Tuesday, February 19, 2008

Console Post of the Week: the Microsoft Mystery

Again, here are the January NPD numbers:
Wii - 274,000
PlayStation 3 - 269,000
Xbox 360 - 230,000

Let's see if we can develop a working theory in regards to the Xbox 360.

Microsoft, two days before NPD results for January were announced, addressed the 360 inventory shortages by saying they were the result of "unforseen demand."

Briefly, here's a summary: horse and shit.

Here's a quick explanation of why--take a look at sales of the original Xbox in previous Decembers (after the first December of the console in 2001):

That 1,260,000 units sold in December for the 360 wasn't "unforseen" at all. If anything, it was probably right on target, and there seemed to be plenty of units available.

Then, supply started drying up. Significantly.

The current status? Here's information from a source who wishes to remain anonymous:
All X360 hardware is currently being allocated on a weekly basis to all direct customers. We've heard that product may not flow freely again until the late spring or early summer. No news (or even rumblings) about new hardware SKUs. If it's happening, the info may come at the Microsoft Vision conference in late July.

I think it's reasonable to assume, based on both this e-mail as well as Microsoft's own statements last week (particularly Don Mattrick's interview where he says that supply issues will be addressed "in the coming year"), that this is not a short-term issue.

In addition, here's a nice piece of sleuthing from Skip Key, based on his analysis of of this excerpt from Microsoft's quarterly earnings report:

"Cost of revenue decreased $523 million or 22 % during the three months ended December 31, 2007, primarily driven by decreased Xbox 360 manufacturing costs."

Skip's take:
We know that they shipped 4.3 million consoles during the quarter. So if 100% of the cost of revenue decrease came from manufacturing cost decreases that would be $121 per console. So let's say that "primarily" means two-thirds. That would be cost savings of about $80 per

Clearly, the "Falcon" unit (65nm CPU, 176w power supply) is cheaper to manufacture. And lower manufacturing costs, which Microsoft desperately needed, must be a key part of their strategy in 2008.

What this means is Microsoft wants to ship as many Falcons to retail as possible. But would they want that cost advantage so desperately that they would stop shipping the 90nm units with HDMI?

I don't think so. The ongoing potential revenue stream created by the sale of a console is far more important, seemingly, than saving $50-$80 on manufacturing costs. Microsoft seemingly wouldn't willingly endure severe inventory shortages for months--it would be nearly suicidal in the third year of a console (which should be a huge year for sales as prices decline).

It is possible, though, that they anticipated a much greater shift in manufacturing toward the Falcon unit than they've been able to achieve, and they've been unable to ramp up production of the non-Falcon unit quickly enough to respond.

At this point, all fingers seemingly point to the Falcon unit, either in terms of reliability or yield. I don't think anything else fits the information that is available.

Of course, I could be absolutely wrong.

On to Sony, and clearly, they've won the format war. HD-DVD is dead, and all these recent announcements of retailers ending their support of the format is just kicking the corpse around. [note: I wrote this Monday night, and this morning Toshiba announced that they're pulling out entirely by the end of March, so the corpse is now interred.]

Sony also had stronger sales in the U.S. in January than many people (including me) expected: 269,000 in a four-week period is a very nice month for them. If that kind of demand continues, even though it's well short of PS2 numbers, it's still leagues above last year's fiasco.

Did the lack of availability of the Xbox 360 increase Sony's numbers? Not substantially. I think the line between the two units is pretty clearly drawn at this point: if you want a game machine, you buy the 360, and if you want a "convergence" device that also plays games, you buy a PS3. I don't think there's a huge amount of crossover among potential buyers, at least not at this point.

I should have known why Nintendo's numbers were so low in January, because the answer was obvious: diverting manufacturing capacity to support the launch of Super Smash Brothers Brawl in Japan. It's easy to see when you look at the last five weeks of sales in Japan:

That's over 80,000 units a week in a market that is much smaller than the U.S. (about half its size, depending on which number you want to use). That means two things (at least): one, Nintendo still can't meet demand, and two, we can expect to see a ton of units to support the SSBB launch in the U.S. on March 10.

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