Video Game Consoles 2007: Wii, PS3 and the Death of Microsoft’s Xbox 360
January 31st, 2008
Daniel Eran Dilger
Throughout 2007, the media consistently reported leading sales of Microsoft’s Xbox 360, dismal figures for Sony’s struggling PlayStation 3, and celebrated the long shot Nintendo Wii as a possible contender in game consoles. This portrayal of the video game market in 2007 was grossly misleading, and I have the figures to demonstrate why.
En Español: Consolas en el 2007; Wii PS3 y la muerte de 360
Traducción: Marcos Limeres Aguín
Ships and Sales.
I’ve been tracking game console sales throughout the year. There are two major metrics for sales: worldwide production numbers stated by the manufacturers themselves (typically released several months after the quarter ends) and US retail figures tabulated by NPD, which are announced shortly after the end of each month. These two sets of numbers look at different information, and were frequently muddled together to create an inaccurate picture of what was happening in the market. However, both sets of numbers are very useful.
NPD’s monthly retail numbers only count US retail sales, but unlike PC or laptop sales, game consoles are all sold at retail. That makes it easier to track what’s happening in console sales compared to PC sales, and NPD’s quick turnaround gives a pretty immediate view of sales trends.
Manufacturers’ production numbers reflect worldwide sales and can reflect the number produced rather than in use. These can be more flattering for Nintendo and Sony, which have major markets outside the US; Microsoft’s Xbox 360 sales are not very significant outside the US, while its competitors only sell about a third of their consoles in the American market.
However, Microsoft’s console also had a full year head start with the 360 compared to the PS3 and Wii, so its manufacturer production numbers are far more impressive when stated as cumulative shipments to date. In the 2006 holiday season, Microsoft shipped a blowout surge of units to stores just as Sony and Nintendo were struggling to launch their new consoles and suffering through the inventory and production problems common to any new rollout. This was no accident.
Stuffing the Channel.
Microsoft, Sony, and Nintendo are all manufacturers that rely almost exclusively on independent retailers to sell their products. That means all three will willingly push as many units into channel inventory as possible, because once sold to stores the consoles are no longer their problem. In contrast, Apple sells a significant number of its Macs and iPods and the majority of its iPhones in its own retail stores or through its direct online store, making it pointless for the company to perform channel stuffing.
Nintendo simply couldn’t stuff the channel because it couldn’t make Wii units fast enough to even meet demand. Sony worked hard to stuff the channel, but also suffered some production problems. At the same time, the high initial price of the new PlayStation 3 helped accumulate channel inventory as many buyers were wary of throwing down $600 for an unproven new game console that was clearly going to fall in price.
Microsoft took the cake and ate it too in terms of channel stuffing. As I presented in the middle of last year, the company met two key goals in its first year, not by selling units to users, but merely by pushing huge inventories into stores. Microsoft announced it would sell five million units by mid 2006 and ten million units by the end of 2006. Both targets were designed to suggest that the company would overwhelm the market with 360s leaving little remaining interest in the new offerings introduced by Nintendo and Sony for the 2006 holiday season.
Sure enough, Microsoft hit its targets. However, after hitting each, subsequent channel shipments trailed off dramatically. That indicated that stores were stuffed with units they could not sell. After supposedly selling eleven million units by the end of 2006 (which required shipping 4.4 million units to stores in just three months), Microsoft then only shipped another 1.2 million over the next six months. It had initially planned to ship out 5 million new units in the first half of 2007, but there just wasn’t room. The channel was stuffed.
The Death of Xbox 360.
Throughout all of 2007, Microsoft could only push out 7.3 million units, a huge drop of 33.6% in unit shipments year over year from 2006’s 11 million units. The Xbox 360 peaked in 2006 and is now in decline, and the channel is still stuffed. This untold story is particularly interesting when compared to the sturm und drang sung about the supposedly “shrinking iPod market” that Apple faces.
Pundits ripped their garments apart and scraped themselves with pottery shards in lamentation over the fact that Apple increased iPod shipments by a mere 5% year over year in the winter quarter. Not only did they ignore the fact that Apple boosted iPod revenues by 17% that quarter, but they also failed to look at sales over the entire year in perspective. Despite the bewailing of the iPod as a product that has plateaued and can’t find new buyers, Apple actually increased iPod sales year over year by 13.5%, from 46.4 million in calendar year 2006 to 51.6 million in calendar year 2007.
Why was this modest increase of 5.2 million new iPods jumped upon by the media while the major drop in Xbox 360 sales by 3.7 million units year over year was conspicuously ignored? Apple has consistently been able to sell replacement iPods to existing users and market improved and expanded models that offer more mobility or new features; how many users will buy another Xbox 360 just to get an HDMI port or a different color or a different bundled game?
The other two differences between the Xbox 360 and the iPod are that Apple sold the iPods at a sustainable profit and that it is finding healthy growth internationally. The Xbox has lost Microsoft billions of dollars and has not been able to penetrate markets outside the US. The iPod is also acting as a launching board for the iPhone and, Apple hopes, the new Apple TV. The Xbox has not only done nothing to help establish related products like Microsoft’s Zune, as many analyst suggested it would, but has also squandered its brief lead in offering video rentals through the company’s online Xbox Live service.
The Sealed Fate of Microsoft Media Downloads.
After its peak year of Xbox 360 sales in 2006, Microsoft was still failing to sell any significant number of digital downloads through the Xbox, while Apple was selling 99% of online TV programs and 40% of movie downloads through iTunes. At this years’ Macworld, Steve Jobs announced Apple had sold 7 million movies, 125 million TV shows, and 4 billion songs, and noted that Apple’s share of the movie market had increased to over 50%.
Microsoft doesn’t release its media sales figures, but according to NPD, it doesn’t even figure as a full percentage point in the TV downloads market, and in terms of movie sales it fights over the tiny 7% slice of “other” vendors outside the top four led by iTunes. Apple had left Microsoft’s online media business in the dirt even before matching its Xbox Live features, including HD content and movie rentals. As Apple’s far larger iTunes media platform expands and the growth of Xbox 360 sales shrinks dramatically, will anything stop or reverse this trend?
In addition to just being smaller, Microsoft’s dying efforts in media attached to its gaming platform are also less attractive due to its requirement that would-be buyers trade their money for a points currency that must be used to buy or rent media from its Xbox Live service. Apple allows its customers to make micro-payments whenever they want, so buying one 99 cent track actually costs 99 cents, and doesn’t require a minimum points purchase or leave an odd balance of points remaining to be used or forfeited. In Microsoft’s points system, you have to buy at least 400 points for $5 online, and then use 79 points to buy the same 99 cent track, leaving you 321 odd points to spend or forget about.
The Real Story in 2007 Console Sales.
If the dramatic year over year decline in sales of Microsoft’s Xbox 360 and its futureless prospects as a media center device come as a surprise, wait till you see the plain numbers from NPD’s monthly sales reports. They simply unravel the entire sweater story Microsoft has worked so hard to knit. According to media reports throughout the year, the Xbox 360 seemed to consistently lead despite brisk sales of the hard to find Wii and much to the embarrassment of Sony, which couldn’t even seem to sell any of the consoles it managed to build.
But things were not as they seemed. Microsoft’s lead was only ever based on its channel stuffing from 2006. Throughout 2007, the Wii outsold the Xbox 360 every month outside of September despite being nearly impossible to find, and even when only considering US retail figures. Including sales outside the US, the Wii outsold the 360 by more than 200% (15.4 Wii units vs 7.3 million 360s), again despite severely constrained supplies of the Wii and abundant stockpiles of the 360.
Of course, the Wii and the 360 aren’t entirely direct competitors; many gamers who own the 360 bought a Wii in addition to their existing console, and use it to play different kinds of games or in group settings. The 360 directly positioned itself against the new Sony PlayStation 3, and fewer gamers are likely to buy and play both consoles. Still, the main competitor to Sony’s PS3 wasn’t the 360 but actually the PS2, which Sony continued to sell throughout 2007.
Sony vs Sony.
Microsoft couldn’t continue to sell its original Xbox because once the 360 was released, nobody would want it and its availability would severely detract from Microsoft’s new console were it priced competitively. In 2006, Sony sold its PS2 against the new Xbox 360 and easily outsold Microsoft’s new console, all the while making profits on the PS2 while Microsoft lost money on the 360. In 2007, Sony continued selling the PS2, and priced it to compete against the Wii.
The result was that the cheap PS2 nearly matched sales of the 360 in the US (4 million PS2s vs 4.6 million 360s) and blew past it internationally (12.7 million PS2s vs. 7.3 million 360s). The PS2 even approached sales of the Wii, and in doing so helped mitigate the deep losses Sony suffered on the new and far more expensive to build PS3. Nobody ever talked about PS2 sales despite its being the second most popular console of 2007 by a wide margin.
What also went entirely unsaid in media reports was that the struggling PS3 actually sold in decent numbers next to the 360 despite competing against its own cheaper PS2 cousin while the Xbox 360 had no cannibalizing competition of its own at all. While selling only a little more than half as many PS3s in the US as the Xbox 360 sold in 2007 (2.6 million PS3s vs 4.6 million 360s), Sony sold 6.5 million PS3s worldwide, a stone’s throw from the 360’s total of 7.3 million. Suddenly the PS3 doesn’t look like the dog Microsoft worked so hard to make it out to be.
Sony’s Big Risks.
And now a different picture emerges: Sony was competing aggressively against itself and still won. Adding all PlayStation sales together (which will no doubt cause Xbox fans to spin into an apoplectic fit), Sony sold 6.5 million consoles in the US and 19.2 million worldwide. Again, Microsoft’s console sales were just 4.6 million and 7.3 million respectively.
Anyone talking about PC market share would collectively consider Windows XP and Vista both as Windows, and not exclude XP’s numbers just because it came out in 2001. Similarly considering Sony’s total consoles sales collectively drops the Xbox 360 into third place in the US (above right), and a very distant third place worldwide (above left).
Sony’s overall profitability certainly didn’t match Nintendo, which sold all of its 15.4 million Wii consoles at a decent profit. However, Sony achieved two things: it maintained its dominance of the console market while also establishing its next generation HD console and its Blu-Ray HD disc format. It certainly paid dearly to do this, but so did Microsoft. The difference was that Sony had the ability to continue selling a profitable Wii-class product in volume while also introducing a risky new venture in the PS3 that bet on big future payoffs in both gaming and media.
Microsoft not only ended up blocked from expanding outside the US, but also had its HD-DVD format and its related VC-1 and HDi initiatives skewered by Sony’s PS3 strategy of bundling Blu-Ray with the new console. Just as Sony risked drawing attention away from the PS3 by continuing to sell the PS2 on the cheap, it also took a big risk in including an expensive blue laser optical drive with its console.
Microsoft’s Cheap Strategy.
In contrast, Microsoft hoped to strip the 360 of features and hit a cheap price point against the PS3; it only offered an HD-DVD drive as an option, left WiFi an $99 accessory, scratched the hard disk from its base model, and even left HDMI output off of a device being sold as an HD system for media and games.
All those stripped accessories ended up costing buyers more in the long run. Microsoft claimed this year that US consumers spent more on the Xbox 360 platform in 2007 than on any other gaming platform, not because they bought more Xbox consoles, but because they had to spend more on higher margin options that were missing out of the box.
Microsoft has consistently worked to set up false price competition to suggest that its products are cheaper when in reality they typically cost far more than rivals when configured as they would actually be used. Throughout 2007, Xbox fans couldn’t stop talking about how much cheaper the 360 was compared to the new PS3, but after matching its basic features, the 360 was actually more expensive. Sony’s big risk in delivering a fully equipped console with an expensive Blu-Ray drive, hard disk, wireless, and HDMI ended up providing its 6.5 million customers with a system they’ll be happier with and with fewer reasons to immediately pay for missing upgrades.
Microsoft’s corner cutting to create an illusion of savings means the majority of Xbox users–who bought the first 11 million consoles in 2006–have no HDMI outputs. Many also went without a hard drive, which is required to use Xbox Live media downloads. Microsoft’s cheap strategy therefore gave its users fewer reasons to try HD media rentals in Xbox Live, sacrificing its future plans in media and the value of the console in order to create the temporary appearance of domination back in 2006. That leaves the company’s gaming and media ventures wide open to competition from the increasingly affordable PS3, the increasingly available Wii, and media downloads through Apple TV and iTunes.
In addition, the rushed to market 360 has suffered more than its fair share of problems, with retailers complaining about a 30% return rate and Microsoft being forced to set aside a billion dollars to service warranty work for machines that overheat, scratch optical media, and make lots of noise.
There Is One More Thing.
If all those numbers sound really bad, consider why they’re actually worse than they seem. Recall that I’m comparing two sets of numbers in parallel: manufacturer’s total worldwide shipments and NPD’s US retail numbers. These numbers overlap. When Microsoft stuffs the channel, it counts millions of units as shipped. When stores actually sell those units, NPD counts them again as having sold at retail. If Microsoft is indeed stuffing the channel unmercifully, NPD’s retail sales should demonstrate that. They do.
While I stated that Xbox 360 sales were 4.6 million for the US and 7.3 million internationally, I really meant that NPD counted up sales of 4.6 million units in the US and Microsoft managed to stuff another 7.3 million into stores. Microsoft did not neatly sell the difference of 2.7 million Xbox 360s overseas; whatever number the company actually sold internationally is still hidden by the piles of boxes in the channel at the beginning of 2007.
That explains why NPD reported that Microsoft sold 721,000 units in the first quarter of 2007, despite Microsoft only reporting having replaced them with 600,000 new units worldwide. It wasn’t selling a negative number of units outside the US! Instead, Microsoft had run up a huge channel inventory balance worldwide by the end of 2006, and continued to slowly sell those boxes while it was forced to scale back new shipments from 4.4 million to 0.6 million quarter over quarter at the beginning of the year.
In comparison, Nintendo sold over a million units in the first quarter in the US but distributed over 2.6 worldwide, and Sony sold a half million PS3s in the US while shipping out 1.9 million worldwide. From the first quarter on, it was obvious that Microsoft hadn’t actually sold as many units as it was saying it had. For the rest of the year, the Microsoft not only fell into third place in the number of console units sold, but also saw its year over year sales shrink significantly as its rivals expanded their markets rapidly.
Where Are the Missing iPhones Xbox 360s?
Pundits have been desperately searching for the 1.3 million iPhones that were sold but not immediately activated, but haven’t demonstrated any interest in finding out why Microsoft has shipped out a total of 17.7 million Xbox 360 units with free Xbox Live subscriptions, only to have only 10 million activated subscribers to announce. Where are the non-activated 7.7 million Xbox 360 units with as yet unclaimed free Xbox Live subscriptions, good for the free game Microsoft threw in as a bonus?
That’s a big number! It’s more units than Microsoft actually produced in 2007. A year’s supply of Xbox 360s have gone missing and nobody in the media has batted an eyelash. That’s on top of a dramatic 33.6% decline in unit shipments for 2007.
iPod sales are up 13.5% year over year to 51.6 million units in 2007, and pundits are worried the platform has saturated the market despite strong international growth and new growth of higher margin products branching out into a new WiFi mobile platform.
Xbox 360 sales are down 33.6% year over year to 7.3 million units in 2007, and pundits are congratulating the company despite anemic international sales and having never turned a net profit on an end of the road platform with little prospects for expanding in any new direction.
Strong iPhone sales would further polish Apple’s iPod numbers were they mingled together, but standing alone they represent a major presence in the US smartphone market and dynamic potential for growth internationally, where demand is high enough to prompt hundreds of thousands of users to pay a premium to obtain it unlocked. Pundits worry that unit sales aren’t sustainable and that demand might collapse under the weight of huge unsold inventories, were they to exist, despite few competent competitors in the market.
Weak Xbox 360 sales are not only down precipitously year over year, but the channel is stuffed with enormous inventory. Competitors are both outselling it and out maneuvering it, leaving the Xbox 360 tied to the dead HD-DVD format and an unappealing media store that only an insignificant few are actually using.
Anyone fawning about the Xbox 360, Microsoft’s overall strategy, and the platform’s future prospects can simply have no credibility whatsoever.
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