MS Q2 Financials

[AlNom]

How many 360s do you have (working) ?

 

[Mintmaster]

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.

We're not trying to accurately predict sales, nor are we using last gen's sales marketshare to predict this gen's.

What Johnny did was characterize the target market in a way that suggests a reasonable upper bound for MS. He looked at last gen to judge gaming preferences of the market, and looked at this gen for sales trends.

 

[Squilliam]

We're not trying to accurately predict sales, nor are we using last gen's sales marketshare to predict this gen's.

What Johnny did was characterize the target market in a way that suggests a reasonable upper bound for MS. He looked at last gen to judge gaming preferences of the market, and looked at this gen for sales trends.

I don't think there is enough information to suggest a reasonable upper limit for hardware sales. Even with the PS2, you had games like Singstar, Eyetoy, Pink Consoles etc. These all broadened the scope of the consoles target market. We are only in the first half of the consoles life cycle, yet we have Xbox Live Arcade, T.V on demand etc. The scope for this generation is much larger than the previous generation. New segments that go beyond the basic casual/hardcore distinctions. Look at the success of Guitar Hero for an exampe of this.

In any case, if you want to make predictions you should pull up better statistics than just numbers sold. Percentage of game types would be a much larger indicator of the market. Sports vs FPS vs Arcade etc.

If Xbox, PS2 and Wii sold 150million between them, why can't we expect sales over double that in the 6-8 years after release?

Grand Theft Auto: San Andreas Rockstar15.23
Gran Turismo 3 A-Spec Sony 14.87
Grand Theft Auto: Vice City Rockstar 14.20
Grand Theft Auto 3 Rockstar 11.60
Gran Turismo 4 Sony 1.16 8.87
Final Fantasy X Square EA 7.95
Need for Speed: Underground EA 6.49
Need for Speed: Underground 2 EA 6.38
Medal Of Honour Frontline EA 6.29
Metal Gear Solid 2: Sons of Liberty Konami 5.56
Kingdom Hearts Square EA 5.50
Final Fantasy X-2 Square Enix 5.21
Final Fantasy XII Square Enix 5.01
Crash Bandicoot: Wrath of Cortex VU Games 4.97
Dragon Quest VIII Enix 3.62 4.69
Medal Of Honour Rising Sun EA 4.65
Madden NFL 2005 EA Sports 4.46
Spiderman: The Movie Activision 4.33
Lord of the Rings: Two Towers EA 4.28
Simpsons: Hit and Run Vivendi 4.24

Look at this top 20 sellers list. Many of these games cater to both casual and dedicated gamers. Madden, GTA, MOH, Gran Turismo etc are examples of this.

 

[Johnny Awesome]

Thanks for the economics lecture, but I have an MA in economics, so no need.

The casual/hardcore designation is too narrow.

IMO the game market will only grow about 20-30% this generation to about 180-200 million gamers, mainly because the Wii will get a few grandmas and a lot of 5 year olds will now be 10 years old and playing games. Most older gamers will continue to game, hence all the articles about the average gamer age increasing.

The past generation IS a guide. It just doesn't tell the whole story...

 

[Squilliam]

Thanks for the economics lecture, but I have an MA in economics, so no need.

The casual/hardcore designation is too narrow.

IMO the game market will only grow about 20-30% this generation to about 180-200 million gamers, mainly because the Wii will get a few grandmas and a lot of 5 year olds will now be 10 years old and playing games. Most older gamers will continue to game, hence all the articles about the average gamer age increasing.

The past generation IS a guide. It just doesn't tell the whole story...

Its my fuzzy C+ Economics from first year

So whats your analysis of the economics of the consoles? Things like price drops, new games etc. I suppose you could say that Halo 3 is complementry to the Xbox. So increased sales in either will increase sales in both for instance.

I think your numbers on potential growth are off. The emerging markets in India and China etc are testament to that. Also the size of the market in western countries is increasing strongly as well due to gaming becoming mainstream. Much to the chagrin of TV executives.

 

[scooby_dooby]

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.

Obviously a huge increase like that is not going to happen, but it's not necessary for the pricedrop to be 'worth it' if that pricedrop leads to increased dominance 2-3 years down the road.

My point was that, you can't be too concerned about how pricecuts impact your short term sales because:
a) It's hard to predict the short term impact.
b) It's nearly impossible to predict the longterm impact.

So, IMO there is no good way to predict when a pricedrop is a good idea at any given moment in time.

All you can do, is have an overall pricing strategy, and follow that through to the end.

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.

MS wasn't really aggressive in my opinion. Aggressive is when you make a pricedrop when you don't really need to. Like Sony did with PS1 and PS2, and MS did not do with the 360.

Having a pricedrop out of pure necessity is not agressive pricing, it's simply doing what you have to do to stay competetive.

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.

I don't brush it aside, I'm saying that there's more to the equation, that's all.

Sony thought there were benefits beyond short term install base, to be had, and they went for them. And considering they were the market leader for 10 years, I think that is enough evidence to prove that there is indeed more to the equation.

Maybe I can put this another way. If MS drops the price now, by $100, maybe they only get an extra 15% of sales in 2008. Ok, at first glance, not worth it right?

But then, perhaps a further drop during Holida 08 causes the PS3 sales to flounder, and see MS's maintaining momentum into 2009. Now, MS becomes the console of choice, and it sees it's strongest year ever in 2010. That dominance could be primarily attrubited to the aggressive pricedrop back in 2008.

Fastforword to 2011, MS has a 65% marketshare in NA (ignoring Nintendo), and launches XBox3 with virtually guaranteed success. Going all the way back...that could be attributed to it's aggressive pricing in 2008/2009.

Of course all these numbers are being pulled out of my ass, I'm just trying to illustrate how a pricedrop can have a cascading affect. And that's why I think a fixation on short term results is a little foolish.

 

[Mintmaster]

My point was that, you can't be too concerned about how pricecuts impact your short term sales because:
a) It's hard to predict the short term impact.
b) It's nearly impossible to predict the longterm impact.

Scooby, for the last time I am not talking only about short term impact. I'm just saying that you need a lot more sales overall - long term and short term - to make a price drop worthwhile.

So, IMO there is no good way to predict when a pricedrop is a good idea at any given moment in time.

I'm not doing any prediction. I'm saying that given a prediction of the two scenarios we can judge whether a price drop is good or not.

I'm also saying that for any reasonable prediction, a price drop isn't favourable at this point in time.

MS wasn't really aggressive in my opinion. Aggressive is when you make a pricedrop when you don't really need to.

No, aggressive is when you take a risk by going beyond the currently judged point of optimality. This definition is true for consoles, business, and even sports. MS cut the price of XBox1 to well below the point they thought would maximize profit/minimize loss over its lifetime.

The risk didn't pay off, though, and MS lost a bundle. For Sony it did pay off (but we'll never really know without an alternate universe). That's why it's called a risk, though.

Maybe I can put this another way. If MS drops the price now, by $100, maybe they only get an extra 15% of sales in 2008. Ok, at first glance, not worth it right?

But then, perhaps a further drop during Holida 08 causes the PS3 sales to flounder, and see MS's maintaining momentum into 2009. Now, MS becomes the console of choice, and it sees it's strongest year ever in 2010. That dominance could be primarily attrubited to the aggressive pricedrop back in 2008.

This is not a reasonable prediction, though. How does a 15% improvement in 2008 (~6% in cumulative sales) make it a console of choice? People are going to buy it because 16 friends have it but they wouldn't if only 15 did?

The other aspect you're ignoring is that of "negative momentum", as Johnny described. Some of those 15% would have bought it later anyway when the price went down in the alternate scenario, so buying it now in fact lowers sales in a future quarter.

Finally, you are making a case of $100 now and another, say, $30 for holiday '08 (which IMO is absurd, but I'll humour you). Is that really so much better than just doing a $130 cut for holiday '08? I don't see why your strategy would generate more long term momentum than mine, and there may be even higher holiday sales in my scenario. Among those 6M sales between now and then, though, MS saves $600M while only losing 900K in sales (15%).

Fastforword to 2011, MS has a 65% marketshare in NA (ignoring Nintendo), and launches XBox3 with virtually guaranteed success. Going all the way back...that could be attributed to it's aggressive pricing in 2008/2009.

So now consider yet another scenario where MS didn't cut price as much and only has 50% NA marketshare (meaning that the price cut was responsible for ~40% overall boost from 2008 onwards), but has an extra $2B in their pocket (whether in more profit or less debt). Does that really put them in a worse situation for XBox3?

Not in my book.

 

[Squilliam]

This is not a reasonable prediction, though. How does a 15% improvement in 2008 (~6% in cumulative sales) make it a console of choice? People are going to buy it because 16 friends have it but they wouldn't if only 15 did?

The other aspect you're ignoring is that of "negative momentum", as Johnny described. Some of those 15% would have bought it later anyway when the price went down in the alternate scenario, so buying it now in fact lowers sales in a future quarter.

.

I don't think that's a fair analogy. If johny has an xbox 360 and then his mate steve wants an xbox 360 but thinks it costs too much. Johny sees the price go down and he wants to play online with steve and share games so he encourages him to go out and buy one. They also have a friend called Mike, he kinda wants a PS3 because hes a little concerned about reliability. But two of his friends have an Xbox and they're encouraging him to get an xbox as well. So he gets one. This can apply to both consoles BTW. I saw it all the time in retail. Pretty much only had to ask someone what console their mates had to determine which one they'd get.

Every console sale can have a flow on effect. In addition to this, having consumers substitute your competitors products for your own is always good thing. Im sure that with their attach rate they can sustain taking a loss on the machines again. Also in general, someone who buys your console now, won't buy your competitors' later.

 

[Johnny Awesome]

But MS has already done enough to sustain network effects. They have a 10 million to 3 million userbase advantage in the US and better software, Xbox Live and a lower price. That's enough for now.

 

[Vic]

But MS has already done enough to sustain network effects. They have a 10 million to 3 million userbase advantage in the US and better software, Xbox Live and a lower price. That's enough for now.

Yes but you pay for Live!, and the PS3 offers a HDD and wifi as standard aswell as Blu-ray, which in some peoples opinion (including mine) means that PS3 offers better value.

Plus 360 has been out a whole year longer, so it definately needs a price cut.

 

[Johnny Awesome]

Not really. The price they can charge is determined by value. Consumers largely believe that the X360 offers more value as a platform than the PS3 right now at the $50 discount mark. That's why it sells more.

 

[Vic]

Not really. The price they can charge is determined by value. Consumers largely believe that the X360 offers more value as a platform than the PS3 right now at the $50 discount mark. That's why it sells more.

But its not selling in Europe is it?

And $50 is not a lot. Not when consider the extra HDD space and Blu ray. Many people use wireless nowadays and a wireless dongle will cost you at least $50 anyway.

To me its clear its MS poor costcutting record and RROD have hurt its ability to price cut thus far. Well its gonna hurt a lot more when Nintendo's and Sony's big exclusives drop later this year.

 

[scooby_dooby]

Well its gonna hurt a lot more when Nintendo's and Sony's big exclusives drop later this year.

Meh..we all heard this in 2006 too...

The biggest game coming out this year in EU is not an exclusive, it's GTA4. An aggressive pricedrop by MS in time for GTA, should help them tremendously in EU.

 

[Zassk]

Yes but you pay for Live!, and the PS3 offers a HDD and wifi as standard aswell as Blu-ray, which in some peoples opinion (including mine) means that PS3 offers better value.

The market overall seems to disagree with you, at least in North America. The market seems to feel that Live has greater value than BluRay+wifi.

 

[Mintmaster]

I don't think that's a fair analogy. If johny has an xbox 360 and then his mate steve wants an xbox 360 but thinks it costs too much. Johny sees the price go down and he wants to play online with steve and share games so he encourages him to go out and buy one. They also have a friend called Mike, he kinda wants a PS3 because hes a little concerned about reliability. But two of his friends have an Xbox and they're encouraging him to get an xbox as well. So he gets one. This can apply to both consoles BTW. I saw it all the time in retail. Pretty much only had to ask someone what console their mates had to determine which one they'd get.

What makes you think this anecdotal BS overrules objective analysis of numbers?

scooby is starting with the assumption of two scenarios, and making conclusions out of that. Let me quantify it for you:
A - 360 sells 10M this year without a price cut now
B - 360 sells 11.5M this year with a price cut now (15% more, as scooby said)

So in situation A we have a total of 27M 360's out there, and in situation B we have 28.5M.

How the heck does your silly example apply to situation B but not to situation A? Did those 6% extra consoles cross some magical barrier that starts a snowball effect?

 

[Mintmaster]

To me its clear its MS poor costcutting record and RROD have hurt its ability to price cut thus far.

So MS should be more like Sony and strip features to reduce cost faster? Just kidding, but please realize that you have no idea how fast 360 has been able to cut cost.

RROD is irrelevant. It's a sunk cost. Whether it happened or not, the objective is and always has been to maximize lifetime profit from this point forward. The console selling price that achieves this has little to do with production cost. Whether the console costs $200 or $600 to make doesn't affect the relative impact of a price cut on profitability.

 

[Vic]

Meh..we all heard this in 2006 too...

The biggest game coming out this year in EU is not an exclusive, it's GTA4. An aggressive pricedrop by MS in time for GTA, should help them tremendously in EU.

GTA is bigger than the combined weight of Killzone 2, GT Prologue, MGS 4, Mario Kart, Super Smash Bros Brawl et al?.

MS wont have its own way this year which means its only downhill in Europe IMO. Unless they price-cut.

 

[scooby_dooby]

What makes you think this anecdotal BS overrules objective analysis of numbers?

scooby is starting with the assumption of two scenarios, and making conclusions out of that. Let me quantify it for you:
A - 360 sells 10M this year without a price cut now
B - 360 sells 11.5M this year with a price cut now (15% more, as scooby said)

To be accurate:
B - 360 sells 11.5M this year with a price cut now, causing it's competitor to sell less.

That was the crux of my argument, that an increase in your sales would negatively impact your competitors sales. That's the entire idea behind maintaining momentum.

And 15% was simply a number, not meant to be taken literally. A $100 pricedrop, worldwide in time for GTA, would probably cause a much bigger increase than 15%, but who can say...

 

[Vic]

So MS should be more like Sony and strip features to reduce cost faster? Just kidding, but please realize that you have no idea how fast 360 has been able to cut cost.

RROD is irrelevant. It's a sunk cost. Whether it happened or not, the objective is and always has been to maximize lifetime profit from this point forward. The console selling price that achieves this has little to do with production cost. Whether the console costs $200 or $600 to make doesn't affect the relative impact of a price cut on profitability.

Yeah thats great, except what do I care if they're not cutting the price for the consumer, i.e. me?

£30 in two years? Ridiculous in my opinion.

 

[scooby_dooby]

GTA is bigger than the combined weight of Killzone 2, GT Prologue, MGS 4, Mario Kart, Super Smash Bros Brawl et al?.

MS wont have its own way this year which means its only downhill in Europe IMO. Unless they price-cut.

First of all, I said it was the biggest. And it is. I didn't necessarily say it was bigger than every single other game combined.

But fine, lets run through them.

Killzone 2 - Is what? An unproven IP that could very easily flop, or slip to 2009.
GT Prologue - Is a glorified demo, I think most people are really waiting for GT5.
MGS4 - This series has never generated massive mainstream success. Nowhere near the success of GTA.

Mario Kart, Smash Bros...these have no place in a discussion about PS3 vs 360.

Funnily enough, I agree with you on your general points. MS needs desperately to pricedrop in Europe. They have been extremely slow to pricedrop 360 so far, and will probably pay for it in future sales.

If they continue this extremely conservative pricing model, they will cede the console lead to Sony sooner rather than later. Their window of opportunity to take advantage of the lower BOM on 360 grows smaller by the day.

I'm just sick of hearing "Wait for the big exlcusives"...it's the oldest argument in the book, it's never proven to be true (LAir, R&C, HS, Uncharted...did nothing). If PS3 succeeds in overtaking 360, it will be mostly on the back of it's brand name, maybe bluray, not a few exclusives.

Only GT5 and FF13 hold that sort of power IMO, and neither of those will be released in 2008.