Xbox One Beats PlayStation 4

| About: Microsoft Corporation (MSFT)
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I'm going to vote that the Xbox One won this console generation. Sure we can hash the idea of preliminary sales data and point out the fact that Sony (NYSE:SNE) won a lot of support over the E3 conference earlier in the year. But it doesn't change the fact that the Xbox One is nearly identical to both a computer and a cable set top box. Plus it's a much more functional alternative to Skype video chatting than any other form factor device. Plus it doesn't hurt shareholders that the Xbox One is a full $100 more than the PlayStation 4. Sure, some of you all may want to raise hell over how Microsoft (NASDAQ:MSFT) should price match Sony, but it doesn't change the fact that we all know that once there's no more Sony PlayStation 4s sitting on shelves, almost every gamer on earth will begrudgingly hand over the extra $100 for the Xbox One. This is so they can get their hands on the latest edition of Call of Duty Ghosts, and Battlefield 4.

In the worst case, I'm willing to bet that some of you will be maxing credit cards, holding back on the weekly bar visit, no more tips for the waiters/waitresses, in fact, no more eating out. If things get really ugly, it's time to ask mom and dad for bigger allowances.

We know the deal - it is console refresh season.

Setting the stage

I'll be honest; I'm not much of a gamer anymore. Things like Grand Theft Auto, Star Craft, and Lord of the Rings Online are all buried memories of the past. I grew out of that phase, but at the same time I can understand the fanaticism around video games and console systems… perhaps more so than anyone else.

The PlayStation 4 will be on sale in North America on November 14th (approximately 3 days from the time of writing). You're likely to see a hoard of people lining up for the next generation consoles on Thursday. It's going to be the black Friday, before black Friday. The Xbox One is planning on an international launch on November 22nd. Following that, Sony will be initiating a European and Australian rollout on November 29th.

Here's the fact, Microsoft is pushing for a global rollout because let's face it… not everyone is going to spend the extra $100 for the Xbox One. So the best way to clear inventory is to sell to a larger group of people. Therefore, Xbox One will generate similar sales figures to Sony, on the basis of broader distribution. Microsoft expects the Xbox One to offset the losses from the Windows RT surface tablet, which is a watered down version of the Windows 8 Surface.

Windows RT was a total disaster. The average consumer does not know the difference between Windows RT and regular Windows 8. In summary, the Windows 8 operating system offers backward compatibility plus cross-platform functionality. The Windows RT lives in its own separate universe running on ARM based technology. The application store is limited to just Windows RT. Microsoft wasn't able to scale this part of the tablet business, and it's expected to cost the company a significant amount of money. Because the number of Windows RT users is limited, the incentive for application developers to develop apps has been limited.

If Intel accepts lower average selling prices for x86 chips in the tablet space, the Microsoft Surface Pro may become more competitive to the iPad. However, here's the stinker, Intel is greedy and wants higher average selling prices. This has been the Achilles heel of the Wintel ecosystem.

These shortcomings have largely been avoided when it came to next generation consoles. Both the Sony PlayStation 4 and Xbox One run on x86 chips architecture, provided by AMD at a steep discount relative to what NVIDIA, or Intel would dare to price itself at. AMD is the low cost alternative and has enough intellectual property to offer a fully integrated chip for both consoles. Currently, AMD monopolizes the living room. But in all other areas, AMD continues to struggle to generate any business.

What to expect from Sony and Microsoft

Sony struggled to surprise investors in the most recent quarter. Sony's smartphone business grew rapidly, but other parts of the enterprise dragged the portfolio of business.

Source: Sony

The company expects to generate 15 million in device shipments for the 2013 fiscal year. The shipment figures are likely to be hit, and may even be exceeded depending on whether or not Sony does a decent job of sourcing components in its supply chain. After all, the key is whether or not Sony can manufacture enough in order to displace the reduction in net income. Sony has underperformed by offering fan service with its recent move to sell the Sony PlayStation 4 for $100 less than the Xbox One. Because of this fact, the company is now unlikely to report a profit to shareholders. While, certain companies in the technology space can get away with revenue growth without profitability, it doesn't seem that Sony is one of those companies.

Source: Sony

The biggest concern was the 33 billion yen decline in both demand and price. The decline in price and demand will likely be temporary. The weakness seemed to have come from the super cyclical impact of console refresh, decline in demand for LCD panels, paired with the falling benefits from a previous restructuring gain. However, on the upside the company was able to mitigate some of these losses through better management of costs. However, being a good manager in the world of tech is NOT good enough.

Source: Microsoft

Microsoft offered some pretty compelling guidance in the most recent quarter. Remember, the Xbox One is priced a full $100 more than what its competitors is willing to price the Sony PlayStation 4 at. Because of this fact, guidance for the next quarter was 37% year-over-year increase in revenue for the D&C segment. This increase is also partially driven by the Surface Pro 2. However, because the Xbox 360's average selling price is below $250, the huge jump in the price of the console is the primary driver in year-over-year revenue gains.

The gross margin is expected to decline because of non-product inventory costs of the Surface 2. Again, Microsoft remains committed to tablets. And it's costing the company a fortune because it hasn't been able to align its strategic interests with Intel (NASDAQ:INTC). For now Apple (NASDAQ:AAPL), has the most vertical ecosystem. And because of this fact, Microsoft has no clue as to what to do. Sure, Microsoft has a lot of money. But that's not the problem. The problem comes down to efficiency. This means being effective partners with Intel.

Sony believes that it will deliver more than 3 million units of the PlayStation 4 by year end. In comparison, Microsoft is expected to deliver 2.5 million to 3 million Xbox One units. Analysts believe that Microsoft will sell a comparable amount of consoles when compared to Sony.

It seems that Sony dropped the price on its console without thinking about the financial impact on the company. Sure, Amazon (NASDAQ:AMZN) can sell devices for a loss or thin margins, but that doesn't mean shareholders will pardon the same behavior for Sony.

Bloomberg reports:

Sony will have adequate supplies of the $399 PS4 through Christmas and stands by earlier projections for sales of 5 million units by March, Jack Tretton, president and chief executive officer of the company's U.S. computer entertainment division, said yesterday in an interview. "This is a marathon, not a sprint, but getting out to a nice start is a good thing," Tretton said. "That hurdle has been cleared. We're very, very confident we're in great shape."

Tretton's remarks suggest Sony will avoid the supply problems that slowed early sales of the PlayStation 3 in 2006.

Honestly, I think Jack Tretton has to be one of the most incompetent executives in the technology space. I mean this in a literal sense. He sounds like a guy who smooth talks the corners of a board room, but fails to deliver results. This is exactly why shareholders dumped Sony stock in the past quarter. Sony consistently underperforms due to the ineffective managers that run the company.

Microsoft added around $60 to $70 billion to its market capitalization. Sony, on the other hand, boosted its market capitalization by around $6 billion to $7 billion.

Source: Ycharts

Clearly speaking, on a total basis Microsoft returned much more to shareholders this past year and is barely off its 52-week high by 1.65%. Microsoft has been able to break above key psychological resistance levels this past year. Sony, on the other hand, has pulled back by 30% from its 52-week high.

Microsoft's Xbox One a trend setter

Microsoft improved the Xbox One significantly. The company is on track to release a line-up of games that go toe-to-toe with Sony's collection. Microsoft has more money than Sony. With those extra resources, the company has been able to add a significant number of features that can only be offered uniquely by Microsoft.

First, I think software is a huge deal. The Xbox One software layout is similar to Windows 8 making it a more familiar experience for the average Xbox user. Microsoft is building an ecosystem of products around Windows. This is to improve the stickiness of the Microsoft experience, and create brand loyalty.

Sure, not everyone likes Microsoft. They're expensive, and the axiom of paying for what you get probably rings true. However what's really nice about Microsoft is that they're going to allow you to multi-task between tasks that were handled by a normal desktop computer. The Xbox One interface connects to the Microsoft application store meaning that the software ecosystem will not be segmented away from the Xbox One. This gives Microsoft a significant edge. Sure not everyone wants a computer in the living room. But, with this move, perhaps Microsoft can keep Apple away from the living room long enough to retain its durable advantage as an ecosystem that crosses all the major form factors (desktop, laptop, tablet, phone, and television).

Not every application for other Windows products will be compatible with the Xbox One. However, the company has plans of making sure the applications port over to the Xbox One. This is extremely important, because if Xbox does not build greater economies of scale with its application ecosystem it will be run over by Apple's application store. Increasing the incentive for programmers to develop an application for Microsoft is of the utmost importance right now. To increase the incentive, Microsoft will offer cross-compatibility of programs through its ecosystem of laptops, desktops, tablets, phones, and Xbox One. This is one competitive advantage that Microsoft has that Sony doesn't.

Also, Microsoft plans on making sure the Xbox One will be able to host servers in the cloud. Go figure, Microsoft can keep the costs of running dedicated servers down by creating a centralized data center for all the game developer studios. This will help to improve the graphics of the online gaming experience, and reduce the overall lag, and latency you'll experience. Latency tends to skyrocket at night, because your host isn't nearby.

The Xbox One has a solution for television navigation. When watching this video, you can clearly see that Microsoft blends the old with the new. Going from ESPN to Netflix (NASDAQ:NFLX) has never been easier. This puts Microsoft at a competitive advantage and will diminish any impact that Google's Chromecast may have ever had. However, Sony has also made the PlayStation 4 a capable multi-tasking device as well.

Finally the video games, sure we're seeing 3rd party developers end their exclusivity arrangements with game consoles. You're seeing game development studios develop games for every console platform, and this trend is likely to continue. It is up to Microsoft's and Sony's in-house studios to do the heavy lifting when it comes to creating exclusive experiences.

The Xbox One has a strong line-up of exclusive titles. The Halo trilogy continues with Halo 5 coming to Xbox One. Other exclusive titles include Titanfall, Dead Rising 3, Forza Motorsport 5, and Ryse.

With the Xbox One, we have the ultimate device for entertainment, internet use, television viewing, social networking, and Skype calling. So couch potatoes of America, you have been saved!


Microsoft is transitioning into being a universal computing provider. There's no point in targeting segments of the market with one group of applications and not others. Microsoft needs to understand its role of being a facilitator for application developers. This means making it as simple and economical as possible for application developers to create applications and video games for the company.

The added stickiness of having a living room device may give Microsoft the keys to unlocking the younger age demographic to staying loyal to the Windows 8 ecosystem. The Xbox One has appeal with the older demographic too. I mean people over the age of 25 can appreciate the fact that the Xbox One can rapidly transition between ESPN, e-mail, Facebook, and Netflix. This can be done on a 60" LED Samsung television. That's enough reason for a household with $50,000 in discretionary income to add a $500 line item to the budget. I mean I've always wanted to have a computer like experience on my TV. So I guess dreams come true.

Sony came ahead at the E3 conference. But in the end all good deeds are soon forgotten. The company lost a lot of money by pricing its consoles a full $100 cheaper than the Xbox One. This type of behavior may be permissible to shareholders of Amazon, and Netflix. But this type of behavior will not go unnoticed at a maturing and perhaps stagnating technology company like Sony. Sure, there's a lot of potential lurking in the depths of Sony. But the conglomerate discount definitely applies, because Sony's collective enterprises are poorly coordinated with the company's primary goal of growing both top and bottom line.

Sony focused on making the purest gaming experience. Microsoft put a computer in your living room. I decree Microsoft the winner.

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.