When Will Microsoft Own Up to the XBox 360 Bomb?

The success (or lack thereof) of Microsoft's (MSFT) Xbox 360 has been a hotly debated topic across both the blogosphere and mainstream media, with an amalgam of sober and utterly confused views depending upon one's vantage point: analyst, investor or gamer.

After taking a step back and looking at some objective numbers - those taken from Microsoft's own financial statements and comparative console sales figures extracted from VGChartz.com and Wikipedia.org - I have concluded the following:

Gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective;

The seeds of this failure are evident from their sales performance in Japan, particularly when comparing their 18 week sales figures (which is about how long the Wii and PS3 have been out) relative to those of the most successful console releases; and

This early failure in the key Japanese market has a compounding negative effect on worldwide console sales, as game developers are less willing to invest in high-risk projects for console platforms that are shaky out-of-the-gates, which makes it less attractive for gamers to buy these consoles, and so on.

Before digging into the data, I'd like to clarify a key point: my perspective is that of a financial analyst. Therefore, my primary interest is in the strategic and financial implications of business decisions, in this case the Xbox 360 and Microsoft's Home & Entertainment strategy, and NOT whether or not the Xbox 360 is a rocking product.

As I've stated before, I have many friends who think the Xbox 360 is awesome. This, however, is not my concern. And to state the obvious for those who know me and/or are regular readers, I am neither a fanboy nor an investor in single stocks, so I have no interest in partisanship one way or the other. I am only interested in truth and understanding, and if a few people get their noses bent out of shape in the process, sorry.

Hemorrhaging Home & Entertainment
Let's first consider Microsoft's Home & Entertainment Division ["H&E"], which includes Xbox 360, Xbox, Xbox Live, Consumer Software and Hardware Products and IPTV. I have used a set of numbers from historical annuals that seem to change by $100 million or so year-to-year; I'm not sure why this is, but the numbers are close. Regardless, it is not a pretty picture from a financial perspective.

Making money, e.g., the creation of long-term shareholder value, has got to be the ultimate driver of Microsoft's gaming (and H&E) strategy, right? Well, after five years and over $21 billion invested all they've got to show for it is $5.4 billion of cumulative operating losses, and Xbox 360 doesn't appear to be the silver bullet to turn things around. I think it is also interesting to note that Microsoft's actual disclosure shows only Revenues and Operating Losses; I backed into and show EXPENSES below for explanatory purposes.

Why might it be that Microsoft has strayed from the classic Revenues - Expenses = Profits (Losses) disclosure? Perhaps because they don't want investors to focus on the fact that over $21 billion - the market cap of a sizable independent company - has been invested in a business that has performed so poorly, with unclear prospects for improvement. Could this be the reason? Hmmm.

Sometimes these cold, stark facts seem to get lost in the shuffle. Xbox 360 (a meaningful part of H&E) might be a fine product, but if so, why is it so financially disastrous to its maker? I understand the concept of selling a console at a loss in order to lay the foundation for recoupment of original investment + operating losses + attractive financial return through gaming, but what is it going to take to turn things around? Nothing short of a tectonic transformation in perception of the Microsoft offering relative to its competitors.

Sure, the Xbox 360 can be righteous and cool with hard-core gamers, but this is not a sufficiently large user base to recoup the magnitude of investment Microsoft has made in its gaming platform. So if this is the strategy, they've got a problem. And if their strategy is really more mass-market, then they've got some serious re-positioning to do relative to the Nintendo's (NTDOY.PK) Wii, which is both cheaper and more accessible to Ma and Pa and Timmy and Tammy gamer. In short, I am at a loss. Correct that: Microsoft is at a loss. $5.4 billion and counting.

The Importance of Japan
It is interesting to consider a few key points about Japan and its role in the gaming world after a little thought and analysis of historical figures:

Success in the Japanese market is a key determinant of success in the worldwide market. In fact, one might say that is a necessary but insufficient condition for a globally successful console platform. Sony and Nintendo have absolutely thrashed Microsoft in Japan, and it shows in the global console sales figures. For historical reference, consider that over 19 million PS1s and 20 million PS2s were sold in Japan alone, close to the worldwide sales figures for the original Xbox console.

Success in the Japanese market is a key part of getting the game developers to buy into a platform, for which they invest substantial sums and create titles, which makes people want to buy consoles with better game libraries. Success in Japan is frequently a precursor to success globally, which makes it particularly attractive for game developers who are looking to amortize their development costs over as large an installed base as possible.

If, for instance, the Wii is hot, you get shops like Electronic Arts (ERTS) turning themselves into pretzels to build their title libraries for the Wii console. And if your particular console isn't hot? Well, let's just say that developers aren't going to be laying out big bucks to invest in the platform.

Success in the Japanese market creates a virtuous cycle - sell consoles, which induces developers to create titles, which makes it easier to sell more consoles, more games, more consoles, etc., etc., etc. In the absence of such a cycle, a console maker is fighting an almost impossible uphill battle towards success on the global stage.

It is instructive to look at where the last major console releases were 18 weeks after launch in Japan. Basically, if you did well in Japan during this time frame, you had a chance to have a blow-out product. If you didn't, well, you didn't.

See how the Xbox did better than the Xbox 360? Even the PS3 has done better than the Xbox 360. But success in Japan is not a guarantee of a run-away success, as the GameCube proved. Without question, Japan is an important and critical market for building a globally successful gaming platform, and an early read of the tea leaves does not bode well for the Xbox 360.

And this is clearly not lost on Ballmer's Boys in Redmond. Remember the promise of runaway success in Japan back in 2005?

From Afterdawn.com 12/04/2005:

By next summer Microsoft hopes to have sold one million Xbox 360 consoles in Japan. This is a pretty high target when you consider that the first Xbox console has not yet even sold half a million units in Japan. Japanese gamers also seem to be more interested in Sony's upcoming PlayStation 3 [PS3] console than the Xbox 360. Japanese Xbox business manager Yoshihiro Maruyama, revealed this target to one-time publication Dengeki Xbox 360.

"It's only a target," Maruyama said, "but the one million mark is a figure we'd like to reach by next summer. And then, we'd like to go to 1.5 million, then 2 million in next year's end of year sales rush. We believe the one million mark to be an important figure. If we cross one million, it will be easier for developers to do business, so we'd of course like to reach it quickly."

Fast forward to today: Mr. Maruyama's words ring hollow. As we approach Summer 2007 Xbox 360 still isn't even at 1 million units. The Japanese launch was a dud, and Mr. Maruyama was subsequently replaced. From Gamesindustrybiz.com 02/16/2006:

Yoshihiro Maruyama, the Microsoft executive who oversaw the launch of the Xbox 360 in Japan, is to take on a new role in the company's entertainment and devices division.

He will be replaced by Takahashi Sensui, who has been at Microsoft Japan for four years and worked closely with Maruyama on the Xbox 360 launch. Sensui, who was previously director of Xbox Japan's marketing department and game content group, will hold the title of general manager.

Quick: Can you name another senior gaming executive that was kicked upstairs after a disappointing product launch? You guessed it, Mr. Ken Kutaragi of Sony (SNE). I feel like we've seen this movie before. And these movies tend not to end well.

An Issue of Strategy
Microsoft management has been talking about cultivating a more global, diversified user base for quite some time. Consider the words of Peter Moore, Microsoft Corporate VP, when speaking at the ELSPA International Games Summit way back in the middle of 2005:

Speaking at the ELSPA International Games Summit in London, Microsoft corporate VP Peter Moore has predicted that the company's first-mover advantage with Xbox 360 will allow the console to reach 10 million installed base "very quickly."

********************

He reiterated his colleague J Allard's comment, made at E3 last month in Los Angeles, that the next-generation could touch a "billion consumers" - but clarified slightly, saying that he was referring to the industry as a whole, including all three next-generation consoles, rather than simply to Xbox 360.

Speaking about the factors which will drive the growth of the next generation, Moore talked about the industry's need to broaden its audience, both geographically and demographically - and highlighted the growth of high definition television as a key factor which will drive next-gen consoles to new consumers.

It seems to me that there is a disconnect between stated objectives, strategy and execution. Microsoft's vision of the gaming console as the window into the living room is a big, big bet, and one that clearly hasn't paid off thus far. Mr. Moore talks about the need to broaden its audience across both geographies and demographics, yet the emphasis on HDTV as being a key factor driving broad-based console sales kind of misses the point.

Is the Wii successful because of its zippy graphics and technological superiority? No. It is successful because it is fun. And because it appeals to a broad audience. And because it is comparatively cheap. The Microsoft strategy sounds more like a niche strategy for hard-core gamers, in which case its investment in a console strategy should be smaller and more targeted. Would Lamborghini try to sell to everyone? Of course not; it would target those who the company knows value its features and are willing to pay for them. This is basic stuff.

They are just not in sync with the Consumer Era of Computing thesis I've written about, something that Apple (AAPL) and others have done quite well. A hard-core high-end gaming console or a console for everyone? The Zune as the answer to the iPod? I don't know who was in those focus groups but clearly that was a misread from a market perspective. Are these miscues a function of unwieldy size or simply flawed strategy? I don't know, but something is clearly amiss. And these weaknesses are apparent all across the firm.

Bottom line, Microsoft needs to take a long, hard look at its gaming strategy - and, in fact, its entire H&E strategy. At what point, regardless of its virtually endless financial resources, does it say "enough is enough." Would we have been better served by returning the extra cash to shareholders rather than investing it in a franchise that seems to have questionable prospects for turning around? These are the kinds of questions Microsoft management should be asking. And hopefully, for shareholders' sakes, they are.

Full Disclosure: The author does not hold a position in the securities of these companies.

Comments

[Tom B:]

Thanks for the wonderfully insightful article. A key point that is missed (source: roughlydrafted.com) is that Xbox sales to RETAILS does not necessarily equal sales to CUSTOMERS.

MSFT has this "Windows everywhere" strategy, which isn't so bad in principal, but clearly fails in execution. They keep plugging away at XBox, even though it is a financial black hole (They have even tried positioning as a way to view HD movies in spite of the fact XBoxes sound like vacuum cleaners). They keep plugging away at Windows Mobile, which has not made money for them, nor has it gaioned much traction in the market after-- what-- 10 years? The Zune-- well-- let us not talk about the Zune. I understand they now come in Pepto-Bismol pink.

Another MSFT agenda is to use market power to overwhelm superior technologies. Part of the XBox agenda was to try to kill off OpenGL by pushing DirectX. Hell will freeze over before they succeed at this, because 3D is simply too important. To my knowledge every PROFESSIONAL 3D app continues to use GL.

To say something nice about MSFT products, I hear "Halo" is a great game (Which they wouldn't have had, BTW, if they hadn't bought up a Mac game company some years ago-- Bungie. Where were the antitrust cops?)

2007 Apr 18 08:58 AM

[Timothy Tripp:]

This is a great article and it’s always useful to get an independent analysis of financial numbers, but I think there are a few missing pieces to this puzzle that help form the whole picture of Microsoft’s apparent stubbornness in this market:

1. Japan has – at least since WWII – been a very closed market to imports of any kind when there are comparable Japanese products in the same markets (with the exception of the iPod, which has been reasonably successful there), so this has been an uphill battle before they ever got started. Japanese gamers generally prefer racing games, RPG games, and puzzle/novelty games much more than Western gamers. Racing games is the only area where Microsoft has some strong offerings, and it’s the only one of the genres that lends itself well to online multiplayer games, which is key to Microsoft’s revenue plans. Europe and the U.S. are generally the money making territories for Western companies and that won’t change any time soon. Western companies can’t ignore Japan, but Japanese consumers buy Japanese products and that’s ingrained in their economy. It may change but it will take a while and a LOT more products like iPod to crack that mentality. South Korea is also helping in this area with their excellent electronics offerings, but there’s still a long road before the average Japanese consumer treats products equally regardless of brand.

2. The 360 itself does not need to be successful financially to be a success for Microsoft. They have found that the Media Center PC has had a large number of configuration and driver issues which have made it difficult for them to get a pipeline into users’ living rooms in any kind of meaningful quantity. While a large number of Media Center PCs have been sold, only a small portion of them are connected to TVs. PCs have also never given Microsoft a good model for a “storefront” to sell additional content to users. Sure, the web itself can give a decent storefront, but the experience of buying, maintaining and playing content such as movies and music is hardly seamless as you see in a controlled system like the 360. More importantly, video content NEEDS to be delivered to the living room – even Apple has now released the $300 Apple TV – and the 360 allows them to do this.

3. Digital Rights Management is a real pain on PCs. The 360, being a closed system with tight protection in place for commercial media sold to the user, finally addresses DRM in a way that is completely transparent for most users. They have a centralized profile management tool (Xbox Live) that users log into (usually immediately and automatically) when they turn on the system. This gives MS an account ID to tie content to, and the content is somewhere between highly improbable to and impossible to decrypt and distribute illegally – a big win for the movie and music property owners. Once Vista is opened to the Xbox Live Marketplace in June, users will also be able to buy and use purchased media on their PCs and eventually mobile devices, which will just continue to make the Microsoft DRM model a win-win for content providers and end-users. The only fly in the ointment for MS may be Sony Pictures and Sony BMG – if these two companies decide to go PS3-only there will be some popular content that will never be available on MS Marketplace. Still, MS will probably acquire or partner with someone who already has applicable rights to Sony content if this happens, and Sony has an even more difficult road ahead for securing 3rd party content in the movie and music markets since they are a direct competitor.

4. IPTV changes everything, and whoever controls the set-top box stands to make a lot of money. IPTV will truly let “mom & pop” users buy things other than PPV movies on their TV. Think of watching theatrical movie previews and buying movie tickets and snacks from your TV, then going to the theater and it’s all ready to go (MovieTickets, Fandango, etc. but without the middle-man). Although certainly not the only unit capable of delivering IPTV, the 360 will make a very good IPTV set-top box with even a 20GB drive - although the upcoming 120GB drive is much more suited to the task – and again the closed nature of the box will make it easier to deploy and support (no strange Taiwanese hardware drivers to worry about crashing users’ systems because no such drivers can be installed in the first place, and no viruses either). Compared to a PC, the 360 looks to be a fine IPTV solution and won’t be “just” a set-top box like other manufacturers will offer.

It all comes down to this: Microsoft needs to develop more revenue streams beyond Windows and Office. As Linux and Google have shown, it’s becoming possible to do business without Microsoft’s core product offerings. MS still controls a huge market share of end-users’ machines, but this may not always be the case and they’d be foolish to assume that they’ll be able to maintain such a monopoly. They have wisely decided to seed many other markets and transform short-term profits from Windows and Office into long-term profits in phones, entertainment hardware and media content. It’s risky, expensive and difficult, but if they succeed they will have secured many years of additional revenue. Look at what’s happening in the phone market now – after 5 years of poor market-share performance in Smartphone and Pocket PC Phone Edition, take a look at the Cingular phones available. Nearly all of their “Smart Phones” are Windows Mobile – only a few BlackBerries, one Palm and one Symbian compared to 9 Windows Mobile devices. This turn-around has only happened in the last year, so if Microsoft had given in to the pressure of nay-sayers in the first 4 years they would have wasted all of that investment. Instead they’ve now created an entirely new revenue stream that also opens up another player for users to play Microsoft DRM protected content. Sounds like a good strategy to me.

2007 Apr 18 10:25 AM

[Tom B:]

'Digital Rights Management is a real pain on PCs' DRM is not the future. Already, the music biz is moving away from it; the video business will have to follow.

"Nearly all of their “Smart Phones” are Windows Mobile – only a few BlackBerries, one Palm and one Symbian compared to 9 Windows Mobile devices."


Number of offerings strikes me as a very dubious metric. Moreover, any blip in the Windows Mobile numbers can best be attributed to the sheer incompetence of Palm's management rather than any sudden interest in MSFT's products. This will all be irrelevant, anyway, soon, as the iPhone heads to market.

2007 Apr 18 11:34 AM

[John Hummel:]

While Mr. Barta argued well on points 2-4 for Mr. Tripp, I would argue that Mr. Tripp's point #1 is erroneous. I have seen this comment elsewhere, which basically boils down to "The Japanese are xenophobes who won't buy anything not maid in Japan".

Even Mr. Tripp mentioned the iPod, but failed to mention Levi's (very popular), McDonald's (incredibly popular), Korean actors (fashionable), French food, and the like. But the key is fitting your product into the demographic. Most "true" sushi does not work for Americans - but a change in the sushi roll (adding mayo and avocado to create the "California roll", for example) has proven to work rather well in the US.

Each of the companies I mentioned above altered their products to the Japanese market - McDonald's offer the teriyaki burger, for example, the iPod can natively accept Japanaese characters without a hitch at all. Microsoft, for the first 5 years of the Xbox, failed miserably to take into account the Japanese taste in gaming. It is only within the last 12 months with the 360 that they have started to show off games that the Japanese market would be interested in.

That failure is not of the Japanese not to buy Microsoft - it is the failure of Microsoft not to tailor their product to the Japanese.

And lastly, as Mr. Ehrenburg states in his article, the US and Europe have *not* proven "profitable" for Microsoft even in the US and European markets, as his analysis indicates. If anything, MS continues to lose money even in those markets that the Xbox brand does well in!

2007 Apr 19 09:32 AM

[60 Hertz:]

Misconception #1: Japanese are nationalistic when it comes to Video Games. False - World Of Warcraft is huge in japan, Crash Bandicoot did extremely well, Tetris is huge. I submit that it's not a nationalistic issue but a quality issue.

Misconception #2: American's dont like RPG's. Sales figures of Final Fantasy, Xenosaga, TEars series are all comparable to Jp sales... THe big difference between Jp and America and Eu and America is AMerican Football... Madden will not top the sales charts in Jp or Eu (but no even mentions this fact...)

Great Article, it's obvious that M$ strategy is to take the hits in hopes of establishing a foothold in this mythical set top box future. Which is funny because i would think the market would tend toward portability, why worry about a set top box when you can do all that stuff and more on you iPhone?

The HD push is madness and (i dont know the figures) but seemed to be a bad gamble. I have a ps3 and probably will get a 360 (for completion) but no way i'm shelling out the dough for and HDTV and i'm hardcore!

There is also the myth of video games being Mass Market, which i guess is true if you define Mass Market as elemteray school to college males. DS was the first true Mass Market machine it attempted to cross genders and age groups, i have yet to see this with either systems. The wii has some mass market titles on the horizon... and yet you here Mass Market bandied around (especially within the industry)... Movies/Music is mass market, hits all ages, classes, genders etc... Until my grandma calls me up talking about the latest gaming triumph she accomplished i think we are a far ways away from being mass market...

Just my 2 (barely coherent) cents...

2007 Apr 19 12:31 PM

[J. Lowther:]

It's simple, really...

MS's only winning strategy is to hold the market with an iron 90% while their "competition" holds a measly 10%. This is their strategy because that's what they did with the OS market and that's what they THOUGHT they were going to do with the gaming industry.

It was arrogant for them to assume they could just waltz into the gaming industry and buy the whole thing out in the first place, but what they REALLY failed to understand is that, every five years during the generation shift, EVERYTHING goes up in the air again. It's not like the OS market where people will be forced to buy their garbage every year: the game market actually functions on quality and every five years, you need to earn your customer base back ALL over again.

MS is too accustomed to a market which equates shooting fish in a barrel. They didn't realize the gaming market is the open range.

And the scarier part for MS? If Apple does with their next OS X release what many are predicting them to do, then there's no longer a compelling reason to own a Windows machine. I'm referring to the hardware-native Windows compatibility which would allow any Mac user to run Windows apps natively on their OS X Intel machine.

With Nintendo edging them out in the gaming market and Apple doing the same in the OS market, MS may quickly find themselves with no profitable divisions left. Don't laugh: it happened to Sony. It can happen to MS just as easily.

2007 Apr 19 05:38 PM

[hiice9itsme...:]

360's main competition is the PS3. Which of course, the article conveiniently ignores. Of course, 360 is more or less destroying the PS3. USA sales to date are 5.3m 360, 1.2m PS3, and 360 has outsold PS3 every month both have been out, where Xbox rarely outsold it's competitor PS2.



5.4 billion losses..who cares? Microsoft has 30 billion in the bank it's shareholders are begging it to spend. 5.4b over six years now, is less than 1B a year, a paltry figure to MS. All that to establish a very powerful Xbox brand in that time, was worth it.



MS is poised to defeat Sony for the high end of the market within two generations, nuff said.



Also Japan is important, but the USA is far MORE important. MS cant do well in Japan because Japanese are extremely nationalistic and for the most part wont buy American industry products. Blaming MS for that is just stupid.



Nintendo can do all it wants with the Wii, the problem is the Wii is not a trojan set top box. That is what MS and Sony are worried about. MS needs to worry about Sony, and they're killing Sony. MS wants to be set up where you get IPTV on your Xbox, you stream PC media on your Xbox, you download movies and TV on your Xbox. So far, it's working out great.

And losses are part of the (non-Nintendo) model, as this maroon might need to learn. How much has Sony lost on PS3 so far? The idea is to win it back over the second half of the life cycle, which it's looking good for 360 to do that for sure.

Does this guy ever look at Sony and say they need to get out of the business? See that's what I dont understand. MS is MUCH richer than Sony as a corporation, yet over the years I've heard so much about how MS is losing too much to continue. But nobody ever says Sony needs to get out of the market. Sony has been barely making a profit, and their videogame division has been losing BILLIONS to support PS3 over the last couple years. Which company is really in a better position here? Where are the constant call that Sony needs to leave videogames? Huh? Huh? Where? It's like "look, Ms is losing billions! They need to leave the industry" "Well, look at Sony over there. They're losing billions too!" "Oh, well, dont worry about Sony! It's ok whenever they lose billions on videogames no problem nobody talk about it or suggest they need to leave the business!". Sorry, that crap is not flying with me.

Like I say, this [analyst] is not very knowledgable about this business. If he was, he should know the normal (not Nintendo) model is, lose money for the first 2-3 years of a console, gain it back and more on the last 2-3 years as hardware costs decrease and software sales rise. It's called CYCLICAL. So how is he surprised that 1.5 years in 360 project has lost money? Seriously how? Has he checked Sony's game division losses? Wow, I think he'll find that shocker, they have a new console and they're losing a lot of money right now! In fact their losses put microsoft's 360 losses to shame! In fact, if he even goes back to check the uber succesful PS2's early years, it lost Sony a lot of money at first too!

This is like videogame business 101, and this guy claims to be a financial analyst writing about this industry. What a joke.

The Xbox, it's true, never gained it's losses back, BUT, the reason was it was built on a bad hardware model. MS bought the chips from Nvidia and Intel who did not lower prices. This time around, MS owns the IP of the chips in 360. They can shop the fabbing anywhere they want, which leads to competition and lower prices, consequently 360 hardware will not be a money pit late in it's life like Xbox was. It will be more like Sony's PS2, which lost a lot of money early on but where is it today? Dirt cheap, profitable hardware, and selling a lot of profitable software. This is a very key point the author doesn't understand, the key difference in the Xbox business model versus the Xbox 360 business model. I recomend for more info on all this, to educate himself as he is obviously very uneducated in this market, he should read Dean Takahashi's book "The Xbox360 uncloaked". This will all be explained in there.

This guy doesn't understand the simple fact that unlike Xbox, Xbox360 is poised to begin making money in years 2 and 3 and on. He's looking at a snapshot 1.5 years in and seeing a small picture, and he doesn't understant the business at all. He could have looked at a snapshot of PS2 1 year in and declared it a failure too, based on his very own reasoning here.

His last sentence:

"With Nintendo edging them out in the gaming market and Apple doing the same in the OS market, MS may quickly find themselves with no profitable divisions left. Don't laugh: it happened to Sony. It can happen to MS just as easily."

Is a joke and proves he's just a dime a dozen virulent Microsoft hater. Apple edging ms out in the OS market? Check their market share sometime dude, I think it's like 2.5%. Apple in the PC space is a corpse. Apple delayed Leopard so they could get Boot Camp to work with Vista. That's Apple's big hope for selling it's OS these days, "hey, you can run Vista on it too! Please buy us..please?" Oh, and wasn't it linux that was supposed to kill windows two years ago? Whatever happened to that? Apple has it's niche market for rich ladies but it's never going to interrupt MS PC dominance as log as you can buy a decent windows laptop for $599 or desktop for $399 a price Apple can never match with their proprietary (and low volume) hardware model.

Anyways back to Xbox360. Looking clearly at the situation we see: Xbox 360 is poised to be profitable, is DESTROYING it's real competitor Sony (outselling it 2-1 monthly in the USA). And as I said, who cares about Nintendo? Nintendo doesn't want to be your set top trojan horse box, and as such they're really not any threat to MS no matter how much they sell. They're a small narrowly focused gaming company, and that's all they'll ever be. A toy company, essentially.

Next we need to talk about Japan. Which is the bigger market USA or Japan? Well, USA=300 million population, Europe=..I dunno, 400-700 million, Japan =128 million. Japan's population is also aging rapidly. Japan has become less and less imprtant in the global games market arguably. Xbox1 pretty much proved you dont need Japan at all to succeed.

Here's another big thing, Western games dont sell in Japan. So guess what, Western developers, crucial to USA and Europe markets, dont care about Japan! They care about..USA 1, Europe 2. And oh look, those happen to be 2 places where Xbox 360 does well. Hmm, lets say Electronic Arts, biggest third party in the world, has a hot new epic game they want to develop. Well, this game will feature hi-def GFX, so the Wii is out. Which will it go to, PS3 or 360? Well, take a guess..360 has ~ 5X the userbase of PS3 and growing...this game is certainly not going to be PS3 exclusive.

Japan has rejected the PS3. It's setting new record sales lows every week and selling under 60k a month there right now. It sold a new record low 13k there last week. Wii is destroying it in Japan. As such, all Japanese devs developing epic high-tech games looking to sell big must look to the West, and what do they see? Xbox360 dominating. Hmm, wonder why DMC4 just jumped ship to 360? Wonder why MGS4 will? Wonder how long Final Fantasy 13 is a PS3 exclusive? It's simple economics my friend. Why would Square stick to PS3? It has an anemic userbase in all territories. They'll either go to 360 also, or go to Wii. They HAVE to. Do you see now?

Finally I want to touch on the Wii. I've already explained how, Wii does not really compete with 360 or PS3. So, even IF it keeps selling as great as it is now, it really will hardly affect the 360. But I think there's a good chance that users tire of the Wii, and that it's sales slow as HDTV gets further adopted. This may or may not happen, but the point is it can only be good for microsoft. If it does, there's a very good chance 360 and not Wii will end up the #1 console in the West, perhaps worldwide.

Xbox 360 has a price cut, Halo 3 and tons of other big epic software (Too Human, Forza 2, Lost Odyessy, Blu Dragon, Shadowrun, Mass Effect, Bioshock) coming this year. It's currently outselling PS3 ~2-1 each month, which will clearly continue all of 2007, and it already has a huge install base lead. It's really lined up incredibly nicely for MS.

2007 Apr 19 10:27 PM

[Tom B:]

"The Xbox, it's true, never gained it's losses back, BUT, the reason was it was built on a bad hardware model. MS bought the chips from Nvidia and Intel who did not lower prices. This time around, MS owns the IP of the chips in 360. They can shop the fabbing anywhere they want, which leads to competition and lower prices, consequently 360 hardware will not be a money pit late in it's life like Xbox was."

Sure, MSFT can keep dumbing down the XBox, but at the same time, low cost personal computers look increasingly competitive by comparison. And they are more flexible than game boxes. I actually wonder if the game console phenomenon will continue. I know more and more game boxes are sold each year, but I am NOT convinced this is an enduring trend.


"Is a joke and proves he's just a dime a dozen virulent Microsoft hater. Apple edging ms out in the OS market? Check their market share sometime dude, I think it's like 2.5%. Apple in the PC space is a corpse. Apple delayed Leopard so they could get Boot Camp to work with Vista."

Apple claims they delayed Leopard so they could make sure the iPhone was as close to perfect as possible going out the door. I have no reason to doubt their word. Boot Camp is a convenience for the millions of happy people upgrading or thinking about upgrading from Windows to Mac, but it is only that, and there are other products, like Crossover that can be used. If delaying Leopard helps Apple avoid releasing a feature-starved, half-baked upgrade, like MSFT did with Vista, so be it. This is good.

2007 Apr 20 09:11 AM

[Alan Williams:]

hiice9itsmeagain,

Microsoft releases numbers of Xbox 360 shipped, not sold. they have sold only about 5 million units world wide. Both PS3 and Wii have outsold Xbox 360 every month since December.

Xbox 360 is a disaster sitting in third place in market share.

Microsoft should stop these hair brained schemes to diversify and start paying the shareholders these billions of dollars of their money that they are squandering.

2007 Apr 20 01:49 AM

[hiice9itsme...:]

360 has sold at least 8-9 million worldwide..NPD figures say 5.3m for th USA. Now add Canada, Australia, Europe, Japan, and a few for the rest of the world.

PS3 has never outsold 360 in US. Worldwide, it's tough to make a case also. PS3 sales are so low in Japan that when you combine Japan+USA, 360 is still outselling PS3, although barely. So you'd just have to guess at EU sales, which I'm sure PS3 won last month, but I dont know that they'll win going forward.

"Third place in market share". [Not Really]. A solid first place worldwide, despite that Japan refuses to buy it for petty reasons. Sure, Wii will overtake 360 in WW sales soon enough, PS3 however, probably never will.

Microsoft can do what they want with their money. If you dont like it, Robbie Bach said go invest elsewhere. BTW, since Sony is already 2+ billion in the hole, shouldn't they also go pay their shareholders instead of these hare-brained videogame schemes? Oh wait, that somehow never applies to Sony..

I've already covered in irrefutable detail how 360 is doing great and and I'm sure MS is very pleased with it. Any profits made from it are just icing on the cake, yet the system will likely be profitable when all is said and done.

2007 Apr 20 05:20 AM

[carleast:]

You can understand why they are trying though. They don't want to rely on Windows.

And here's where I think they're really running scared. My prediction is that over the next few years we'll see our operating systems move online. I think Google will jump in to bed with the Linux developers and offer bespoke operating systems for free. Everything will be done online with all of your data stored on line. then you'll just go to any computer in the world and have access to your own bespoke operating system.

Then we'll all save £100 on every computer we buy because we won't have to fund Microsoft.

2007 Apr 20 09:31 AM

[Tom B:]

Carl, I respectfully disagree. The XBox runs a stripped down version of Windows. MSFT is trying to prop up the increasingly dead horse known as Windows* -- they want to capture more developer eyeballs than Sony and Nintendo.


*Dead I say, because it is isolated as the only widely used OS that has failed to update to a UNIX foundation; thus, it will never meet par with respect to multitasking performance, stability, or security. Already you have LINUX which is vastly superior technologically, and OS X which is vastly superior AND widely supported and convenient-- and runs legacy Windows apps, to ease the transition.

2007 Apr 20 11:42 AM

[genghisbahng:]

I am not an analyst, but a game industry professional. I'd like to clarify a few things:

1) check your data. as Roger indicated in his article, 360 has clear #1 market share WW over Wii and PS3

2) as has been proven many times over in the gaming space, it's about the SOFTWARE. is the DS outselling PSP 2-to1 because it is more powerful, has better graphics? no. it dominates the handheld market because of the incredible number of games that CAN ONLY be found on that system, while PSP has very little to offer that isn't already available on other systems. PS2 crushed its competition by having the widest array of killer, original content available for that generation. Nintendo has a hardcore fan base that will buy any console they make just to play the latest iteration of Mario / Zelda / Pokemon / etc.

3) yes, the Japanese are nationalistic, but honestly, that is at the bottom of the list of reasons why 360 (and Xbox before it) is failing in Japan. what's the #1 answer? because it doesn't offer any original titles that the Japanese want to play. (Halo isn't enough.)

4) MSFT must a) develop more original IP that is so compelling it will drive hardware sales, and b) court the big Japanese publishers (Capcom, Namco, Square, Konami) to develop original content for 360.

5) the boys in Redmond did get 1 very important thing right - Xbox Live. their online infrastructure and community are the most robust of any of the players, far outstripping Sony. they need to continue to leverage this advantage with episodic content, user-generated content, and improved integration with home entertainment (Media Edition works... barely.)

so don't stick a fork in 'em yet. as has been mentioned, $5B is couch change for these guys. the brand has tremendous value with the ever-growing gaming community and if they play it smart, these first 5 years of operating losses will seem like an excellent bet.

2007 Apr 20 05:14 PM

[Sonia Mirza:]

Despite the perceived success (or lack thereof) of the Xbox, MSFT has a a very good set of ratios and a lot of free cash. This despite Vista's launch, and the Xbox's success/failures.

Take that into consideration and I'd say MSFT is cruising along in the gaming platforms environment.

My disclaimer - I do not, and would never buy an Xbox, despite the price and no matter how neat the visuals might look. It's no PS3! Can you say irrational? :)

2007 Apr 21 01:59 AM

[Michael Eis...:]

Wagner James Au had this to say over at GigaOm gigaom.com/2007/04/19/.../
Worth reading although I think the core financial agrument above is better.

2007 Apr 22 04:51 AM