itself to an extent because it owns the rights to exclusive titles that are only available on PlayStation. The real challenge for Sony may not be losing sales of lower-margin hardware but having to renegotiate pricing for its exclusive titles on third-party subscription services, which could eat into margins over the long term.

Another way out for Sony could be expanding its PlayStation Now streaming service to a more robust cloud gaming offering.

It's not game over for Sony, as the electronics giant does have options to navigate the cloud gaming threat. But the company needs to come up with answers fast if it wants to stay in the game.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. John Ballard owns shares of Electronic Arts and NVIDIA. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, NVIDIA, and Tencent Holdings. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.