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Based on sales data from America and Japan, it looks like traditional video consoles are in trouble and portables are staging something of a coup. Furthermore, the Xbox 360 and major software developers that hitched their 2006 wagons to it are facing a tough year.
In May, the Xbox 360 was outsold -- 232,000 units to 221,000 -- by the elderly PlayStation 2, according to NPD Group. Topping both, Nintendo sold roughly 300,000 of its portables GameBoy Advance and DS.
Earlier, the weak sales of the 360 were attributable to limited production.
However, the persistent weakness, now that plenty of supply is in stores, is surprising. Presumably, there was some pent-up demand for the 360 over the winter when the console was unavailable and eBay prices for it topped $700. Why did demand evaporate by spring?
The delay of the PlayStation 3 until the fourth quarter could have been a fatal blow for Sony (SNE, news, msgs), but now it appears as if the company can sit back and watch its old PS2 outsell Microsoft's (MSFT, news, msgs)next-generation miracle machine globally this summer.
Microsoft's point of launching the 360 a year ahead of its Japanese rivals was to expand the user base from the first Xbox. But more than a half year after the 360 launched, it is tracking the early performance of its predecessor with eerie precision -- the original Xbox also shifted around 220,000 units during its first May after a winter launch. In Japan, the 360 has flopped as comprehensively as the original Xbox -- it's selling fewer than 10,000 units a month.
The original Xbox sold about 23 million units globally. That won't do for the 360; if it stalls around the same level, the project is unlikely to produce a decent profit for Microsoft.
The user base shows no signs of expanding. What's going on?
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Anticipation, thrift and miniaturization
There are three major factors undermining the Xbox 360.Sony's PS3 and Nintendo's Wii are whipping up considerable media coverage for their launches toward the end of the year, which is causing some consumer hesitation. Wii was supposed to be a rather weak also-ran, but its motion-sensing technology and low price point may turn this generation of consoles into another three-way race. In previous rounds, the cheapest console never featured the kind of innovation displayed by Wii's control scheme.
At the moment, there is considerable confusion regarding the PS3, its final specifications and even whether it can hit its fourth-quarter launch target with decent unit volumes. But so far, this has helped maintain solid PS2 sales rather than boosting the prospects of the Xbox 360.
The 360 needs to have a very good autumn in order to change the dynamics of the video-game market. The deafening marketing hype surrounding the PS3 and Wii launches is going to snag most game-magazine covers in the run-up to Christmas. If early PS3 volumes are thin and Xbox 360 sales continue to soften, the winter might be ugly indeed for both Microsoft and the large Western game companies like Electronic Arts (ERTS, news, msgs), many of which have huge development budgets for expensive early Xbox 360/PS3 titles.
The second problem that both Xbox 360 and PS3 face is a possible shift in consumer behavior by Christmas. The astonishingly robust U.S. retail spending of the past 20 years lured both Sony and Microsoft to develop products that come with a $600-$800 "launch hit." That's what buying the Xbox 360 or the PS3 effectively costs when you factor in the console, a couple of games and some basic add-ons like extra memory or extra controllers. If the U.S. consumer grows more hesitant, depending so heavily on the luxury spend angle may cost Microsoft and Sony dearly.
Nintendo's Wii is more or less recession-proof.
It could be launched below $200 and dropped to $150 by spring 2007 without much financial stress on Nintendo.
Of course, Microsoft and Sony bet on expensive consoles precisely because America has not seen a consumer recession for literally a quarter-century. That may turn out to be stinking thinking.
Uniquely competitive game market
The third headache for the Xbox 360 is the growing heft of the portable console market. The importance of the Japanese market is becoming obvious now that Xbox 360, PS2 and Nintendo's portable consoles sell in rough parity in North America. In Japan, the DS Lite sold nearly 700,000 units in May alone, outselling all tabletop consoles by more than a half-million units.Globally, Nintendo's DS Lite is staging a major debut this summer; it launched in America on June 11 and boosted two DS software titles to the top of the Amazon sales chart. The summer drought of major Xbox 360 titles gives handhelds like DS Lite and Sony PSP a shot at building momentum toward the Christmas season. Globally, DS is poised to become the No. 1 game machine of 2006.
By the fourth quarter, we should have a uniquely competitive game market: three next-generation tabletop consoles, two viable portables and the still-strong PS2, with some major new titles. I don't believe that the earlier consensus that the video-game market will consolidate around an Xbox 360 vs. PS3 duel is going to play out. More likely, the market is going to splinter between four or five viable consoles.
And if consumer confidence misses a beat, sub-$200 consoles may well be the hottest ticket this Christmas.
By Tero Kuittinen, RealMoney.com contributor
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