Monday, January 21, 2008

Console Post of the Week

As a starting point, here are December NPD numbers:
Nintendo Wii--1,350,000
Xbox 360--1,260,000
PlayStation 2--1,100,000
PlayStation 3--797,600

Nintendo has sold more than seventeen million Wii's worldwide. Back in December of 2006, it was estimated that the Wii cost Nintendo $160 to manufacture.


So Nintendo, at launch, may have been been making $90 a unit. What do you think it costs Nintendo now, after selling over seventeen million units? Yes, I know that some people say Nintendo has made a mistake by not fully supplying demand, but it's hard to argue with those economics.

I think there are two very, very important lessons that can be learned from the Wii:
1. Innovation does sell--if it doesn't cost too much.
2. A console should never, ever ship without a pack-in game.

Seventeen million dedicated game machines. Thirty million by the end of this year, easily--maybe even thirty-five million. Oh, and developing a game for this system costs well less than half what it costs to develop for the competitors.

It's hard to see any scenario where Nintendo doesn't continue to dominate in 2008. I certainly don't see one.

Oh, and Nintendo's biggest contribution to the future of techology? It's not the technology behind the Wii and the Wiimote--it's their cost. Nintendo created innovation for the consumer without making them pay the usually sizable early-adapter surcharge. That's probably even more revolutionary than the motion-sensing controller.

This is a different way of looking at new technology. Instead of just asking "what can it do?" Nintendo asked "what can it do that people can still afford?" That is a huge paradigm shift.

Sure, it would have been really, really nice if the Wii had supported HD graphics. But if it did, it cost $400, and they'd only sold five million units in the first year, would anyone still be talking about it? And if they were, would anyone be asking anything but 'can it survive'?

How do I see them selling in the U.S. this year? Over 80,000 units a week, and that's probably conservative.

On to Sony.

Sony released the biggest piece of bloatware in console history in November of 2006 and priced it at $599. It sold well everywhere at launch, and then sales everywhere fell off the cliff.

Sony continued to demand that they didn't have any real problems other than "consumer education," but they released a $399 unit in time for the holidays. Funny how that happens.

The question is not how bad 2007 was for Sony--by any normal standard, it was catastrophic--but what are their prospects going forward?

1. Blu-Ray's apparent victory in the HD format wars.
2. A far more reasonably priced PS3 model.
3. Sony's name, although clearly tarnished after 2007, still carries weight.

1. The game library is far inferior to the 360, and that gap is not going to be closed anytime soon. 2. In terms of gaming, the PS3 installed base is hopelessly diluted by units purchased as Blu-Ray players only. This will make it hard for developers to actually establish their potential sales base. 3. Even with the price reduced to $399 and unlimited availability, the PS3 sold over 330,000 units less in December in the U.S. than the 360 did last year (at an equivalent time in their lifespan).

If you think the numbers are really lining up nicely for Sony in terms of increased sales, think again. Let's look historically at the second Christmas of sales (usually the 14th-15th month in the lifecycle, using December NPD numbers) in the U.S. for other consoles:
PS2 (2001): 1,940,000
Xbox (2002): 1,040,00
Gamecube: 600,000
Xbox 360: 1,130,000
Wii: 1,350,000

The PS3? 798,000. And this is with a one-month old price cut and 100% availability.

There was an article last week, linked in many places, that claimed the PS3 manufaturing cost had been "halved." This was all attributed to a single analyst in Japan.

If true, this is a big deal. It means that Sony might have room to make additional price cuts in 2008, and they need to, because the PS3 (no matter its features) needs to reach $299 as quickly as possible. I'm skeptical, because that seems like a disproportionate reduction in manufacturing costs, even with the reduced unit functionality, but it's certainly possible.

Think about this, though: if the PS3 halved its manufacturing cost after one year, what does that say about the Wii manufacturing cost, when Nintendo sold over twice as many units? That's scary to even consider.

Here's what I see happening in 2008 for Sony. As a gaming machine, it's not going to do very well. The other consoles offer more fun at a lower cost.

However, as a Blu-Ray player, the PS3 will do just fine. By all accounts, it's both an excellent Blu-Ray player as well as an excellent upscaler of standard-definition DVD's. From that standpoint, it's a value.

I would be surprised if the PS3 consistently sells over 40,000 units a week in the U.S. this year unless there's another price cut.

On to Microsoft, and there was an interesting article over at 8Bit Joystick this weekend (and I think Skip Key was the first person to send it to me, although so many of you guys sent it that I'm not even sure). It purports to reveal the "truth" about the 360 hardware failures and why the system launched with what, clearly, seems to have been a defective design. It's very specific, it seems relatively credible, and it's an excellent read. Here's an excerpt:
First, MS has under resourced that product unit in all engineering areas since the very beginning. Especially in engineering support functions like test, quality, manufacturing, and supplier management. There just weren't enough people to do the job that needed to be done. The leadership in many of those areas was also lopsided in essential skills and experience. But I hear they are really trying to staff up now based on what has happened, and how cheap staff is compared to a couple of billion in cost of quality.

Second, MS was so focused on beating Sony this cycle that the 360 was rushed to market when all indications were that it had serious flaws. The design qual testing was insufficient and incomplete when the product was released to production. The manufacturing test equipment had major gaps in test coverage and wasn't reliable or repeatable. Manufacturing processes at eall levels of suppliers were immature and not in control. Initial end to end yields were in the mid 30%. Low yields always indicate serious design and manufacturing defects. Management chose to continue to ship anyways, and keep the lines running while trying to solve problems and bring the yields up. Whenever something failed and there was a question about whether the test result was false, they would remove that test, retest and ship, or see if the unit would boot a game and run briefly and then ship. 360 is too complex of a machine to get away with that.

That kind of attitude will bite you in the ass, and it has, to the tune of billions of dollars. Incredibly, though, Microsoft seems to have survived an eighteen-month rate where their defect rate approached 30% (I believe that's a good ballpark estimate), as well as periods where their repair times stretched to four weeks or more (I've received several e-mails indicating that people have had a better experience in the last month).

I think Microsoft has one more PR nightmare ahead of itself in 2008, and the 8bit article explains it quite clearly:
I imagine the next big outrage will be when some of the folks who waited till Falcon to buy a console for reliability reasons, and has to send it in for service, gets a Xenon back!

That's another lawsuit waiting to happen, and if Microsoft wants to stay in front of this, they need to issue some kind of statement that owners of Falcon consoles (cooler, quieter, and far more reliable) will not receive Xeon units if their console needs to be repaired. This is guaranteed to be a mess, it's entirely avoidable, and Microsoft (for once) needs to get out in front of a reliability issue and defuse it before it blows up in their faces.

Going forward? Without a price cut, I think 360 sales will be in the 55,000 units a week range in the U.S. That's about 35% over the PS3 sales, and I think that's the high-end for the 360 without another price cut.

However, and this is an important however, if sales start to drop below 50,000 units a week, Microsoft has to cut the price, and they have to do it immediately. They can't go through four months of weak sales like they did in April-July of 2007.

The good news for us is that competition, again, is going to be fierce in 2008, and as consumers, we'll all benefit.

Boy, that was a crappy bailout ending, wasn't it?

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