Tuesday, November 28, 2006

Attach Rate and the 360

I've gotten quite a few e-mails from you guys about this article. Here's an excerpt:
The latest issue of Jason Kraft and Chris Kwak's 'Video Game Journal' for the Susquehanna Financial Group examines the software attach rate for the Xbox 360, and explores why such an “alarmingly high” rate may not bode well for Microsoft's next-generation console.

Specifically, the report cites the recently announced Xbox 360 attach rate of around five games per console sold as confirmed by Microsoft in October, a number that was up from the roughly four games per console attach rate announced by the company at the console's launch in 2005.

While traditionally a growth in attach rate is considered to be a positive, the report suggests that such an increase could mean that even though Xbox 360 software continues to enjoy brisk sales, the hardware itself has not seen similar increases in consumer demand. In fact, it concludes: “We believe the unusually high attach rate on the 360 is a sign of an increasingly unhealthy console growth rate, and should be worrisome to publishers and investors.”

...The report further adds that the Xbox 360's high software attach rate is “a damning commentary on the limited hardware installed base, most of whom are hard-core gamers.” The analysts add that what is actually needed by Microsoft for its latest console, as well as by third party software publishers, is “quicker adoption of hardware and a rapidly growing installed base on which to sell progressively more game units,” rather than just more games sold per existing Xbox 360 owner.

Now before I say anything else about this, let me say up front that I like these guys. They actually send me their weekly report, even though I'm not in the industry in any capacity, which I very much appreciate.

Having said that, it's important for them to get coverage. Analysts have to get coverage of what they say or it doesn't really matter much, and it's not good for business. That's true of all analysts, not just these guys. And in this particular case, I don't think there's anything to support their conclusion. There are times when someone can try so hard to be clever that they wind up being not clever at all, and I think that's what's happened this time.

In this case, the clever part is trying to tie attach rates to the future of a console, when the bog-standard, totally obvious way to do it is to look at monthy unit sales. Instead, the path to using attach rates to measure the health of a console is incredibly convoluted. If a console has a robust selection of games, and no pack-in, then the attach rate should be higher.

Only hardcore gamers have purchased the 360? Seven and a half million of them? Remember, Microsoft has built this installed base in twelve months with a price that's $100 above the initial price point of the previous generations ($299).

If any single statement is true about gaming consoles, it's this: unit price drives sales. This has always been true, and it's been true for every single console ever introduced. Even bad consoles have sold better when the price was reduced.

Microsoft's had a year to lower their manufacturing costs, there's been recent speculation that they actually turn a profit on the $399 units now, and they can, over the next four years (at most), lower the price in $50 increments until they hit $199. Maybe less.

Will that attract a wider audience? Of course.

I fail to see how selling over seven million units in twelve months could be considered a failure. If you want to look for weakness, look after the holiday season--if the 360 didn't sell well in November and December, when hardware sales can equal sales of the rest of the year, then they have a problem. I've seen nothing to indicate that's happening, though.

Here's a tangent not related to Chris and Jason's article.

I've written at length about how the Wii is going to win this generation, even though no one believes me quite yet. But the 360 appears, by all data I see, to be very healthy and doing very well. So when analysts suddenly get religion and forecase the Wii to "win" the unit war, don't think it means anything, because it doesn't. That was always going to happen. That's not new information. Microsoft can be very successful in second place.

And that's where they'll be, unless Sony figures out what's happening and drops the price of the PS3 by $150-$200 in the next twelve months. In that case, all bets are off.

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