MS Q2 Financials

[one]

In the case of the X360 this last holiday season saw some shortages from MS for the Premium and Elite versions.

I don't remember shortages, do you have a link? What I found is an article like this
http://www.informationweek.com/news/showArticle.jhtml?articleID=205918713

Microsoft Xbox 360 Sales Fall 2.3% As 'Halo Effect' Fizzles

Microsoft shipped 4.3 million Xbox 360 systems in the three months ended Dec. 31, compared with 4.4 million systems during the same period in 2006.

By Paul McDougall

1 25, 2008 12:15

Microsoft sold fewer Xbox 360 video game consoles during the lucrative holiday shopping season than it did the previous year -- despite September's launch of the blockbuster Xbox 360 title Halo 3.

Microsoft shipped 4.3 million Xbox 360 systems in the three months ended Dec. 31, compared with 4.4 million systems during the same period in 2006-- a decline of 2.3%.

Overall it looks like a good time to cut the price unless they are really determined to make it a sound business at this point in the console life cycle.

 

[Zaphod]

That's just Paul McDougall not knowing what he's talking about.

Over the following two quarters last year, MS shipped/sold (to retail) about as many (or less) consoles worldwide (going by their financials) as they sold at retail in NA alone (going by NPD). Those shipments in Q3-4 2007 also include the introduction of the Elite, so it seems pretty obvious that those 4.4 million from Q1-2 last year were heavy channel stuffing yielding a combination of being a nice round PR number for the calendar year as well as giving them a lull in which to introduce the Elite and start transitioning to the new motherboards.

 

[one]

That's just Paul McDougall not knowing what he's talking about.

Over the following two quarters last year, MS shipped/sold (to retail) about as many (or less) consoles worldwide (going by their financials) as they sold at retail in NA alone (going by NPD). Those shipments in Q3-4 2007 also include the introduction of the Elite, so it seems pretty obvious that those 4.4 million from Q1-2 last year were heavy channel stuffing yielding a combination of being a nice round PR number for the calendar year as well as giving them a lull in which to introduce the Elite and start transitioning to the new motherboards.

The fact that they could stuff channels shows that they had production capacity to do that in 2006. Do you think they reduced production output for 2007? They have to sell inventory somehow.

 

[Zaphod]

No, I believe it shows that they pretty much sold what they could make both years and that capacity is relatively equal to last year. In Q2 fiscal 2007 this was deliberate channel stuffing, while this year the result might have been minor and localized shortages of some SKUs.

 

[Acert93]

Are people really still argueing about the channel stuffing and MS "sold" versus NPD "sold"? MS stuff the channels in 2006; actual consumer sales are up in 2007 (not down). And Halo 3 actually shipped in September where it made its biggest dent in hardware sales.

 

[assen]

I don't remember shortages, do you have a link?

Search NeoGAF for "retail" - they have this regular "retail reports" types of threads where people working in stores report what is selling and what is in stock. Since mid-December there's overwhelming chatter of Elites and Pros missing everywhere, with only Halo editions and the occasional Arcade in stock; in the latest reports even Halos and Arcades are sold out. It's either channel clearing in preparation for new price and/or SKUs, or criminal incompetence - which, of course, is not a remote possibility

 

[Mintmaster]

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

I never said that I could predict sales, nor the impact of a price drop.

The point of my posts is to illustrate just how much of an impact is necessary to make a price drop worthwhile. Do you really think that a $50 drop will result in 50% boost in sales? Even though I don't know the exact impact, that seems well outside the margin of reasonable expectations.

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?

Scooby, nothing is guaranteed. MS was very aggressive with pricing on the original XBox, and all it got them was a truckload of red ink. Looking at the demographic that MS captured, chances are that they wouldn't have lost a large percentage of sales if they priced it higher, nor would it have impacted 360 sales much. There's not point in going after "lost revenues" if it costs 10x as much to obtain them.

You can't make any judgements with absolute numbers. All that can be done is some market research to try predicting the sales under different pricing scenarios, and then compare relative numbers in the manner I did above. You brush aside the point that Sony may have been successful with higher pricing anyway, but that is at the very crux of the argument.

 

[Mintmaster]

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 think you're being a bit delusional if you think 360 could ever take substantial market away from Nintendo. Even if 360 cost $50 less than the Wii, it wouldn't sell as much. Nintendo has an image of fun it built over decades that MS's entertainment division could only dream of. The software is also largely exclusive.

MS didn't price themselves out of anything. They just accepted reality and went after the market they were capable of capturing. That a large percentage of their sales are to PS2 owners who never owned the original XBox is already impressive. Even if Sony starts catching up in monthly sales, it doesn't mean MS had the wrong pricing strategy or dropped the ball. They could well be operating at peak lifetime profitability right now.

 

[Johnny Awesome]

I agree with you Mintmaster. There is only so much use in chasing after casual gamers at huge losses. The Sony and Nintendo brands are still pretty strong.

Lowering the price isn't going to make someone who wants to play Wii Sports go out and get an X360 Arcade, or someone that wants to be able to play FFXIII, GT5, and MGS4 or watch Blue Ray movies get an X360 instead of a PS3.

What IS true is that at each lower pricing level more people that want a particular console will take the plunge and get that console. ie. The demand for a $300 X360 Pro will be higher than the demand for a $350 X360 Pro. Usually it makes people get the console earlier than they otherwise would have.

Is it worth it for MS to spend an extra $50 to get someone to get an X360 a year earlier than they would have? Probably not. Since the tie ratio is only 7:1 since launch (ie. 27 months) we can conclude that the average X360 gamer will buy 3 games per year. Well, MS isn't going to get their $50 back for that gamer to get in the game a year earlier IMO, especially since that same consumer will probably keep buying games at the tail end of the generation more than the early adopters will, because they will have moved on to other newer systems.

ie. Does MS really care if a gamer buys X360 + games from 2005 - 2010 or from 2008-2013. My guess is that they don't really care as long as they get that gamer.

So how can they lose a gamer? Well, there might be a point at which potential X360 buyers might consider a PS3 if the PS3 gets low enough and has the right software mix, at which point MS has to keep the price differential high enough to make that a very hard decision for that gamer.

IMO $50 right now is enough difference. Why would a potential X360 gamer buy a PS3 and miss out on Bioshock, Halo 3, Mass Effect, etc..? Blu Ray and missing out on these games isn't worth $50 to most of these people yet. $100 is overkill.

I'm of course being very specific about "potential X360 owners" because that is all MS cares about. The guy who HAS to have MGS4 or FFXIII or the girl that HAS to have Singstar is already lost to MS. They can never have them at any price. Why slit your throat trying to chase that gamer?

 

[Shifty Geezer]

Is it worth it for MS to spend an extra $50 to get someone to get an X360 a year earlier than they would have? Probably not. Since the tie ratio is only 7:1 since launch (ie. 27 months) we can conclude that the average X360 gamer will buy 3 games per year.

Tie ratio economics aren't the whole picture though. Downloads could add a lot of extra revenue, both Live Arcade titles and TV/film media. You also have the impact of more sales == more exposure, and friends of that console owner will become more inclined to get the same console if a friend has it than hasn't. If that $50 up front becomes an extra two consoles sold in the following year, wouldn't it be worth it? Critical mass is worth a considerable amount!

 

[Squilliam]

Tie ratio economics aren't the whole picture though. Downloads could add a lot of extra revenue, both Live Arcade titles and TV/film media. You also have the impact of more sales == more exposure, and friends of that console owner will become more inclined to get the same console if a friend has it than hasn't. If that $50 up front becomes an extra two consoles sold in the following year, wouldn't it be worth it? Critical mass is worth a considerable amount!

This is a slight change in direction...

Do you think the 20gb size is enough for all the content a savvy user will want to download and the t.v on demand content as well? People can buy and rent content, but if movies weigh in at 4-5 Gigabibyes, they can't fit more than 2 or 3 onto the console at any one time. Also the Xbox live arcade files can't be bigger than 150mb. Could this limit the revenue potential of the Xbox Live service?

I.E Would the cost of a larger HDD be offset by increased Live downloads and would it be worth the expense?

 

[Johnny Awesome]

A supplemental:

IMO MS knows that the best audience they can hope for this generation is:

Xbox userbase + PS2 action/sports/online gamer userbase that isn't super brand loyal to Sony + more disgruntled PC gamers tired of lack of games and continual hardware upgrades

ie. 25 million + that portion of the 120 million PS2 userbase that is primarily into FPS (Halo, Call of Duty etc...), Madden, TPS (Gears of War, GTA, etc..), + ex-PC gamers

Despite the rhetoric you hear from MS talking heads, they're going to keep trying to get that casual/family Nintendo type demographic, but they realistically know that it will be monumentally difficult.

So IMO the max userbase for the X360 is probably 25 + 30 (25% of 120) + 5 = 60 million gamers.

MS has a plan to grab those 60 million, stealing 30 million from Sony in the process. Nintendo is working on stealing another 30 million from the other side (Singstar casual types).

This almost guarantees the market is going to split three ways almost equally IMO.

That's a huge success for MS to be neck and neck with Sony after only two generation, and profitable.

MS cutting X360 price to $300 last year and then $200 this year is the strategy designed for a company that can sell 120 million units. MS isn't that company, so their strategy of cutting $50 per year will get them to their 60 million units, really hurt Sony's bottom line and ensure that MS continues to encroach on Sony and keep them at bay in the living rooms of tomorrow.

All IMO of course.

 

[Johnny Awesome]

Tie ratio economics aren't the whole picture though. Downloads could add a lot of extra revenue, both Live Arcade titles and TV/film media. You also have the impact of more sales == more exposure, and friends of that console owner will become more inclined to get the same console if a friend has it than hasn't. If that $50 up front becomes an extra two consoles sold in the following year, wouldn't it be worth it? Critical mass is worth a considerable amount!

The principle and theory of what you say is true. It's the magnitudes that I disagree with. Will two people who wouldn't buy one at $350 buy one at $300 because their friend bought one at $350 and exposed them to it earlier, but wouldn't buy one at $300 otherwise? I doubt it.

I think this is very true at the beginning when network effects have yet to be established, but MS is at 10 million units in the US now. The friends effect is in full force now, regardless of a mere extra $50 cut.

 

[Mintmaster]

Tie ratio economics aren't the whole picture though. Downloads could add a lot of extra revenue, both Live Arcade titles and TV/film media.

Sure, but it's all the same in principle as it boils down to how much MS thinks it can get people to spend on accessories/software/downloads for each console. MS just gets a cut of each, so you need a lot of consumer spending to make up for a console price cut.

I agree with you Mintmaster. There is only so much use in chasing after casual gamers at huge losses. The Sony and Nintendo brands are still pretty strong.

Lowering the price isn't going to make someone who wants to play Wii Sports go out and get an X360 Arcade, or someone that wants to be able to play FFXIII, GT5, and MGS4 or watch Blue Ray movies get an X360 instead of a PS3.

I agree with everything you said, Johnny. Forget the 50% improvement needed to make a $50 cut worthwhile, as even 25% is optimistic.

Shifty, you and others have to realize that when MS makes a price cut, doing so loses money on not just the additional consoles you move, but rather all consoles sold. If a price cut gets them 25% more sales, then they need 1/0.25=4 times that in royalties to make it worthwhile, and even this is assuming there is no saturation effect (i.e. more consoles sold today could reduce consoles sold tomorrow - a sort of counter-momentum effect - as Johnny illustrated).

 

[Squilliam]

A supplemental:

IMO MS knows that the best audience they can hope for this generation is:

Xbox userbase + PS2 action/sports/online gamer userbase that isn't super brand loyal to Sony + more disgruntled PC gamers tired of lack of games and continual hardware upgrades

ie. 25 million + that portion of the 120 million PS2 userbase that is primarily into FPS (Halo, Call of Duty etc...), Madden, TPS (Gears of War, GTA, etc..), + ex-PC gamers

Despite the rhetoric you hear from MS talking heads, they're going to keep trying to get that casual/family Nintendo type demographic, but they realistically know that it will be monumentally difficult.

So IMO the max userbase for the X360 is probably 25 + 30 (25% of 120) + 5 = 60 million gamers.

MS has a plan to grab those 60 million, stealing 30 million from Sony in the process. Nintendo is working on stealing another 30 million from the other side (Singstar casual types).

This almost guarantees the market is going to split three ways almost equally IMO.

That's a huge success for MS to be neck and neck with Sony after only two generation, and profitable.
All IMO of course.

I think your analysis is flawed for several reasons.

You haven't accounted at all for new entrants into the market since the PS2 came out. In addition to this, you haven't taken into account the people that buy more than one system. The Wii60 or the Xboxstation type people that get multiple consoles.

Many people who had PS2's when they were younger aren't in the market anymore for another one as they've grown up. Many of the PS2's sold worldwide could have been 2nd consoles in the family and replacements for consoles as they broke down. A PS2 is a DVD player for the kids as much as a game console.

Lastly, THe PS3 has almost as many FPS type games as the Xbox does. So this crowd will still be about as satisfied with the PS3 as the Xbox. Whilst the Xbox may have more games now, when there are enough games on both sides the differences won't matter long term.

 

[Mintmaster]

In addition to this, you haven't taken into account the people that buy more than one system. The Wii60 or the Xboxstation type people that get multiple consoles.

What makes you think this didn't happen last gen as well?

Many people who had PS2's when they were younger aren't in the market anymore for another one as they've grown up. Many of the PS2's sold worldwide could have been 2nd consoles in the family and replacements for consoles as they broke down. A PS2 is a DVD player for the kids as much as a game console.

Again, many of these arguments apply this gen too. Conversely, in 2000 many PS1 owners grew up. The point is that last gen is an indication of the market, and there isn't much reason to believe that it changed much. Johnny isn't really giving an analysis anyway, as he's just estimating what MS can realistically hope to achieve.

Lastly, THe PS3 has almost as many FPS type games as the Xbox does. So this crowd will still be about as satisfied with the PS3 as the Xbox. Whilst the Xbox may have more games now, when there are enough games on both sides the differences won't matter long term.

Again, the point of the post was just to estimate what portion of the market MS can target and capture.

Obviously not every PS2 owner will buy a console this gen, nor will all buyers this gen have a previous console. The point is that there are probably ~200M consoles to be sold, and there probably aren't any drastic changes in the makeup compared to last gen.

 

[Squilliam]

What makes you think this didn't happen last gen as well?

Again, many of these arguments apply this gen too. Conversely, in 2000 many PS1 owners grew up. The point is that last gen is an indication of the market, and there isn't much reason to believe that it changed much. Johnny isn't really giving an analysis anyway, as he's just estimating what MS can realistically hope to achieve.

Again, the point of the post was just to estimate what portion of the market MS can target and capture.

Obviously not every PS2 owner will buy a console this gen, nor will all buyers this gen have a previous console. The point is that there are probably ~200M consoles to be sold, and there probably aren't any drastic changes in the makeup compared to last gen.

I don't think anyone at this point can accurately predict how many consoles and to whom. I think the whole premise of basing console sales on the previous generation has been discredited by the sales success of the Wii and the lack thereof for the PS3. A complete role reversal that absolutely noone predicted would happen in 2006. Applying previous generation stereotypes to this generation is folly IMO.

What this generation has seen, is a breaking down of the normal distinctions between consoles. The Xbox has an excellent online movie/tv/game service. Very useful for a family, especially from the generation that grew up with computers and now know how to take advantage of it.

Im afraid this might be going off topic so I won't continue with this unless a mod give me the O.K

Edit: Yes it's ok. Thanks mod.

 

[Johnny Awesome]

In the end it all boils down to gaming experiences though. Online movie services and blu ray are fairly secondary considerations to the gaming public at large.

I think the last generation is a good guide. Even for Nintendo. They basically used the innovation of the Wii controller to steal from Sony the type of gamer that would have bought a PS2 for Singstar last generation in addition to pleasing their existing 20 million fanbase.

The demographics I mentioned are still in full force IMO. The 8 year old sister from last generation 5 years ago that is now 13 got a Wii this generation instead of a PS3 for her casual gaming needs. In a lot of ways this kind of gamer was Nintendo's 15 years ago. They just lost this gamer to Sony for two generations until they could figure out how to get her back. I'm sure the odd grandma has a Wii, but let's be serious, that phenomenon is overexagerated IMO.

Multi-console owners are still rare. Especially at this point in the generational cycle.

MS was never going to get that 13 year old girl this generation. I don't care if the X360 Arcade is $100. As long as the Wii exists that 13 year old girl will find a way to get the extra $150 so she can have a Wii for $250. If she can't, she'll wait until she can, or wait until the Wii is $200 or $150. She's still not getting an X360 Arcade and for MS to lower the price of that Arcade unit to $200 to chase her is just plain stupid IMO.

You ARE going to generate more demand with an additional $50 price cut, but not enough extra demand to justify the cost at this point in the lifecycle of the console. Especially not during the holidays last year. They ran out of consoles in many areas of the US! Now, we'll get to that saturation point this year at the $350 price point and then MS will be forced to go to $300 to grab the next set of gamers, but last holiday wasn't the time to do it IMO.

 

[iceberg187]

As of result of not being able to find an Elite. I broke down and bought an Arcade with an 120GB hard drive. My console was made December 4th 2007. Quiet as hell. The launch 360 is with the kids.

 

[Squilliam]

You ARE going to generate more demand with an additional $50 price cut, but not enough extra demand to justify the cost at this point in the lifecycle of the console. Especially not during the holidays last year. They ran out of consoles in many areas of the US! Now, we'll get to that saturation point this year at the $350 price point and then MS will be forced to go to $300 to grab the next set of gamers, but last holiday wasn't the time to do it IMO.

I think it's more than just getting more people at a different price point. It's also economics 101. When two items are almost perfect substitutes, when the price of one goes down. The demand for the other goes down as people substitute one for the other. If you take into account the substitution effect, it does make it worthwhile to reduce the price when you can. Furthermore you have "network externalities" which means there are more people playing online, more friends to share games with, more friends to play with etc. This kind of explains the completely irrational fanboyism. Those people know that the more people they get onto "their" system, the better their experience is going to be.

One more thing, the makeup of the house does determine what kind of system. Whether or not "dad and mum" are playing, number and gender of the kids etc. My feeling is that more girls = more Wii's and more older boys = Xbox or PS.

My general feeling is that the Xbox is currently more family friendly than the PS3. This is a floating point as im not sure. I don't have enough flops to argue it anyway.