Tuesday, May 15, 2007

Console Post of the Week: Moving Targets, Tagamet, and a Substantial Revision

NPD numbers come out later this week. What will be interesting are not the PS3 numbers (which will be around 100k, anything over 120k would be very, very surprising) or the Wii numbers (which will be big, in the 350k range), but the 360 numbers.

Microsoft has a problem.

Here's what's going wrong for Microsoft: their most important competitor, Sony, is floundering. Sony has followed the most ill-conceived pricing and product strategy in console history with five months of complete ineptitude.

In the last two months, according to NPD, the 360 has sold 427k units, while the PS3 has sold 257k. That's with the PS3 being $200 more expensive (excluding the Elite) and with only a small number of quality games.

With the magnitude of Sony's errors, and a 33% difference in price, the 360 should be pounding the PS3 right now. I don't consider the difference in sales for the last two months to be nearly enough from Microsoft's perspective. So while Sony executives must be throwing up bloody chunks of stomach lining right now, I bet Microsoft's executives are swilling Tagamet as fast as they can.

Here's Microsoft's other problem--take a look at this quote from Peter Moore (VP of Microsoft's Entertainment Division) in response to a question about failure rates for the 360:
“I can’t comment on failure rates, because it’s just not something – it’s a moving target. What this consumer should worry about is the way that we’ve treated him. Y’know, things break, and if we’ve treated him well and fixed his problem, that’s something that we’re focused on right now. I’m not going to comment on individual failure rates because I’m shipping in 36 countries and it’s a complex business.”

I mentioned this last week, but as soon as I saw this quote, the alarms started flashing. It's a moving target? You know, things break?


Failure rates are only a moving target if they're not under control.

Moore emphasizing post-failure response is a pretty dramatic concession that Microsoft has a significant problem, and I think he's also implicitly acknowledging that someone besides Microsoft has access to the data (or can somehow arrive at an accurate estimate).

What I'd really like to know is what the impact of warranty repairs to the 360 have had on the profitability of the entertainment division. iSupply estimated in February that the Premium 360 BOM was down to $323--in other words, the hardware not only isn't losing money anymore, but it's got almost a 20% profit margin. How much of this profitability, though, is being eaten away with the costs of warranty repairs?

One last note on Microsfoft. Take a look at this quote from Robbie Bach (President of Microsoft's Entertainment and Devices division) about the Wii in an interview with N'Gai Croal:
It's a very nice product, but it actually has a relatively specific audience and a fairly specific appeal, frankly, based on one feature, which is the controller itself. And the rest of the product is actually not a great product--no disrespect, but...the video graphics on it aren't very strong; the box itself is kind of underpowered; it doesn't play DVDs; there are a lot of down-line components [that] aren't actually that interesting...They don't have the graphics horsepower that even Xbox 1 had.

And yet somehow they're kicking your ass, Robbie. No disrepect.

Here's what Robbie doesn't get: the Wii is goofy. It's fun. There are hundreds of millions of people out there who would enjoy playing games, but have no interest in arguing about the appropriate rate of fire and energy usage of the Spartan Laser. For many people, Robbie, as shocking as this might sound, fun is more important than uber.

Sony did something a bit smarter this week: they shut up. Based on what their executives have said in the last year, I think that shutting up is a fine idea. Jack Tretton did blather today about how the Playstation 3 is a ten-year product, which is utterly ludicrous.

Here's how technology works right now: cutting edge ten years from now is so advanced that it is unknown. So it doesn't matter how many billions of dollars Sony spent in R&D on the PS3--they did the same thing with the PS2, and it was inferior the day the Xbox was released. The PS2 was a seven-product, and it's nothing short of engaging in magical thinking to believe that the PS3 will do any better. It might well be magical thinking to believe that it will even do as well.

By the way, Wedbush analyst Michael Pachter believes that the PS3 will "win" this generation, based on an industry reportthat was published this month:
...we see Sony 'winning' the console war in American and European regions with 36% of the market, with Nintendo 'capturing' second place at 34% and Microsoft finishing third at 30%" -- a virtual "dead heat," with all three generating "significant profits." Japan, however, is expected to be "dominated by Nintendo (51% through 2011) and Sony (44%)."

Fair enough. That's far, far less interesting than what he said last February, though:
Looking past 2007, however, the market seems likely to settle down to a more familiar pattern - "with Sony capturing around 45% of the total market, Microsoft capturing 35%, and Nintendo capturing 20%. These estimates do not include market shares in Japan, which we expect to be dominated by Sony (65% through 2010) and Nintendo (25%)."

If you're wondering how many units Pachter's talking about, he mentions his projections in a Gamespot interview here:
Through 2011, he projects that the PS3 will have sold 73.7 million units worldwide, edging out the Wii's 72.4 million systems. Pachter has the Xbox 360 finishing third among the consoles with 54 million sold worldwide.

Roughly (and there are quite a few variables here, including possible revisions of total market size, so this won't be exact), it looks like Pachter originally expected the PS3 to sell about 100 million units in the same amount of time the PS2 did--about five years from the date of the U.S. launch. Now, though, he's scaled that back over twenty-five million units. That is a staggering revision, and should give you an idea of how much the tide has turned against Sony. If Sony sells 25 million fewer consoles than the PS2 in the first five years when the gaming market has greatly expanded, it will be a disaster.

Of course, they're not going to even get to 75 million in five years, but that's a different post for a different week.

Lastly, Nintendo. Love that little console, love the controller, but where are the damn games? Hurry up, please.

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