Microsoft's U-Turn Does It No Good

| About: Microsoft Corporation (MSFT)

I did not attend the E3 conference but rather had it covered by four national buyers at large video game retailers -- three from the U.S. and one from Germany -- who then shared their notes and their opinions with me after the event. Since they are the ones who issue the purchase orders for both consoles and games, their opinions in fact are much more important than those of any of the gurus who went there and then offered their insights.

Firstly, they, like everybody else, were surprised by the PS4 triumph and the XBox One fiasco. They believe that three factors will virtually ensure that Sony (NYSE:SNE) will totally clobber Microsoft (NASDAQ:MSFT) when the two machines come to market in November this year:

  • The price differential between the PS4 at $399 and Xbox One's $499 is huge.
  • The fact that Sony has very definitely ruled out any blockage of used games in comparison to Microsoft's wavering and eventual U-turn has already damaged the latter's chances in the eyes of the core gaming consumer group.
  • PS4's GPU appears to have as much as 50% more graphical computational power than the one in the Xbox One. That, coupled with its faster graphics memory, will translate into faster downloads, sharper graphics, and an overall superior gaming experience. As far as the dedicated core gamer is concerned, this is of much greater consequence than the fact that the Xbox One has multimedia capabilities designed to invade the living room as opposed to the gamer's den.

Whatever the reasons were, the impressions the four buyers took away from the E3 were clearly supported by research conducted by IGN. IGN asked 280,000 readers who they thought had been winning at the E3 and the response was that Sony took the top spot with 81% of the votes. Microsoft garnered 12% and Nintendo grabbed the remaining 7%.

Asked about their sales expectations worldwide for the two machines, the four buyers believed that the PS4 would sell about the same number of units as Sony did when it released the PS3 back in 2006, or about 1.8 million units worldwide by end of 2013. In contrast, they also estimated that the Xbox One would sell about a quarter less than when Microsoft launched the Xbox 360 in 2005 -- or about 1.1 million units this year worldwide. They assert that their pre-orders for both machines support this massive differential - approximately three PS4s for every two Xbox Ones.

Microsoft's change of heart regarding used games has not changed these ratios. In fact, its flip flop on the used game issue has not gone down well with GameStop (NYSE:GME) management at all, and they believe that the MS position vis-a-vis used games continues to be hostile. Whatever the case may be, it appears that GME management has instructed its employees to give the PS4 preferential treatment.

If the buyers are correct in their estimates, the outlook for the U.S. video game market has turned modestly positive in that we shall see at least a temporary uptick during the fourth quarter of this year. The graph below shows the anticipated picture at the retail level, not counting online software sales, which of course, are quite substantial:

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Source: NPD data

When pressed for estimates further out, all four buyers became very cautious. They had watched the progress of the Wii U, which, after a very promising start late last year, slowed to a crawl after the first two months. A comparison between the first six months of Wii sales versus Wii U sales tells the story:

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Source: NPD and Klosters Retailer Panel

The difference in performance is even more pronounced in reality since the Wii was out of inventory most of the time until May of 1997, when ramped up factory capacity came fully on stream. In comparison, the Wii U had none of these issues and has, in fact, excess inventory at the major retailers. Target (NYSE:TGT) has already taken action to reduce its overhang by slashing the price of a basic unit from $300 down to $240 and the other retailers are thought to be contemplating similar price cuts.

What worries the buyers when they look at the prospects of the PS4 and Xbox One is that there could be repeat of the Wii U experience -- a very strong start and then very lackluster demand thereafter. In the case of the Wii U, they explain this by pointing to the fact that the early adopters rushed in to buy the new console even before it was released, but that the majority of the consumers, let alone the laggards, never came to the party. If the same happens to the PS4 and the Xbox One, then the sunny spring of the next console cycle could turn into a very dismal summer.

The same buyers also rated the new games presented at the E3. In this context, Sony did less well - weighing the sales potential of these twenty games, Sony came in at 18% of the total versus MS at 22% and Ubisoft at 25%. This is the composite ranking assigned by the four buyers:






Assassin's Creed IV: Black Flag


PS4, Xbox One, PS3, PC, WiiU




PS4, Xbox One, PS3, 360




Xbox One, 360, PC


The Crew


PS4, Xbox One, PC


Ryse: Sons of Rome


Xbox One


Watch Dogs


PS4, Xbox One, PS3


Halo 5


Xbox One


Diablo III


PS4, PS3, 360


Project Spark


Xbox One, PC










Skylanders: Swap Force


PS4, Xbox One, PS3, 360, Wii


Killzone: Shadow Fall




Mario Cart 8

Wii U



Tom Clancy's: The Division


PS4, Xbox One


Beyond: Two Souls




The Witness




Brothers: A Tale of Two Sons


PS3, 360, PC


Zelda: A Link between Worlds


Wii U





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However, the buyers also thought that the twenty games would sell about equally well between the Xbox One and the PS4 with the latter having perhaps a slight edge.

What they also point out is that even given the very significant sales improvement this year because of the forthcoming new console launches, all they expect is a total 2013 retail sales result on par with 2011 and more than 20% below the 2009 peak.

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.