Over the past 7 years, there have been two major competitors for the top gaming consoles (not including Nintendo). Microsoft Corporation (NASDAQ:MSFT) with the Xbox and Sony Corporation (NYSE:SNE) with their hugely successful Playstation consoles.
It has been over 7 years since we saw the release of the two companies' last console, the Xbox 360 and Playstation 3. However, as their next generation consoles draw nearer to their release, how should you position yourself to capitalize on this major revenue generator?
Firstly, let's look at some statistics for the Xbox 360 and PS3.
Total Games Sold
Number of Network Subscribers
Despite the delays for the release of the blue ray compatible console from Sony, the PS3 has managed to remain neck and neck with Microsoft when it comes to console sales and has doubled the number of network subscribers (although they do not charge for membership).
Technology has improved in leaps and bounds over the past five years, and it is evident from the progression of the games being released. Whilst I am not going to speculate as to the features on the new consoles, they are sure to be more powerful, have slicker graphics and take a step towards more advanced computing once more.
Sony and Microsoft have kept quiet about specifics of the Xbox 720 and the PS4. It is expected they are both going to release the consoles between this summer (Microsoft) up until Christmas. By making an investment decision now, you can take advantage of a possible jump in earnings at either Q3 (optimistic) or Q4 results. .
Microsoft has seen a gradual decline in the numbers of consoles shipped, as it slipped from 13.7 million in 2011, to 13 million in 2012. However, recent earnings results for 2013 Q1 saw a 56% jump in revenue from Microsoft's Entertainment and Devices division (contains Xbox 360 platform, Skype and Windows Phone) to $2.6bn from $1.6bn in 2012 Q1. This was partly due to increased sales of the Windows phone, but mainly due to $641m in growth from the Xbox business.
Sony as a company has been struggling for the past few years, and their gaming products have been an area which has been costly, through high development costs. Sales of PS3s have been slipping as well.
So Which Console will Generate More Revenue?
It is difficult to tell at this stage, however one can delve into the statistics of current users of the Xbox 360 and PS3. As shown above, the sales for the Xbox 360 and the PS3 hardly differ, and although the statistics are fairly similar, the geographical dominance of each product is intriguing. Microsoft has a strong hold on the US, and Europe, whilst Sony has a greater success in Asia.
It is certain it will be a close call between the two products; however it will come down to other areas of revenue generation associated to the console that will determine their success.
Microsoft has been making steps towards evolving the use of the Xbox 360 and their corporate vice president of the Interactive Entertainment Business said:
We believe that Xbox is being used by more people in the household, during more hours in the day and for more forms of entertainment. People are using Xbox in the morning to work out with the Kinect Nike+ Fitness program, kids are watching cartoons, families are enjoying movies, and of course people are playing blockbuster games like 'Halo 4'.
A third of Xbox users have a Kinect (full body motion controller), and a more advanced version is expected to be released with the Xbox 720 in addition to many more compatible games due to be released in 2013. This is likely to generate a significant amount of revenue going forward and continue to be a bigger part of the entertainment business going forward.
Based on Q1 earnings, Xbox and associated revenue (including the Windows Phone and Skype) account for almost 20% of total revenue. For Sony, this is a slightly less figure at 14%, however it highlights the importance of this business segment for revenue.
Currently I would have to side with Microsoft. This is based on how they have evolved the current system and focused more on entertainment rather than just gaming. The specs from the Xbox 720 and PS4 will likely replicate this. Also, the cash rich Microsoft have ample flexibility in developing the hardware and software further.
Microsoft as a business is financially sound with strong profits and free cash flow. They are likely to outperform Sony over the long term. The release of Windows 8 last year will generate further revenue for the company as the software becomes more widely used. Share price performance has been relatively stable over the long term and year to date it has risen 24%.
Sony has had a more troubled time amongst restructuring and cost cutting. The PS4 will be fundamental in the recovery of the company, and the weaker Yen should help boost exports. Whilst there are many other factors in play, there are certainly headwinds facing this company.
So whether you are a PS3 or Xbox 360 fan, Microsoft would be the way forward for me, and I expect many more will agree. The new release of the Xbox 720 and PS4 will most definitely draw in a lot of revenue and look to boost revenue for both companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.