Tuesday, February 12, 2008

Console Post of the Week

Darrin Gosse of PS3blog.net solved the puzzle I presented last week, and in doing so, corrected an error on my part.

The puzzle was this: how did Sony sell 4.9 million PS3s in their last fiscal quarter when it was absolutely clear that consumers did not buy that many?

Darrin's answer was: they didn't sell them to consumers.

Here's my mistake. When Sony said "Begining with the quarter ended June 30, 2007, the method of reporting hardware and software unit sales has been changed from production shipments to recorded sales," I thought that "production shipments" meant shipments to retailers, and "recorded sales" meant sales to consumers.

Darrin correctly pointed out this quote from Kaz Harai in a Bloomberg article:
``We haven't made any conclusion whether we have to give it up,'' Hirai said, referring to this fiscal year's 11 million shipment target. ``It depends on how aggressively dealers buy our PS3 inventory.''

That seems to clearly indicate that Sony "records" sales when retailers buy PS3s for stock, not when a consumer buys a unit. And I should have caught that, because the phrase "recorded sales," in retrospect, is perfectly obvious.

Well, except to me, apparently.

So this means that Sony didn't need to fudge that 4.9 million number. They're saying that they shipped 4.9 million to retailers during the quarter.

By my best estimate, they sold 3.5 million.

Thanks to Darrin for correcting me, and it also brings up an interesting sidenote. Seemingly, this means that when Sony was talking about "production shipments" for the first three quarters of the PS3s existence, that was how many they built. I don't see any other way it can be interpreted, unless there's some kind of intermediate stage between building and shipping to a retailer--"stored in a warehouse," for example.

Either way, that number was totally meaningless as a gauge of consumer demand.

Now, here's an interesting possibility (one among several this week). If Sony shipped 1.4+ million more units to retailers than sold to consumers in the last quarter, that's a bit of an inventory pile-up in the retail channel (although I don't think it's nearly as egregious as how Microsoft stuffed the channel last year during the holidays).

In Sony's Q3 earnings report, they make this notation:

Inventory, as of December 31, 2007, was $1,605 million, which represents a 77.2% increase compared with the levels of December 31, 2006. This increase was primarily due to the build-up of finished goods inventory following the worldwide expansion of the PS3 business. Inventory decreased by 26.2% compared with the level as of September 30, 2007.

On July 2 of last year, I wrote this:
Somewhere in Asia, in a warehouse (or several), Sony has 1-2 million PS3s.

Hey, based on their inventory numbers, it sounds like they still do. And that's still down 26% from the last quarter. So they're sitting on vast quantities of inventory, and it looks like the retail channel is already full.

Having said that, though, if they can somehow get to $299 this year, at least they seem to be headed in the right direction in terms of pricing and advertising.

One last note from Darrin before we move on. He pointed out that Microsoft reported selling (to retailers) 900,000 Xbox 360s in North America in 2005, while NPD numbers indicated that only 607,000 were sold in the U.S. Even accounting for Canadian sales, that still leaves a sizable discrepancy, and I remember inventories being very, very tight for the 360 that holiday season. Yes, I know it was two years ago, but his point is that Microsoft's numbers, at times, are also suspect.

Point taken.

I intended to talk about the challenges Sony and Microsoft face this year (Skip Key, in particular, did an interesting analysis of the information contained in the earnings reports), but I've noticed something very interesting recently.

It appears that 360 inventory in the U.S., to some degree, is drying up.

I say "it appears" because this is an analysis that is impossible to do precisely. It's actually overstating things to even call it an "analysis." However, based on both anecdotal reports and iTrackr, it does seem that inventory for all three 360 models is significantly lower than during the holiday season.

I know what you're thinking. I totally agree that iTrackr isn't absolutely accurate, and it simply indicates whether product is in stock at a retail location, not how many units might be in stock. However, even with the qualifications, when inventory for the Premium unit was consistently on iTrackr above 75% during the holidays, and now it's dropped below 30%, it appears that something's going on. And Elites are in even shorter supply.

Here's some anecdotal information on the ground to back that up, provided by DQ reader Rafael:
I've got an ongoing story to add as well as a question to ask. I'll start with the question: So how's the Xbox 360 supply situation out in Texas?

The reason I'm asking is that I've decided to pick one up so I can play Halo 3, etc., and they're just about impossible to find around here (and "here" includes a big swath of territory, as I'll get to in a moment).

I made this decision about 3 weeks ago, thinking I'd pick up one of the Costco bundles for a good deal. But I wanted to pick up a post holiday bundle to avoid the extra risk of a RROD failure so I decided to wait for a bit. They also had accidentally put out a sign for the upcoming (I thought) Call of Duty 4 bundle, a good reason to wait.

At the same time, a woman was picking up her second 360 in a month after the first had died. The assistant's comment, "Oh yeah, we've been getting a lot of those back." A bad sign for my Costco bundle approach.

Regardless, our local Costco had run out of Halo 3 at the discount price, so on a trip up to the San Francisco Bay area ~2 weeks ago I swung by the Mt. View Costco to see if they had any, and managed to pick up a copy of the game at $50. But I was surprised to see no 360s available. No worries, I was satisfied to wait some more. Still I made a quick decision to pull into another Costco (this time in Gilroy) on the way back to Santa Barbara. Still no 360's, so I decided to ask if they had any (in case they were somewhere unexpected in the store). The kind lady looked it up on their computer, and found out that they had sent back the previous shipment and had absolutely none in the store. Sent back?

Anyhow, back in Santa Barbara I waited until they had sold out of the holiday bundles, only to find no Call of Duty 4 packs replacing them. After another session of looking up the inventory history I was informed that the store had only ever had 5 of that bundle, 4 of which had already been returned (holy crappy reliability Batman!) The assistant assumed that the 5th had been sold and for some reason wasn't coming up in the system. So I made some calls around town (and did some internet searching all the way down to the Ventura, Thousand Oaks area, about an hour south of here) and no one has a new 360 pro in stock.

So what's going on? There seem to be four possible explanations for this:
1) The 360 is absolutely selling through the roof, and retailers can't keep the Premium and Elites in stock.
Likelihood: zero. The 360 may be selling well, but for the inventory numbers to change this dramatically after the holidays, there must be another explanation. If this really is true, then the NPD numbers for the 360 in January will shock all of us.

2) The 360 is still experiencing hardware issues, and Microsoft has temporarily reduced shipments in an attempt to fix the problem.
Likelihood: not impossible, certainly. The company (Microsoft) telling us that the Falcon has a failure rate below 5% is the same company that denied were reliability issues with the original 360 for over a year.

Here's a personal data point. I took my Rock Band drums (the defective ones, which have now been replaced) to the UPS store to ship them back to EA. I was asking the lady about returns in general, and I asked her about the 360. "We still get four or five of those every day," she said.

If there is a reliability problem, it's going to be impossible to keep quiet, most notably because it would require financial adjustments that would be reflected in their earnings statement. So if it's happening, we're going to find out eventually.

3) Microsoft is trying to drain all non-Falcon units from retail inventory.
Likelihood: it's certainly possible. If their ability to ship Falcon units in volume has increased significantly, Microsoft might want to drain the retail swamp of all non-Falcon units as quickly as possible to contain financial reserves for repair costs going forward (in other words, the 90nm unit's repair costs would be off the books sooner). Still, though, when the PS3 is available absolutely everywhere, that would seem to be a move that Microsoft might not be able to afford right now from a competitive sense.

4) They're about to unveil new units.

Likelihood: this is, by far, the most interesting possibility. In a strictly "machine" sense, I don't think the $349 Premium unit compares favorably to the $399 PS3, and Microsoft isn't stupid--for all their marketing bluster, I'm sure they realize it, too.

It's entirely possible that I am totally misinterpreting a temporary inventory drawdown. I just think it's very, very strange that a console entering its third year, after being widely available during the holidays, is having any kind of inventory drawdown at all.

If this apparent shortage continues, I think we will know pretty quickly what's going on. And again, this is certainly one of the most speculative limbs I've ever climbed out on--I could be 100%, absolutely wrong here.

I know--"and that would be different from normal in what way, exactly?" Comedians.

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