MS Q2 Financials

[cthellis42]

I know everybody here knows the story but it's worth remembering Xbox 1 was at 199 just 5 months after it's introduction.

You can't really count a situation where MS was 18 months behind (6 in North America) and the PS2 was already cresting 30 million units as a "track record" for price cuts where they were a year ahead, and the PS3 wasn't busting out of the gates at the same rate.

There isn't "due" in general... it's just part of each company's strategy.

 

[Johnny Awesome]

I'm going to stand my ground and state that there wasn't enough latent demand to drop the price to $300. As more and more people get an X360 their friends will want one, you drop price at each level to scoop up more and more of these people. I'm not convinced that the 7 million mark MS was at in the US before the holidays was enough people to scoop up significantly more 1st tier holdouts than a $50 drop would give them. Then they drop another $50 to grab the next group, and the $50 for the next etc...

MS has the momentum in the US. They haven't lost it. Sony had a very average Christmas with the PS3 in the US. They are still doing worse than Dreamcast did in it's first two years. Not good.

I realize it's at a higher price point and they have a lot of upsides to exploit going forward, but the reality is that the average 3rd party game would have sold more on Dreamcast in 2000 than on the PS3 in 2007. That's pretty sad.

MS has a 3-1 userbase advantage in the US over Sony and Sony is bleeding casuals because of the Wii as well. I don't think MS has to worry about momentum.

 

[dobwal]

I personally think MS is doing the right thing and being conservative in its pricing strategy. I think MS should be concentrated on viability of the 360 platform, which means pushing sales but at the same time allowing the 360 to maintain profitability.

Nintendo has been the only player in the market that has been able to maintain longevity and profitability without being number 1 every time out. They've done this by ensuring profitability even with limited marketshare. Every other manufacturer that has failed and left the market has done so because they tied their profits on a sales volume that they never met.

The 360 won't be a 100 million sold console and would be lucky to break the 50-55 million mark. I think its in MS's best interest that they be able to produce a 360 with a 40 million userbase that shows an overall profit.

I don't think MS will maintain its presence in the market just eat 5-6 billion in losses every 5-6 years. I think MS's continuing presence will be dictated by how well the 360 does this generation in terms of profits and not userbase. A longterm MS presence is great for the market as it will ensure that Sony will have added incentive to push its console technology wise as I doubt Nintendo will do much to encourage Sony on that front.

 

[Mintmaster]

You're not factoring in momentum though, which seems to be huge in the console market.

I definately have thought about momentum. You're just thinking in a rather limited context when you read my statement of "50% more sales".

Momentum is just another factor that affects sales. One way of putting it is whether a $50 price cut tomorrow will result in enough of a sales boost by years end compared to a price cut in August. After holiday 2008 momentum will have evened out. If the difference in Jan-Dec sales between the scenarios is about 50% more than the Jan-July sales of the first scenario, then it's probably worth it. For example:

1 - $80 cut in August:
Jan-July sales of 4M, Aug-Dec sales of 8M.
2 - $50 now, $30 more in August :
Jan-July sales of 6M, Aug-Dec sales of 9M.

Scenario 2 costs MS $300M more in loss leading, but by years end they get 3M more consoles out. 3M is 50% of 6M, so it looks like this outcome is favourable (note how this means MS needs to get back $100 per console in games/accessories/downloads to match the profit of scenario 1, which is reasonable). Of course, my numbers are pulled out of my ass. It's rather optimistic to think making a price cut now would have such a big difference.

IMO real momentum isn't really generated by price anyway, and it's the games that do that. Look at the PS3 sales spikes after price cuts that withered away in a few weeks. What's really going to get the PS3 going is GT5, and I don't think a cheaper 360 is much of a lure away from that.

 

[Mintmaster]

I dunno if it's ok to turn this thread into a price cut debate, but Johnny A and Mint, I totally disagree. The bottom line is looking at what 360 is and looking at history, a price cut is way overdue. I know everybody here knows the story but it's worth remembering Xbox 1 was at 199 just 5 months after it's introduction. 360 is now 27 months out and the "base" model is at 349. Next factor is look at what Sony has done, their machine has Blu Ray and is now just 399, only $50 more. Granted they are losing more money but, if MS cant do better than this it's a bit sad.

It's also worth remembering that XBox1 lost 4 billion dollars!!!

By this logic we would never see price cuts. You have to cut the price sometime.

Wrong. You cut the price when the boost in sales is worth it, and at some point it really is worth it and you get a big boost with a small cut. The price elasticity isn't constant, and depends on saturation level (i.e. you eventually run out of people willing to buy $300 consoles) as well as the competition's offerings.

When the PS3 drops to $349 or even $299, then the 360's sales will really drop if they don't cut the price. At that point MS will gain a lot by cutting the price, so it makes sense to do so.

As for Europe, maybe it's worth it and maybe it's not. Maybe having an even larger price difference compared to PS3 won't affect sales much, and they just don't like MS and/or the 360.

 

[mrcorbo]

I'm going to continue to bring up that the reliability issues with the current console design might be giving MS a reason to be conservative when it comes to really pushing sales. From this POV a couple of questionable strategic decisions by MS which don't otherwise make much sense seem more reasonable.

The first is obviously the lack of a price cut for so long and then when they finally did having the cut be fairly minor.

The second and most puzzling was being so conservative with production this year that they ended up short-shipping their best-selling model during the holiday season.

The first is a definite sign of a conservative strategy. Is this them being short-sighted trying to maximize the profits now or is it them not wanting to deal with the long term problem of having an even larger number of consoles in users' possession with a design that is prone to fail?

The second could have been an attempt to make sure that the last of the old models got cleared out of the supply chain, something that is complicated by the fact that they overshipped so much last year to meet their "10M shipped" target.

It seems to me that MS's strategic decisions make a great deal more sense if you look at them as being in a position where they want to sell "just enough" consoles to not lose their momentum, keep their buisness partners in the industry happy, and continue to draw more support to the platform from content providers, but don't want to really sell the console in big numbers until they have a hardware revision in the channel that fixes their reliability issues.

I don't know whether this is actually the truth or not, but I'm just looking at it as an alternate explanation to the popular one which seems to be MS's execs are incompetent.

 

[iceberg187]

I'm going to continue to bring up that the reliability issues with the current console design might be giving MS a reason to be conservative when it comes to really pushing sales. From this POV a couple of questionable strategic decisions by MS which don't otherwise make much sense seem more reasonable.

The first is obviously the lack of a price cut for so long and then when they finally did having the cut be fairly minor.

The second and most puzzling was being so conservative with production this year that they ended up short-shipping their best-selling model during the holiday season.

The first is a definite sign of a conservative strategy. Is this them being short-sighted trying to maximize the profits now or is it them not wanting to deal with the long term problem of having an even larger number of consoles in users' possession with a design that is prone to fail?

The second could have been an attempt to make sure that the last of the old models got cleared out of the supply chain, something that is complicated by the fact that they overshipped so much last year to meet their "10M shipped" target.

It seems to me that MS's strategic decisions make a great deal more sense if you look at them as being in a position where they want to sell "just enough" consoles to not lose their momentum, keep their buisness partners in the industry happy, and continue to draw more support to the platform from content providers, but don't want to really sell the console in big numbers until they have a hardware revision in the channel that fixes their reliability issues.

I don't know whether this is actually the truth or not, but I'm just looking at it as an alternate explanation to the popular one which seems to be MS's execs are incompetent.

Price drops are the biggest console movers this generation, plus there is a thing of not wanting to appear 'scared' in the face of competition. By holding the same price as the PS3 in some aspects, Microsoft wants to show the consumer that they brand can contend with a Playstation at the same price.

 

[scooby_dooby]

I definately have thought about momentum. You're just thinking in a rather limited context when you read my statement of "50% more sales".

Momentum is just another factor that affects sales. One way of putting it is whether a $50 price cut tomorrow will result in enough of a sales boost by years end compared to a price cut in August. After holiday 2008 momentum will have evened out. If the difference in Jan-Dec sales between the scenarios is about 50% more than the Jan-July sales of the first scenario, then it's probably worth it. For example:

1 - $80 cut in August:
Jan-July sales of 4M, Aug-Dec sales of 8M.
2 - $50 now, $30 more in August :
Jan-July sales of 6M, Aug-Dec sales of 9M.

Scenario 2 costs MS $300M more in loss leading, but by years end they get 3M more consoles out. 3M is 50% of 6M, so it looks like this outcome is favourable (note how this means MS needs to get back $100 per console in games/accessories/downloads to match the profit of scenario 1, which is reasonable). Of course, my numbers are pulled out of my ass. It's rather optimistic to think making a price cut now would have such a big difference.

IMO real momentum isn't really generated by price anyway, and it's the games that do that. Look at the PS3 sales spikes after price cuts that withered away in a few weeks. What's really going to get the PS3 going is GT5, and I don't think a cheaper 360 is much of a lure away from that.

But the thing is, it's impossible to predict the impact a pricedrop will have and when. Especially longterm. As one pricedrop sets the stage for an earlier drop next time etc etc

All you can do, is look at your competition, try and predict what they will do, and then do whatever you think you have to to increase your momentum.

Who knows what impact a $100 pricedrop in April, before GTA would have?? Hard to say really.

So, I think the console makers generally have to choose a strategy, and how aggressively you decide to drop price is part of that overall strategy, and you don't get hung up on short term 3 month sales figures.

Who's to say if MS's reactive pricedrop strategy is a good one, I don't know. But I do know how succesful Sony's strategy was with PS2, and while you may point out that they would have been succesful regardless (true), I would argue that the mere fact Sony felt they needed to do so, with all their experience and wisdom, shows that there is more to the equation that the simple formula of short term install base:revenues lost.

For example The position they created with PS2 put them in place to walk away with profits this generation, they screwed it up, but how much is that potential worth?

Sometimes, a runaway success like the Wii would obviously change your strategy. And I think, with MS, the initial lack of success for PS3 has changed theirs, but the time is now(2008) to be aggressive, and to push that cost advantage, or they could easily see their lead slip away.

Which impacts their profits all the way down the line, for years and years on the current 360, and it puts Sony in a stronger position
for PS4. How much are all those lost revenues worth?

 

[Carl B]

By holding the same price as the PS3 in some aspects, Microsoft wants to show the consumer that they brand can contend with a Playstation at the same price.

It's one thing to say what it might achieve, but it's another to claim authoritatively what MS wants.

Personally I'm in the "profit before marketshare" camp here, but at the same time I don't see that as mutually exclusive to a price drop either. In terms of MS' execs though, what we can be sure of is that the present strategy - however it might even be defined - has been judged the best course of action by them. Whether they are right or wrong is open to speculation... we will never know the results of alternate strategies. For now though IMO it seems to be giving the division what it most requires, which is a clear sign that it is not forever destined to losses. I think this has a greater bearing on future XBox support than any market share gains, whatever the hypothetical damage to Sony would or would not be in that scenario.

 

[Laa-Yosh]

People also seem to forget that the PS2 would only work with a memory card, and that was sold separately. Obviously, it had an outrageous price, which lead to Sony instantly reclaiming a good deal of profit lost from the console itself; or if it was already breaking even, then they've made some extra profit.
How much was an 8MB card at launch? The original Sony version still costs $35...! And they've sold at least a hundred million of those... they must have made more than a billion dollars just on this accessory.

Now with the current gen, this revenue stream has been lost, so it certainly plays a part in the lack of price cuts.

 

[cthellis42]

MS has the momentum in the US. They haven't lost it. Sony had a very average Christmas with the PS3 in the US. They are still doing worse than Dreamcast did in it's first two years. Not good.

I realize it's at a higher price point and they have a lot of upsides to exploit going forward, but the reality is that the average 3rd party game would have sold more on Dreamcast in 2000 than on the PS3 in 2007. That's pretty sad.

...and the 360 in 2006? Because if all you're measuring is unit sales straight up...

Isn't it pretty much the same sales rate that the 360 had during its' first year, though? With a bit of a better holiday sales bump at the end of year one because of the price drop, but a bit worse than the 360 this year specifically because of 2007 was delivering some of their most desired titles, while the big ones for the PS3 all slipped to '08.


Admittedly the attach rate is more encouraging, but you're misrepresenting it. (Or just have old info.) Recent numbers mention around 8.8 for the 360, and the Wii and PS3 at around 5; somewhat to be expected while the 360 is running a year ahead and had a full 2007, while the Wii and PS3 especially had major titles aimed to come out in 2008, or ones that slipped there. 2008 will probably see the gap close by about half.

 

[dobwal]

...and the 360 in 2006? Because if all you're measuring is unit sales straight up...

Isn't it pretty much the same sales rate that the 360 had during its' first year, though? With a bit of a better holiday sales bump at the end of year one because of the price drop, but a bit worse than the 360 this year specifically because of 2007 was delivering some of their most desired titles, while the big ones for the PS3 all slipped to '08.

The sale rate in the US of the 360 in 06 versus the PS3 in 07 isn't anywhere near each other. Its something like ~4.5 mil (360) versus ~3.2 mil (PS3). The sales of the PS3 in the US so far is only at 70% of what the 360 did in 06.

Regardless of titles that drop to 08, the PS3 had access to COD4, GHIII, AC, Uncharted and others, while 06 was mostly about Gears of War. Most of those PS3 titles I mentioned are mostly multiplat, but its the multiplat games that seem to have the most traction with the PS3 userbase.

Admittedly the attach rate is more encouraging, but you're misrepresenting it. (Or just have old info.) Recent numbers mention around 8.8 for the 360, and the Wii and PS3 at around 5; somewhat to be expected while the 360 is running a year ahead and had a full 2007, while the Wii and PS3 especially had major titles aimed to come out in 2008, or ones that slipped there. 2008 will probably see the gap close by about half.

The attachment rates has more to do with the extra full year as the 360 reached an attachment rate of over 5 well before the PS3 in terms of time from respective launch.

 

[Zassk]

The attachment rates has more to do with the extra full year as the 360 reached an attachment rate of over 5 well before the PS3 in terms of time from respective launch.

The attach rate speaks more to the attractiveness of software on the platform. If the 2007 software had been bad, then the 360's attach rate would have decreased.

 

[Johnny Awesome]

That's obvious, but nevertheless it still stands that the Dreamcast had a better first two years in the US market than the PS3. That's pretty bad guys. Like I said, it's not all doom and gloom. Sooner or later the PS3 will be $299 and more people will want BR, but Sony's still a LONG way from having momentum.

 

[pipo]

The US isn't the problem IMHO.

They need a very agressive strategy for Europe. I expect a huge push in time for GTA4. They better make sure that everybody knows about the exclusive content too...

It might be their last chance to shift momentum in Europe.

 

[Johnny Awesome]

Those Euros really like their guns and ultra violence.

 

[Silent_Buddha]

Something else you have to keep in mind.

A price drop does you absolutely no good if you cannot supply the potential demand introduced with the price cut.

Or on the other side of the coin...

There's no reason to have a price cut if demand remains roughly even to or close to your ability to supply the product.

In the case of the PS2, Sony was able to crank those suckers out so fast that supply greatly outstripped demand at the price the PS2 was set at. So a price cut there makes sense...

In the case of the X360 this last holiday season saw some shortages from MS for the Premium and Elite versions. Showing that Demand was still greater than Supply. IE - a prime case for NOT cutting prices. A drop in prices at that point would have only made the supply issues worse and not increased marketshare one bit.

Even if supply is now able to meet and exceed demand it STILL isn't the right time for a price cut as right now you want to build up some stock on consoles to be able to meet demand for the next blockbuster title.

Sure at some point, as Mintmaster said, a price drop makes sense. I just don't see it right now. And I personally doubt there will be one this spring. Unless Sony drops the price of the PS3 further, I see no reason for MS to drop the price until possibly the back to school shopping season...around August.

Especially with the upcomign release of GTA4. Which will do more to boost sales than a price drop would.

I would imagine a price drop is most likely to happen...

1. A few months after GTA4 assuming MS has time to build and maintain stock (supply) for the next blockbuster title/holiday season.

2. Shortly after or concurrent with a price drop in the PS3.

I don't see any other scenario's that make all that much sense for dropping the price.

Regards,
SB

 

[dobwal]

Something else you have to keep in mind.

A price drop does you absolutely no good if you cannot supply the potential demand introduced with the price cut.

Or on the other side of the coin...

There's no reason to have a price cut if demand remains roughly even to or close to your ability to supply the product.

In the case of the PS2, Sony was able to crank those suckers out so fast that supply greatly outstripped demand at the price the PS2 was set at. So a price cut there makes sense...

In the case of the X360 this last holiday season saw some shortages from MS for the Premium and Elite versions. Showing that Demand was still greater than Supply. IE - a prime case for NOT cutting prices. A drop in prices at that point would have only made the supply issues worse and not increased marketshare one bit.

Even if supply is now able to meet and exceed demand it STILL isn't the right time for a price cut as right now you want to build up some stock on consoles to be able to meet demand for the next blockbuster title.

Sure at some point, as Mintmaster said, a price drop makes sense. I just don't see it right now. And I personally doubt there will be one this spring. Unless Sony drops the price of the PS3 further, I see no reason for MS to drop the price until possibly the back to school shopping season...around August.

Especially with the upcomign release of GTA4. Which will do more to boost sales than a price drop would.

I would imagine a price drop is most likely to happen...

1. A few months after GTA4 assuming MS has time to build and maintain stock (supply) for the next blockbuster title/holiday season.

2. Shortly after or concurrent with a price drop in the PS3.

I don't see any other scenario's that make all that much sense for dropping the price.

Regards,
SB

There is plenty of reasons to price drop this spring and those reasons are why spring has been the traditional price cutting times for all manufacturers.

You want to keep demand up during the slow months to keep console production from fluctuating too much or maintaining too heavy of an inventory during those slow times.

Spring cuts carry momentum through out the year. When the PS2 dropped to $199 it shot up demand where Sony moved almost 700k in the US in one spring/summer month alone and then saw Sony produce one of the best holiday season for the PS2 ever when it moved 4 million PS2 the following holiday season in the US.

 

[dobwal]

The attach rate speaks more to the attractiveness of software on the platform. If the 2007 software had been bad, then the 360's attach rate would have decreased.

That just goes to show its the attractiveness of the library and not a year head start. The 360's attachment rate was also simply more than the result of heavy sales of big hitters, almost all quality titles from the 360 showed good sales during the first year. The PS3 library had more than Resistance, Motorstorm, COD4 and AC going for it than its first 14 months. There was alot of overachieving going on with the 360 and alot of underperforming on the PS3.

The 360's attached rate is the result of quality titles + a userbase with a huge segment of hardcore gamers.

 

[Acert93]

Looking back on 2007, sales weren't so hot until August with Madden and Bioshock. It wasn't until the fall frenzy that the 360 began to manifest a sales curve distinctive from the Xbox. Sales aren't horrible, but they aren't as great as people are suggesting either. On the profits side, if you substract the RROD fees, the 360 appears to be in position to break even as a product. They are definately not losing money on units sold at the moment and their perephrials are a huge, huge cash cow.

As for momentum and the market, I think too much focus is on Sony and people are ignoring the impact of Nintendo. MS has done very little internally to address this market irt software. The "friends" effect is definately favoring the Wii right now.

Ultimately MS has chosen a business model that makes money on software. As one developer put it, the 360 giveth and taketh. It is supporting strong software sales... for the top tier. But unlike consoles before it, if you miss, you tend to miss very, very hard. This isn't necessarily healthy for the market where a single title can destroy a development team. This is an install base issue that ultimately will impact the sale cap. On the other hand MS, with a strong platform and an early launch as well as demonstrating rough parity with the competition has captured a strong core of the "high volume consumers" and with a high price tag has kept the lower volume consumers away. The return on consumer is pretty high right now, but the reality is the Wii (with profitable hardware and strong 1st party sales) is quickly capturing the market under the 360. In this regards Nintendo has MS in a hard place: Ninny makes money on their hardware, so the lower volume software sales for the low end isn't as devastating. For MS (and Sony) to compete in this market segment they are going to face a crunch on hardware/software.

I still believe, as I did early in 2007, that MS had missfired on a number of fronts (only muted by the compete shambles of the Sony camp and Wii shortages) and 2007 has shown MS has already conceeded momentum and marketshare. MS was doing poorly through the first half of 2007 (if the goal is market leadership to reap the backend of huge software sales) and I really think with the RROD and their unwillingness to gamble as well as their "commitment" to early profits (over lifetime product profits) they have taken an approach to maximize profits through high volume consumers and minimize hardware losses and let the Wii corner the low end of the market.

Of course I do expect further cost reductions and price drops in 2008. Sony has a very strong software lineup in 2008 and the emergance of BDR as the market force for HD optical media will make the PS3 an enticing long term product. Right now MS, imo, has two core demographics in the market (a) those waiting for big profile titles to be released and (b) gamers looking for compelling software to buy. Sony has a clear edge on A with MGS4 and the like; as for B as good as titles like Fable and Alan Wake will be, are these titles going to compell *new* consumers at $350 that titles like Halo, Mass Effect, and so forth didn't in 2007?

Price, back library, and new titles are going to have to find a happy medium in 2008 for MS to continue momentum. Put another way, of a sampling of 100 consumers if you gave them a choice in 2008 of picking up

A PS3, with BDR, a couple free movies and HDD for $400 plus MGS4 or FFXIII /or/ A 360, with a DVD drive and a smaller HDD for $350 (plus Live on top) and Banjo or Fable 2 or AW ... I would be surprised if Sony wasn't able to begin to close the monthly sales volume gap that has existed. Maybe the 360 wins more than 50 of those consumers based on other factors, but right now the PS3 is posed to compete in 2008 and the Wii shows no signs of slowing down.

MS had a great initial plan in place, and with all their follies aside the general execution early on (and strong software support that was promted by the hardware/tools as well as release timing and support that came with the launch plan) has really carried the day up until now. But MS launch plan, which entailed the first 2 years of software, is over. It is time for them to execute "market growth" stage plans. Lets see how they do in 2008.