MS Q2 Financials

[Mintmaster]

Successful consoles have a pretty long history of using price cuts to boost sales / carry momentum.

Boosting sales, sure (especially short term), but I'm still not sold on the momentum idea.

I don't think price has a lot to do with that, and it's mostly determined by games and public perception. Under a more aggressive pricing scheme, you advance a lot of sales that you would have had anyway in the future, and that works against momentum. I think most console owners (particularly those that will buy more than just a few games) knew that they'd get one years in advance of purchasing it, even if some haven't decided which one at the time. It's just a question of when.

Advancing sales through accelerated price reduction is not smart when you know the production cost is always falling. To make up this loss, you have to lure a lot of potential buyers of other platforms.

As for traditional momentum concepts, when you've already been out for two years the domino effect of one sale leading to another is greatly diminished. You need a massive sales boost to have an impact in the number of consoles that a buyer's friends have.

$350 is quite expensive. It would be shocking if a significant price cut wouldn't do much. Price sensativities are a real factor. An Xbox 360 at $199 is a totally different product/appeal than a $399 Xbox 360. For those in the know the RRoD issue does cause some hesitation to jump in at $350.

Obviously price is a factor. The problem is that you need a really big sustained sales boost to make it worth it in the end. The $199 market for an HD console isn't going anywhere if MS doesn't go after it now.

While I cannot say I will be shocked if MS doesn't make a move this spring, this slow market period is the ripe time to do a price drop to boost sales during a slow period (you cannot magically bump these sales to the holidays) as well as even out production and supply channels.

There's nothing magic about it. If someone is only going to buy a 360 Pro for $300 and not more, what's he going to do if MS doesn't cut the price now? Spend $400 on a PS3? Is he going to snub MS when it goes down to $300 or less during the holidays?

Point taken about production, but I don't think that's a major issue. Even storing them in a warehouse is better because MS still gets more profit from those willing to buy at $350.

360 has been offered for $299 for 2 years and now it's $279, it's likely that absolutely price-sensitive people to whom the magic $299 matters are already counted in the current 360 install base.

I think the generally accepted "magic" barrier is $199.

 

[mrcorbo]

360 has been offered for $299 for 2 years and now it's $279, it's likely that absolutely price-sensitive people to whom the magic $299 matters are already counted in the current 360 install base.

Have you followed the relative sales of the core/arcade and premium/pro SKUs? Consumers have largely rejected the HD-less SKUs and the price cut only reinforced the lack of value compared to the premium/pro since they only got a $20 vs. a $50 cut.

Since consumers don't seem to consider the $279 unit a valid option it makes the de facto price of entry $349 even if it is not technically the case.

 

[Squilliam]

It's February, so if theres a price cut it'll either happen in March or April?

When do we usually hear about price cuts? 2 weeks before the fact?

Lastly, whats with the lack of stock? Are they trying to clear out the older models? Or is something up there?

Edit: My speculation, they are migrating their suppliers to a process that has a lower defect rate in anticipation for increased sales later in the year. Perhaps different solder techniques etc. Shut off the factory for a month while the changes are being made?

They would be very concious of anything that can improve the defect rate im sure.

 

[scooby_dooby]

There's nothing magic about it. If someone is only going to buy a 360 Pro for $300 and not more, what's he going to do if MS doesn't cut the price now? Spend $400 on a PS3? Is he going to snub MS when it goes down to $300 or less during the holidays?

A more realistic scenario is a gamer who will not spend more that $199 on a game console, that's just their mental threshold. They would prefer a PS3 (due to the majority of last generation owners owning a playstation), however could be enticed to buy a 360 if the price is right.

That's the market MS needs to be aggressively pursuing. They're still well above the price that the majority of people paid last generation, and as such are not currently appealing to majority of past console owners.

They currently have a situation where they could appeal to that consumer base, when their competition would be unable to. Forcing many of them to switch brands instead of waiting around for the PS3 to come down in price.

If they are lackadaisical about price drops, then eventually Sony will reach cost parity, and they will no longer be able to play that card.

I really think it's a closing window of opportunity, and if they don't use their price advantage now to create a large gap in install base, thus securing additional exclsuives and mainstream acceptance as 'the' console, then they have no hope of outselling the PS3 once it reaches mainstream pricepoints.

 

[Zassk]

A small price cut is coming in Japan... sort of. (Looks like the Arcade SKU is finally hitting Japan, and at a reduced price compared to the Core.)

http://www.iht.com/articles/ap/2008/02/04/business/AS-TEC-Japan-Xbox.php

"The entry-level offering goes on sale March 6 at 27,800 yen (US$260; €175) — about a fifth less than the least expensive Xbox 360 now sold in Japan. The stripped down version went on sale in the U.S. late last year for US$279.99."

 

[Johnny Awesome]

I think you've raised some interesting points Scoob, but the thing I think you're forgetting is that if MS chases the $199 price point, Sony will chase it along with them. This might actually have the reverse effect of what they intend.

I think I can combine some ideas from Scoob, Mint, and myself into a new pricing theory:

Mint and I believe that lowering price to increase sales to the potential userbase is counterproductive if done too quickly, but Scoob pointed out that MS aren't just selling to THEIR potential userbase earlier, but they might also be converting some future PS3 sales into current X360 sales.

I acknowledge that this effect can exist, and also postulate that there is a way of measuring it. MS only needs to track what is happening with PS3 sales. If PS3 sales increase too rapidly, then MS knows they don't have enough of a price differential and they are leaking future sales to Sony.

I'm sure this effect will present itself more as Blu Ray becomes more popular and the PS3 library gets better, but at present I don't think that MS needs more than a $50 differential at the moment. It wouldn't suprise me to know that MS starts drying up at $350 this Spring and needs to lower to $300 regardless, but they also might need to drop more to increase the differential with Sony if BR and PS3 software starts to take off.

So really I think there are two parts to MS pricing strategy: Absolute price ($350) and relative price differential with PS3 ($50).

Currently $350/$50 seems to be very good for MS in NA. They probably need to be $300/$100 in EU.

The next few months of NPD data will tell the full story in NA.

 

[scooby_dooby]

I think you've raised some interesting points Scoob, but the thing I think you're forgetting is that if MS chases the $199 price point, Sony will chase it along with them. This might actually have the reverse effect of what they intend.

Actually, I don't think Sony is in a position right now to match MS if they decide to go aggressive on their pricing.

Though, they are certainly much better off than they were at this time last year, as the window of opportunity continues to shrink.

 

[Shifty Geezer]

Currently $350/$50 seems to be very good for MS in NA. They probably need to be $300/$100 in EU.

Are you excluding the Arcade, and if so, why? Are 'casuals' going to be fussed over the HDD? Current pricing is ~£250 for the XB360 Premium and £280 for PS3 (available e-store prices, can get better deals). High-street stores seem to be at £250 fo rthe XB360 premium and £300 for the PS3, which is your $100 difference already. The Arcade is £190, nigh on $200 difference in price, but it isn't selling en masse. This ought to be the biggest concern for MS - they have the big price advantage, price comparable with a Wii, but still they're not popular. Price isn't winning them much European share. If they already are cheap at the entry-level price, how can they drum up interest and turn that into real sales?

 

[Mintmaster]

The Arcade is £190, nigh on $200 difference in price, but it isn't selling en masse. This ought to be the biggest concern for MS - they have the big price advantage, price comparable with a Wii, but still they're not popular. Price isn't winning them much European share. If they already are cheap at the entry-level price, how can they drum up interest and turn that into real sales?

This is strong evidence for the point that Johnny and I are making. Price can only do so much in a market with significant brand loyalty. The Arcade is more equipped for extra functionality (beyond basic gaming ability) than the PS2 ever was, but it's not doing the trick. Does anyone here really think that offering Pro features at Core price would make that much of a sales impact?

Sometimes you just have to accept that there's nothing you can do with pricing. There's a very real possibility that MS will only lose more money - even in the long term - if it cuts the price in Europe.

I think MS should try it anyway just to see if it makes a difference, but I'm very skeptical that it will be enough to be worthwhile. The good thing is that they can cut the price there and not worry about imports to other regions due to the high taxes.

 

[mrcorbo]

Are you excluding the Arcade, and if so, why? Are 'casuals' going to be fussed over the HDD?

At this price point casuals aren't going to make an impulse buy. They are more than likely going to ask their "gamer" buddy or someone in the store for advice on which model to get and both will try to steer them away from the HD-less SKU for different reasons. The friend will be trying to be helpful and the salesperson will be trying to upsell.

Everyone I have explained the difference in the Non-HD SKUs to has decided to either buy a pro/premium or wait for a price drop. From a value standpoint it just doesn't hold up and that's something even casuals can understand. Now if they ever drop the price of the add-on HD....

 

[Mintmaster]

A more realistic scenario is a gamer who will not spend more that $199 on a game console, that's just their mental threshold. They would prefer a PS3 (due to the majority of last generation owners owning a playstation), however could be enticed to buy a 360 if the price is right.

That's the market MS needs to be aggressively pursuing. They're still well above the price that the majority of people paid last generation, and as such are not currently appealing to majority of past console owners.

You're still not providing a solid argument as to why MS needs to pursue that price point now, nor how they will lose sales to the PS3.

The 360 will reach $199 well before the PS3 unless Sony is willing to eat a far larger loss on each console than MS. There is no doubt about that. It may happen at the end of this year or the beginning of next.

If anyone is truly waiting for a price point as you suggest, then they will jump when a product hits it unless the competition has a price cut looming (which it won't in the case of 360 vs. PS3).

They currently have a situation where they could appeal to that consumer base, when their competition would be unable to. Forcing many of them to switch brands instead of waiting around for the PS3 to come down in price.

If they are lackadaisical about price drops, then eventually Sony will reach cost parity, and they will no longer be able to play that card.

Sony won't ever reach cost parity with 360, nor is that their goal. They want their product to be attractive enough that people will spend more for it, just like PS2 vs. Dreamcast.

I really think it's a closing window of opportunity, and if they don't use their price advantage now to create a large gap in install base, thus securing additional exclsuives and mainstream acceptance as 'the' console, then they have no hope of outselling the PS3 once it reaches mainstream pricepoints.

You are asking for a truly monumental increase in sales to achieve these goals, and it just won't happen with price as the only difference between two sales strategies. You really ought to draw up some fictional scenarios to see how unrealistic your expectations are.

Let's ignore price specifics and look at the extreme example of MS getting a 50% sales boost in Scenario B compared to A.

America 2008:
A - 360 6M, PS3 5M
B - 360 9M, PS3 3.5M (this is the advancing sales effect)

Japan 2008:
A - 360 0.4M, PS3 3M
B - 360 0.6M, PS3 2.9M

Elsewhere 2008:
A - 360 3M, PS3 6M
B - 360 4.5M, PS3 5M

Total marketshare at end of 2008 (assuming Wii sells 12M):
A - Wii 40%, MS 32%, PS3 28%
B - Wii 39%, MS 36%, PS3 25%

Forget about the maybe $1-2B needed that MS would have to pump in to achieve the figures of B. Do those marketshare numbers really differ enough to secure big exclusives? Hell no. In scenario B a 360/PS3 title would lose 41% of its sales by being 360 exclusive, and in A it would lose 47% (assuming equal tie ratios, but even if it's not equal that would apply to both A and B). In both instances MS would have to dish out a substantial sum to get an exclusive.

The impact of securing an exclusive through sales is questionable to begin with. All the titles that make PS3 attractive are first/second party anyway. GTA, GH, and various EA games are the only really big third party titles that I can think of, and MS already did what it could with GTA. If Rockstar went exclusive, they'd probably jeapordize the long term dominance of the franchise, as would EA and Activision with their titles.

A similar argument applies to the networking effect of your friends' consoles affecting your decision. Say you have 10 friends with consoles, and the probabillity that they have a console is as in the marketshare above. You'll probably need a 7/3 split at least to make an impact on the decision. In scenario A there's a 23% chance that MS crosses this threshold, and in scenario B it's 36%. Remember that this is just one factor for the consumer, too.

So even with this huge sales increase (which, IMO, would need an additional ~$100 price cut in B on top of whatever is planned in A), the impact of all the auxillary factors that you mention are fairly constrained.

 

[one]

the salesperson will be trying to upsell.

Really? Aren't plenty of Arcade units on the shelf and in stock already while more expensive models are scarce according to you?

 

[Laa-Yosh]

The market can easily get saturated at a price point, there are only so many people willing to pay $X for a console. Thus a price cut may be required in order to simply maintain sales.

 

[scooby_dooby]

snip.

I must say Mint..you do make a strong case

The only real flaw I see in your argument is you're weighting Japan as if it actually matters to 3rd party developers, the difference in western marketshare is significantly larger than 6%. Also, by including the Wii, you minimize the benefits of extra sales for MS. Most high-end games will not target the Wii at all, and it comes down to PS3 vs 360.

For example, if we look at US Marketshare:

Scenario A: 17million 360's, 9million PS3. (65:35)
Sceneario B: 20million 360's, 7.5million PS3. (73:27)

That is a major difference. And if MS is making profit on the HW, the extra profit from the 3million consoles sold, would help offset the revenues lost on the 6million which would've been sold anyways.

I think Sony would have an extremely hard time recovering if they found themselves in Scenario B at the end of 2008, 360 would run away with the North American market.

The rest of the world, I think you're probably right and pricing can not change things all that much, but in North America the potential is certainly still there to initiate a major momentum shift with an aggressive pricing strategy.

 

[Johnny Awesome]

That's a big IF though. MS probably isn't yet making profits on the hardware due to RRoD problems.

I think in an alternate universe where MS didn't have RRoD problems, they were able to get the process shrink perfected on time, and the US currency had held up on world markets the X360 would probably have already hit $299 and be heading towards $249 pretty shortly.

Sony's floundering has really allowed MS to cover their costs for these problems and still stay competitive in the US market.

 

[mrcorbo]

Really? Aren't plenty of Arcade units on the shelf and in stock already while more expensive models are scarce according to you?

Yes, and...? What of it? This is clearly a recent and temporary phenomenon. If you want to nit pick, yes, clearly salesman are going to try to sell what they have available when they only have the one option. But, since the Pro supply didn't start to dry up until Dec. at the earliest and probably won't stay dried up for too long in the future I would consider it irrelevant.

And does "according to you" mean that you personally doubt the many reports of low or no availability of the Pro SKU?

If you accept that there are shortages, doesn't the ready availability of Arcade SKUs while the Pro SKU is scarce point to the latter being the more attractive option despite the higher price?

 

[Mintmaster]

The only real flaw I see in your argument is you're weighting Japan as if it actually matters to 3rd party developers, the difference in western marketshare is significantly larger than 6%.

For example, if we look at US Marketshare:

Actually, Japan is the least affected region. If we ignore that, then a 360/PS3 dev would lose 45% of its sales by going going 360 exclusive in A and 38% in B, compared to the respective 47% and 41% figures from my previous post. I'm pretty sure they care about the "elsewhere" countries as it's mostly Europe.

I don't see the point in looking at just NA. The only big franchises that focus there in isolation are some of the EA brands, and I seriously doubt that they'd go exclusive. It would open up a major part of the market to a competitor.

(BTW, it's not much larger than 6%. See below).

That is a major difference. And if MS is making profit on the HW, the extra profit from the 3million consoles sold, would help offset the revenues lost on the 6million which would've been sold anyways.

Well that's just dreaming. They're barely making a profit with their current pricing strategy, which I guarantee you does not involve keeping the same price throughout 2008, so expecting one with a further $100+ cut (or whatever is necessary to get a 50% boost) is ridiculous.

I think Sony would have an extremely hard time recovering if they found themselves in Scenario B at the end of 2008, 360 would run away with the North American market.

Do you really see that much difference in the NA isolated numbers? Is a 65% share of the HD consoles at the end of 2008 so much less dominant for MS than a 73% share that it's not worth having around $1B more profit in the former scenario vs the latter?

 

[scooby_dooby]

I don't see the point in looking at just NA. The only big franchises that focus there in isolation are some of the EA brands, and I seriously doubt that they'd go exclusive. It would open up a major part of the market to a competitor.

Because MS can create a snowball effect in NA. Most people are still playing their PS2's/Xbox's waiting for the prices to come down...

Well that's just dreaming. They're barely making a profit with their current pricing strategy, which I guarantee you does not involve keeping the same price throughout 2008, so expecting one with a further $100+ cut (or whatever is necessary to get a 50% boost) is ridiculous.

I'm expecting a $100 pricedrop in 2008, I just think they should do it in spring rather than fall. Admitedly, in order to get a 50% increase in sales, they'd probably have to follow that up with a $50 Holiday pricedrop to $199 for the premium. But anyways...

As for recouping costs, say for example the 360 costs $200 to manufacture (estimated at $320 16 months ago). If they make $150 profit on each console, and sell 6million that's $900million in profit.

If the cut it by $100, and sell 9mill, they generate $450million profit, recouping $150mill on additional sales.

Then add in all the software royalties, XBox Live subscriptions, HD movie sales, and peripheral revenues they generate from any 'converted'' Playstation fans.

Then, add in a virtual guarantee of additional sales in 2009 due to nearly a 3:1 ratio of 360 owners and PS3, rather than 2:1.

At the end of the day, they probably lose 200-300million tops when you count all those deferred revenues. And if sales really snowball, they end up making much much more. Obviously it's about their threshold for risk, to secure the greater reward.

Every single additonal console MS places in consumers hands is going to generate extra revenue through the form of software sales, peripheral sales, live subscriptions, live arcade, Video Store, DLC etc etc etc

Do you really see that much difference in the NA isolated numbers? Is a 65% share of the HD consoles at the end of 2008 so much less dominant for MS than a 73% share that it's not worth having around $1B more profit in the former scenario vs the latter?

It's nowhere $1billion though, they don't have to do worldwide pricedrops.

And I think it's a 65/35 split is totally different scenario than 73/27, where it's really reaching the tipping point of being the mainstream console of choice among the two.

 

[one]

Yes, and...? What of it? This is clearly a recent and temporary phenomenon. If you want to nit pick, yes, clearly salesman are going to try to sell what they have available when they only have the one option. But, since the Pro supply didn't start to dry up until Dec. at the earliest and probably won't stay dried up for too long in the future I would consider it irrelevant.

And does "according to you" mean that you personally doubt the many reports of low or no availability of the Pro SKU?

If you accept that there are shortages, doesn't the ready availability of Arcade SKUs while the Pro SKU is scarce point to the latter being the more attractive option despite the higher price?

I don't see any reason to believe a salesperson tries to sell more expensive versions over Arcade unless they have better margins or they can return any unsold units to MS. Is it the case?

 

[Dave Baumann]

I would expect the retailer margins would be similar across all models, however margins are percentage based, hence they would get higher profit off the higher price models.