Seeking Alpha
Long/short equity, value, tech
Profile| Send Message|
( followers)

Summary

  • Xbox One sales have fallen behind PS4 sales despite a strong opening.
  • Kinect has failed to gain user popularity despite package bundling.
  • Microsoft executives have announced their openness to an Xbox sell-off.

Great Success?

Following the successful launches of the first-generation Xbox and second-generation Xbox 360, Microsoft (NASDAQ:MSFT) seemed poised to maintain its dominance in the console gaming realm with the release of the Xbox One. Despite strong opening sales (over one million units were pre-ordered / purchased in the first 24 hours), the Xbox One now finds itself lagging behind Sony's (NYSE:SNE) PS4 in terms of units sold for the fifth month in a row.

(click to enlarge)

(source: stockcharts.com)

What Went Wrong:

Prior to its launch, the Xbox One underwent a PR nightmare. Controversy arose when strict DRM guidelines were announced, essentially requiring Xbox One users to stay connected to the Internet whilst using their console (this was to ensure product authenticity and avoid piracy). Amidst massive public outcry, and strategic "DRM-free" positioning by Sony with its PS4, Microsoft finally backed down and announced that it was revoking its initial DRM mandate. This was only after Microsoft Studios create director Adam Orth sparked an Xbox One hate-train via pointed comments referring to the necessity of always-on DRM. Don Mattrick, the then president of Microsoft's Interactive Entertainment Business, also left the company shortly after the DRM fiasco.

While launch sales still hit estimates, the public misstep illustrated Microsoft's growing disconnect with its consumer base. The Microsoft Kinect, a motion-controlling camera slated to be a revolution in gaming that was bundled with the Xbox One, was also a huge failure. Game developers refused to revolve games around the Kinect's abilities, leaving the secondary device with almost no purpose. Microsoft admitted defeat early last month when it began selling the Xbox One without the Kinect add-on for a $100 discount. The company appears to be backtracking on nearly every major agenda since its E3 showcase, much to the discontent of consumers.

(source: microsoftstore.com)

Xbox One Revenues:

With current Xbox One sales at around 5 million and PS4 sales at 7 million, it's hard to pinpoint exactly what is creating the disparity. More likely than not, it is a result of a number of variables. By the end of May 2014, Sony had spent $59M on advertising for the PS4 to Microsoft's $34.7M for the Xbox One. The Xbox One also launched at a higher price point than the PS4 ($499 vs. $399). Lastly, networking effects may have come into play once the PS4 gained its first sizable advantage - as consumers realized the PS4 was the more popular console they had an additional reason to purchase it, given the importance of having the same device as everyone else.

Interestingly, the success of the Xbox One is not an overwhelmingly important component to Microsoft's financial health. The company's "Devices and Consumer Hardware" revenues, which include the Xbox One, are less than half of revenues derived from Devices and Consumer Licensing, which includes products like Microsoft Office. The proportion is even smaller when comparing actual gross margin ($258M vs. $3.9B). However, Xbox's success is crucial if Microsoft aims to successfully integrate its devices and services sectors, as Xbox One sales can also generate additional content sales.


(source: microsoft.com)

Impact and Options:

And so the choice seems clear - retain ownership of the Xbox, and, if anything, work on PR and perception of the console. Unfortunately, it's not that simple. There is huge competition arising from both the PC-realm and the console-realm. The recent rise in popularity of Valve's Steam client, an online marketplace and platform for PC gaming, poses a potential threat to console gaming as a whole. Additionally, Valve aims on launching their own console, the Steam box, which will have built-in synergies with Steam and be PC-user friendly.

Valve announced earlier this year that they had over 75 million active users on Steam, with over 8 million concurrent users at the beginning of this month. This massive user base, which essentially matches those of the PS4 and Xbox One (taking into consideration multiple users on a single console), can be expected to migrate to Valve's Steam box at a respectable rate.

Conclusion:

This new market segmentation, Sony's growing momentum within the current console war, as well as the increasing popularity of mobile gaming all serve to hinder Microsoft's future success with Xbox. Understandably, Xbox's following is still massive and the revenues non-negligible, though it's worth wondering how the product may cope under the watch of a different corporation.

Microsoft may find it worthwhile to sell off the brand and cash in now, rather than hope to stay relevant under the guidance of already questionable brand management. It is something that even founder Bill Gates has not discounted, stating that the corporation will support Microsoft's new CEO if he chooses to sell the Xbox division. Whether or not Microsoft chooses to extend its ownership of the division or sell is still a toss-up, though I'm willing to bet the choice happens sooner rather than later.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Should Microsoft Sell Off Xbox?