Wednesday, October 31, 2007

Console Post of the Week

The Big Three announced financial results last week. Like almost everything else in what's come to be called the console wars, it was interesting.

First, from Nintendo:
Nintendo lowered expected revenue for the year from 550 billion yen to 510 billion yen ($4.8 billion), and its expected net profit to 54 billion yen ($509 million) from 60 billion yen. Its report attributed the downward shift to weakening sales of games and hardware in Japan, as well as the continuing rise of the yen against the dollar, which hurts the yen value of Nintendo's overseas sales.

Well, that's a surprise. I thought Nintendo was doing really well--oh, wait, that story I just quoted is from 2005.

Here are the results from the first six months of the 2008 fiscal year:
Kyoto-based game giant Nintendo reported its mid-year financial results today, posting a 132.5% increase in year-over-year sales to 694.8 billion yen ($6.072 billion) for the six months ending September 30.

...Nintendo's profits showed even greater gains, rising to 132.4 billion yen ($1.157 billion), a 143.7% increase over the first half of the last fiscal year.

If their projections for the rest of the fiscal year are accurate, their revenue will have tripled in two years. Tripled.

And their profits? Well, they print money.

Do you know what Nintendo's done in the last two years? They took chances. The DS was a big, big gamble, and I thought it was a mistake. Why split a screen in two? Why do you need a stylus? Well, I was totally wrong--the stylus is terrific. It changes how it feels to play a game.

The Wii? Same thing. The Wiimote changes how it feels to play games. No matter what kind of weak denial Microsoft and Sony want to put out, it really is revolutionary.

Everyone seems to complain in the gaming industry that innovation isn't rewarded. Now it has been, and the way everyone is whining and crying about it, you'd think the success of the Wii was some kind of travesty.

Now let's look at Microsoft--specifically, the games division. Here are the division-specific results:
The revenue of the Entertainment and Devices Division, under which the Xbox 360 (as well as the Zune and Windows Mobile) falls, increased 91% to $1.92 billion. According to Microsoft, PC and console game revenue in the quarter increased $895 million, or 148%, with some of the huge gains driven by Halo 3, which contributed around $330 million of revenue in that timeframe.

However, hardware also helped the company's revenues, as Microsoft shipped 1.8 million Xbox 360 units in the quarter, compared to 0.9 million in the same quarter last year. This led to a profit for the division of $165 million, compared to a $142 million loss last year.

Microsoft did blame the Xbox 360 for increased costs, however -- noting that there was a 99% increase in cost in revenue, or $584 million, primarily related to sales of the console, inventory write-downs and most notably
the warranty costs brought on by the console's technical issues.

Hey, the entertainment division made a profit! For the, um, first time in the 360 era. Halo is freaking huge, some units with the 65nm chip are now in stores, Guitar Hero III is going to sell in huge numbers, and November still has AAA titles to come.

Microsoft is also trying to appeal to the same audience they've dismissed previously--well, when they were buying Wii's, anyway. See this (thanks Eapen):
With Microsoft's announcement of the Xbox 360 Arcade, the anticipated device looks to be changing how the Xbox targets consumers.

According to a Microsoft representative, the company feels that "the timing is right to really focus and turn the spotlight on our family content and, yeah, we feel great."

Believe it or not, Microsoft has inked a deal with Warner Bros. to bring HD Looney Tunes to the Xbox Live Video Marketplace, and more games designed with children in mind will be coming down the pike with the help of this new console.

I think these are the same people who were supposed to buy 360s "when they grew up." Looks like Microsoft isn't waiting for them to grow up anymore.

Sony announced financial results this week as well:
TOKYO, Oct 27 (Reuters) - Sony Corp said the operating margin at its electronics operations is expected to beat its target for the year to March, but operating loss at its videogame unit will likely be double its initial forecast. Operating loss at its game unit, which offers loss-making PlayStation 3 game gear, is estimated to exceed 100 billion yen ($876 million) for the current business year, compared with its original projection of 50 billion yen, a Sony spokeswoman said.

That was from Reuters (here), and here's some additional information about the losses in the game division:

In Sony's game segment (the SCE division), sales did increase 42.9% year-on-year, primarily as a result of the contribution to sales from the PlayStation 3. However, an operating loss of 96.7 billion yen ($841 million) was recorded, significantly larger than the previous year.

According to a statement from the company: "This deterioration was primarily due to the loss arising from the strategic pricing of the PS3 at points lower than its production cost and the increase in PS3 inventory-related write-downs... compared to the same quarter of the previous year."

Sony sold 1.31 million PS3s worldwide in the three months ending September 30. Remember, this includes the initial price cut in the U.S.

Remember how I said a few months ago that Sony had backed itself into a corner? This is the corner. They have no choice but to lose massive, mind-bending amounts of money on the PS3 in the next six months, and that's just to stay in the game.

This is what happens when you launch a console that costs over $800 to build.

Sony is somehow projecting that their games division is going to lose only $876 million for the year after losing $841 million in the first six months. They are claiming that they're only going to lose $35 million over the next six months.

Whatever, Lebowski.

I'd go into all the reasons why this is totally ridiculous, but you know them all by now, so there's no need.

Having said all that, though, Sony is finally doing some things right. They've got a console that's far more reasonably priced now, they've got at least one stellar game (Ratchet & Clank is fantastic, and I'm going to tell you more about it in a few days), and they don't seem nearly as smug as they were a year ago.

Getting your ass kicked for 200+ days in a row can do that.

Most interestingly, the new 40GB units are apparently using a 65nm CPU, so Sony successfully moved from 90nm to 65nm in less than a year. It took Microsoft twenty months, and even now, the new 360s are a mixed mess of 90nm and 65nm units.

Last note, and this involves all three systems. Software sales have been a big X factor. The stereotype is that the 360 is for "real gamers," Wii owners only buy Nintendo software, and the PS3 has a diluted unit base because of the people who just bought it for a Blu-Ray player.

So if we could just get one game that was released across all platforms, a hugely successful and popular game, then maybe we'd have a little more data to talk about some of these issues.

Oh, and we do. It's called Guitar Hero III.

The sales figures for October should be very, very interesting.

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