We have seen this before, from Sega to Nintendo to PlayStation. In the gaming industry the only thing that seemingly is constant is the conveyor belt at the top.
The projected battle this year will be between Sony Corporation (ADR) (NYSE:SNE)’s PlayStation 4 and Microsoft Corporation (NASDAQ:MSFT)’s Xbox One. Nintendo’s Wii U, which was released last November, isn’t pushing the expected numbers; the system’s sales have hit only 3.45 million units in its fiscal year ended March 31. Unlike its predecessor, which leads both its rivals in unit sales, the new console isn’t meeting its target sales. Things will get worse around December when the PS4 and Xbox One hit the shelves.
Xbox’s unbelievable loyalty
I owned an Xbox 360, as did my best friend, and there’s nothing we feared more than the “red ring of death.” The Xbox 360, which was launched in May 2005, has managed to move in the region of 77 million units globally. Its online service, Xbox Live, has over 46 million users. The PS3 is pushing similar numbers, while Nintendo’s original Wii console is up to 100 million units.
When you connected your Xbox and found a red ring over the power button it basically meant your machine had fried. The problem was so common that endless online column inches were specifically dedicated to help users “fix” this. For users in places where support wasn’t readily available such as Kenya, this typically meant the end of your gaming experience. The Kinect peripheral wasn’t any better, as it had infuriating shortfalls in tracking, especially in low lights. Yet the Kinect still sold 24 million copies.
What’s my point? Despite the fact that people experienced plenty of problems with the Xbox 360, they just couldn’t keep away from it. I actually know someone who bought the console twice, then convinced me to buy it over the PlayStation 3; he had both. Despite the option to buy the PS3, which had proven itself to have lower failure rates, people still bought the Xbox 360, having already reconciled with the possibility of waking up one morning to switch it on and finding the red ring staring at them.
And this is how I decide to look at it. The Xbox, if only Microsoft Corporation (NASDAQ:MSFT) realized, has created an army of gaming zombies; an extensive and loyal base that is as easy to build on as it is to lose. The Xbox 360, despite its huge success, was a machine that was released hurriedly so as to beat the PS3 to the shelves. Against the Xbox, which sold just 25 million versus the PS2’s 150 million, the Xbox 360 currently triples its predecessor’s sales. In comparison, the PlayStation brand has halved its sales thus far.
What did Sony do wrong?
For starters, exclusives! People buy consoles for the game experience. Before the third generation of PlayStation consoles, Sony Corporation (ADR) (NYSE:SNE) held a 70% percent market share. In an interview with GeekWire, the former president of Microsoft’s entertainment and devices division said “…a factor in Xbox 360’s success was Microsoft Corporation (NASDAQ:MSFT)’s ability to strike up strong partnerships with publishers like EA and Activision.”
Sony Corporation (ADR) (NYSE:SNE) was also remarkably late into the seventh gaming generation. Allowing a whole year of consumers’ exposure to a rival market product, no matter how monolithic your market share is, is simply pathetic strategizing.
That, coupled with high introductory prices that were likely due to market confidence, worked significantly against the PS3. It also didn’t help that while Xbox and Wii later reduced prices PS3 maintained “cruising altitudes.” Microsoft Corporation (NASDAQ:MSFT) also offered cheaper, stripped-down versions of their console that featured less memory at a lower price.
What can Microsoft learn to keep itself afloat?
Having industry leadership now is as useful to the future as a cockpit altimeter and gyrocompass would be to your child’s nanny. After Nintendo’s Wii was released, reclaiming that top spot for PS3 would forever be elusive.
The most important factor is innovation. The Nintendo Wii’s remote turned the tables of the industry with a motion-activated controller. The Wii tore into and beat individual PS3 and Xbox 360’s sales by more than 30 million units globally. This evidences the gravity of innovation.
Games’ exclusivity is the second most important frontier. The fact that Microsoft Corporation (NASDAQ:MSFT) is going to spend $1 billion dollars and have 15 exclusive titles in the first year of the Xbox One means the company is going for a total onslaught on the industry. Forget about the hardware profiles which have been put up on every tech magazine online. Partnerships with Activision Blizzard, Inc. (NASDAQ:ATVI) and EA Sports are key. Microsoft’s best-selling game “Halo” will also be made into an exclusive action TV show, and Steven Spielberg will have role in it directing. Titles sell consoles.
The bottom line
Low Wii U sales have created the perfect environment for the Xbox One. Microsoft can take the button and run away with it. For the first five years after 2003, Microsoft Corporation (NASDAQ:MSFT)’s gaming division had been reporting losses. Things took a turn for the better from the 2008 fiscal year onward when Microsoft made its first profits from the Xbox division. The company has never managed to break even to date, presenting a $3 billion loss on the balance sheet. But Xbox is now an established brand with incredible brand loyalty, and if the last five years are anything to go by then Microsoft can maintain their graph on the green. Sony, meanwhile, has faced turbulence and suffered a $2.6 billion loss last year.
Microsoft Corporation (NASDAQ:MSFT) is also still hoping to push another 25 million units so that the Xbox 360 will hit 100 million consoles sold in the next five years. I firmly believe that the next generation is for Nintendo to lose. As much as it will be shared by the PS4 and Xbox One, the latter will have the upper hand. The basic life span of a present-day console generation is 7 years, so this is just one reason that Microsoft is a company to go long for.
The article The Next Console Generation Is Microsoft’s originally appeared on Fool.com and is written by Frank Midega.
Frank Midega has no position in any stocks mentioned. The Motley Fool recommends Nintendo. The Motley Fool owns shares of Microsoft. Frank is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
