Is 3 Million Units in 2013 a Good Enough Start for Microsoft's Xbox One?

Microsoft sold more than 3 million Xbox Ones to consumers in 2013. What do these numbers suggest for the company's console battle with Nintendo and Sony?

Jan 17, 2014 at 5:06PM

Much has been made about the sales war presently under way between the Xbox One from Microsoft (NASDAQ:MSFT) and the PlayStation 4 from Sony (NYSE:SNE). After Nintendo's (NASDAQOTH:NTDOY) Wii U stumbled and suffered through its year-long head start, the device has largely been written off as a serious contender. The system's poor performance had a small body of speculators insisting that new systems from Microsoft and Sony would find the market similarly inhospitable.

With the release of holiday sales press and tracking data across a smattering of countries, the idea of the Xbox One and PlayStation 4 facing a scenario comparable to Wii U's can be set aside. Microsoft has recently announced that 2013 saw the company sell over 3 million Xbox Ones to consumers. Meanwhile, Sony's PlayStation 4 sold over 4.2 million units in 2013.  What does this early data suggest for the coming stages of the console war?

Mr. Softy serves hard numbers
Moving 3 million consoles in approximately five weeks on the market has to have Microsoft feeling at least a little relieved. There are other, more troubling indicators to consider, but this scenario is vastly preferable to one that might have been. The Xbox One was revealed with a controversial product vision that ultimately had to be amended in order to placate the consumer base and ensure that Microsoft's gains in the gaming industry were not erased. The system's late-2013 performance puts its sales within striking distance of what the Wii U managed in its first year across three territories. The Xbox One has yet to launch in Asia and a number of smaller European countries, but the system won't find much of an audience outside of the West. That puts it in a somewhat similar two-territory boat as the Wii U, which looks to have close to no presence in Europe.

While 3 million units in a little over a month would suggest impressive adoption, reports that demand is being met and Microsoft's own figures show a steep decline in sales. Launch sales can be misleading, and even successful debuts are not guarantees that a product will have a healthy lifecycle. With early Microsoft PR claiming 2 million units sold in a span of 18 days, that puts sales for the last three weeks of December at approximately one million units. Sales drop-off after launch is to be expected, but reports of the PlayStation 4 outselling Xbox One and still being hard to find complicate the picture.

How the West was won
The success that Microsoft achieved in the U.S. and Europe with the Xbox 360 wasn't just a product of the system's blockbuster exclusives. The fact that the system was substantially cheaper than the PlayStation 3 for much of its lifecycle played a major role in making the 360 the market favorite in the U.S. and Britain. Now that Sony's console enjoys the pricing advantage, the company is seeing brisk sales and setting a record pace. With eight years having passed since the debut of the 360 in 2005, it's not surprising that Sony's smartly priced PS4 is flying off the shelves. It looks like Microsoft will need to shave down the One's price in order to match PS4 in sales.

Now that both pieces of hardware are known commodities and launch line-ups have been weighed and compared, focus shifts to the importance of upcoming games. Both the Xbox One and the PlayStation 4 look to suffer from the typical post-launch software drought. Between now and the end of March, Sony's machine will see more releases thanks to an array of smaller games sold through the PlayStation Network. The other side of that coin is that the Xbox One will get Titanfall from Electonic Arts, a game that has the potential to be one of 2014's breakout hits. Sony's big release for the first half of 2014, Infamous: Second Son, may wind up a critical and commercial success, but it's likely to fall short of Titanfall's sales and profile.

Microsoft will use these numbers to fight itself
The numbers coming in on Xbox One are a mixed bag. The console has shown that there is still a good amount of power behind the brand and that it can succeed given the right conditions. That said, being outperformed by the PS4 will cause Microsoft to shake up its One timeline and reassess the path to success. As a company that is internally at odds with whether a presence in the console space is a worthwhile investment, there will be voices within Microsoft that say very different things about the numbers it's collecting.

The console's sales performance should improve as price comes down, but a straight price cut will generate losses and embolden the One's internal critics. This reason, among others, sees the company likely to release a cheaper Xbox One package that does not include a Kinect camera by the end of 2014.

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Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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