20 July 2007

XBox360 Double Whammy

The news on XBox 360 failures is truly quite amazing - easily on a par with the Sony laptop battery recall episode last year. Amazingly Microsoft's stock has hardly budged. There are very few companies in the world that could withstand a write-off of over $1bn so easily. Yet, I don't think Microsoft has yet done the right thing by its users. I think this post makes many reasonable points. Microsoft should do a recall and fix this problem for good. However, I would say that, based on comments attributed to Microsoft VP Peter Moore (see same link),

In our interview with Microsoft corporate vice president Peter Moore, he pointedly declined to offer specifics about what was causing the problems on the grounds that he is not a technical person, nor would he answer whether the flaws should be attributed to design or manufacturing.

it's not entirely clear that Microsoft has a complete solution to this problem even now.

However, it was not this particular issue I wanted to post about. It seems that Microsoft used that tried and trusted PR technique of burying bad news on a day of other bad news. In this case, its own bad news. Hardly commented on was the amazing confession that they had failed to hit their target of selling 12million XBox 360's by end of June 2007. Maybe those that read this saw that they had sold 11.6m, so it wasn't after all that far off the target. But let's look a little closer at this. Only in January this year did Microsoft revise its target from 13-15m units to 12m. So, it is now at least 1.4m below the target it had just 6 months ago, and perhaps up to 3.4m below. So, it's not 0.4m of 12m (just over 3%) but between 11 and 22% below.

There's another way to look at this, too. By the end of December, Microsoft had sold 10.3m XBoxes. It has since sold just 1.3m boxes. Instead of the 3-5m for that period (as per Microsoft's own December targets), it has sold between 1/4 and 1/2 of that number. This is the truly amazing statistic and something I'm surprised has not been more widely commented on. During this time, Microsoft introduced the XBox 360 Elite, and it has had ample product to sell globally. Despite this, its sales have been less in the most recent 6 months than the first 3 months of its life when it was limited to the US market and very supply-constrained. These statistics are available here.

Now, in fact, things are not as bad as this, but only if you understand the phenomenon of channel stuffing - whereby a vendor records sales by stuffing products on shelves even though they remain unsold. This is widely reported as how Microsoft account for both XBox and Zune sales and why individual figures need to be taken with a pinch of salt. It is highly likely Microsoft stuffed the retail channel with lots of XBox 360's leading up to Christmas last year, perhaps so it could meet its target then of selling 10m by the end of 2006. So, either you think Microsoft missed both targets, and engages in this practice, or you think it only missed the current one - by a large margin. It's pretty bad either way (in fact a cynical person might suggest that channel stuffing is continuing and that the situation is even worse than the numbers suggest). And, a nasty by-product of that strategy is if you were to buy an XBox 360 today, it is quite likely you may be buying one made sometime last year and subject to the potential failures noted. As Microsoft have not published serial number ranges, this makes it pretty hard to guess what you're getting.

(As an aside, I don't believe Apple can account for sales in the same way due to its own retail presence which accounts for a significant chunk of sales. At the very least, I believe that Apple would not be able to call an iPod sale via its own online or retail stores a sale until it was sold to a real customer).

Really, this XBox 360 sales fiasco is a BIG deal, and it should have been picked up as such. I am somewhat surprised in all honesty, as I had expected the XBox 360 to be a winner. Back in 2005 before any of the new generation consoles was released I posited that Sony would be the loser and that it seemed Nintendo might defy the odds and with the XBox 360 would be the other winner (not a bad forecast for a non-gamer!). At this point in time, both the high-end consoles are struggling badly, despite (or perhaps because of) the huge companies behind these products. There has been just one winner so far - the company that focused not on stuffing untried/unproven/unwanted technology in to a device then subsidising its high price, but on delivering a value product that consumers adored, could afford and all the while making sure that it makes a profit from each unit sold. Both Microsoft and Sony are behaving almost as state-sponsored monopolies delivering what they THINK the public want, using the vast resources of their other monopoly/semi-monopoly businesses to get by. Microsoft's failings have opened the door to Sony who, while being late to the party, at least have the better-specified box. Instead, they should have been dead and buried. A real price cut from Sony (not the reduced price for discontinued models) at this time might allow it yet to beat Microsoft.

Some will say that new games about to be delivered for the XBox 360 and other developments will rescue it from this lull. But unless Microsoft sells at least 10m more units before the end of the year, its shareholders should be calling for it to pull the plug. Even then it will have TOTAL sales for 2 years of around the same as the iPod for just Christmas quarter 2006. Indeed, its own sales for this calendar year will be barely above 2006 calendar year sales. The supposed "future of gaming consoles" selling less in its second full year than its first is a pretty bad sign.

Update: Is this in fact a triple whammy with reports that Robbie Bach (head of the MS division that includes XBox) sold over $6m of Microsoft stock just a few weeks before these announcements? Or a quadruple whammy to include this week's news that Peter Moore (see above) has left?

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