Who's Winning The Game Console Market? (SNE, MSFT)

Includes: MSFT, SNE
by: Yankee Group

By Carl Howe

The wires were full on Friday with glowing reports of Microsoft's earnings release. And some are touting the XBox 360 launch numbers, tepid though they were, as indicating that Microsoft will make headway in its push into next-generation gaming.

In Microsoft's filing, the company noted that its revenue shortfall was partly due to XBox 360 shortages (see the conference call transcript). Still, Microsoft logged more than $1.5 billion in revenue for its Home and Entertainment division while recording nearly $300 million in losses for the quarter. Given that XBox 360 consoles are sold at a loss, the lower volumes actually kept the losses at Home and Entertainment from being bigger.

Meanwhile, tiny little gaming competitor Nintendo (OTCPK:NTDOY) also reported earnings for the quarter. Unlike Microsoft, it had no new console launch to talk about (other than the Gameboy Micro which came out earlier in the year). Yet, the company reported a near doubling of profits over the prior year to almost 56 billion yen (about US$482 million at today's exchange rate), based upon Gamecube and Gameboy sales. That's within spitting distance of giant Sony's gaming profit for the same quarter of 68 billion yen (about $521 million), despite Sony's more than installed base of 100 million Playstation 2s worldwide. Needless to say, Nintendo is making profits on every console and game it sells, and it shows in their business results.

Looking forward to the coming year, both Nintendo and Sony have next-generation console launches to manage, while Microsoft is past that point. Sony will get all the glitz for its Playstation 3, with its 1080p high-definition gaming action and Blu-ray disk player, but Nintendo's new Revolution console with its radically redesigned gaming controller and backward compatibility for practically every Nintendo game made may turn out to be the business results star.

Nintendo continues to delight its young gaming market with its focus on kid-friendly games and great gaming experiences, while innovating with completely new gaming concepts such as Nintendogs for the Gameboy DS. But if it continues to generate near-market-leading profits like the ones last quarter from its more target-market-driven strategy, it should delight investors as well.

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