Microsoft: Game On

| About: Microsoft Corporation (MSFT)

The console gaming industry is getting back to the growth with two big launches in the last few days. First Sony (NYSE:SNE) launched its PlayStation 4 and now Microsoft (NASDAQ:MSFT) launched its new Xbox called Xbox One.

Launched on 22 November 2013, Xbox One received a phenomenal reception with record sales in the first 24 hours of launch. Microsoft reported that more than a million Xbox One consoles were sold across 13 countries after hitting shelves less than 24 hours ago. It is the most successful launch in Xbox history.

Video Game Market:

The global video game market includes video game console hardware and software, online, mobile and PC games. The market is expected to reach $111 billion by 2015, from $93 billion in 2012 (see the table below). Video game console market is expected to reach $55 billion in 2015, from $37 billion in 2012.

Xbox One:

Xbox One is the next generation console and is the successor to Microsoft's Xbox 360*. Xbox One comes with Kinect and headset. Moreover, there may be a game included in the package (depends on the location).

*Launched in November 2005, Xbox 360 is one of the top selling consoles with about 80 million console sold across the world since the launch.

Microsoft wants to go beyond the gamers with this console, as it intends to deliver an innovative entertainment experience by bringing movies, music, sports, and live TV together in one place.

New Xbox is an entertainment system not just a gaming platform. Its innovative architecture allows user to switch from a game to TV, movies, fitness, music, sports, the Internet, Skype video chat, etc. with the sound of the voice i.e. voice commands. It allows multitasking as one can make Skype calls, watch TV, use the Internet, etc. while playing a game. It also gives an access to new generation of TV experiences with services like OneGuide, which facilitates the access to shows, apps, channels or games with the Bing natural language voice search. One can also show a slide show with the photos and videos that has been stored in SkyDrive.

As said by Yusuf Mehdi, corporate vice president of Marketing, Strategy and Business, Xbox.

"We believe a truly next-generation system must deliver not only incredible games but also all of the entertainment you love in one device."

Xbox One vs PlayStation 4.

Despite the record sales, the company was not able to match the success of PlayStation 4, which crossed the one million mark within 24 hours in just two countries the U.S. and Canada.

Xbox One and PlayStation 4 are the two most popular consoles in the industry. The key differences between both are the approach and pricing.

  • Approach:

PlayStation 4 has been built for the core gamers as Sony wants to consolidate its position in the gaming industry by offering a high quality console at reasonable price.

Xbox One has been for the gaming as well as home entertainment. Microsoft enhanced its Xbox to act as a multitasking console, which is engaging beyond gaming and can act as a medium to access the Internet, live TV, cloud storage, video calls, music, etc.

  • Pricing:

There is steep price difference between the consoles. Xbox comes with a price tag of $499 while PlayStation 4 is priced at $400.


Xbox is a major part of the company's Devices and Consumer Hardware segment, which contributed 8% of the company's revenues during the last reported quarter. The segment showed the maximum (year-on-year) growth of 37% during the quarter as against overall growth of 16%.

So, it's a small but the fastest growing segment for the company. The launch and initial success of Xbox One will further fuel the growth of the segment.

The success is phenomenal, but not unexpected, as the company was sure about the success of the launch that's why it had built-up the inventory for the consoles.

As mentioned by the company in Q1, 2014, earnings call:

"We expect the launch of Xbox One to be the biggest in Xbox history"

"Our inventory balance sequentially increased by $675 million, mostly due to build the Xbox 360 and Xbox One. Ahead of holiday selling season, Xbox represents over half of our inventory balance."

The initial success was very much expected but not guaranteed. The Company held the significant (over one billion dollar) inventories of Xbox products at the end of the last reported quarter. So, the company may well be feeling relived by the initial success.

Moreover, the initial success of Xbox One will somewhat make it sure that the company will be able to meet the higher end of its revenue guidance for Devices and Consumer Hardware segment. The revenue growth in Consumer Hardware segment will be good enough, for the ongoing quarter, to offset the lower revenue from licenses of Windows OEM and Consumer Office (a key worry for the company).

As mentioned by the company in Q1, 2014, earnings call:

"In Hardware, we expect revenue to grow 35% to 45% to $3.8 billion to $4.1 billion"

The increasing share of Xbox related revenues in the overall segment revenues will also improve the segment margins.

  • Future:

With all new and enhanced Xbox, the company wants to further enhance the life value of Xbox platform by making it more user-friendly and engaging.

This simply means that the company wants to generate more recurring (service related) revenues from Xbox something that Amazon (NASDAQ:AMZN) is doing for years with Kindle. Moreover, with this kind of approach the company may well be able to offer the consoles at low prices in the future. This will help it to compete with its competitors more effectively and also allow it to gather more share of the huge and growing game console market.

All in all, a great news for the company and investors. The company is moving in the right direction as it's increasingly using its Xbox platform to enter the thriving ecosystem of entertainment and communication services. A big positive for the company's near-term as well as long-term future.

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