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

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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Comments from our Foolish Readers

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  • Report this Comment On January 17, 2014, at 10:05 PM, KenLuskin wrote:

    Bozo the Clown, Both MSFT and Sony could NOT meet Global demand, that is why MSFT could NOT sell more units during the ONLY 4 weeks of sales.

    Xbox1 was ONLY in 13 markets out of over 50 WORLD WIDE!

    SONY is so supply strained that the are NOT launching in Japan until Feb. 22.

    Xbox 1 did NOT launch until END of November!

    That means the average sales were 750,00 a month.

    HOW do I know that MSFT and Sony were supply constrained?

    Because each Console has a $100 APU from AMD!

    It is EASY, (if you have a functioning brain) to see that AMD's division that accounts for the console chip business had an increase in SALES of $350 million in Q3 over Q2 = 3.5 Million chips shipped in Q3.

    It is likely that MSFT contracted for 1.5 million chips in Q3, while Sony contracted for 2 million.

    THESE are the chips that were built into Consoles made the 2 week journey from the factories in China to the stores in the launch countries.

    AMD had to ramp up production in Q4, in order for Sony and MSFT to sell a total of 7.2 million because of the build time, and shipping time.

    In other words, there are about a total of 1 million chips in consoles in TRANSIT from the factories to the stores at any point in time. There also are chips that are in transit from AMD to the factories, and there are chips in units being built as well as ones that are waiting to be shippped.

    I estimate that there are about 1.5 million to 2 million chips in the "pipeline" at any point in time.

    This means that the "pipeline" chips plus the chips that were sold in the 7.2 million consoles during the 4 to 5 weeks of Q4= a total of 9.2 million.

    This means that AMD had to RAMP up production in Q4 to about 5.2 to 5.7 million chips from the 3.5 million shipped in Q3.

    MSFT, Sony, AMD, and other suppliers could NOT ramp up production fast enough to meet the OVER whelming demand.

    Sony most likely ordered more aggressively, and had an extra week to SELL, than MSFT.

    Bottom line, your assumptions are false, which means your conclusions are WRONG!

    There is stronger demand for the PS4, but Sony also had planned for greater demand, and had 25% MORE time to sell!

    In mid December Sony announced they were selling the PS4 in 48 markets, while MSFT was still in only 13 markets.

    BOTH the Xbox1 and PS4 sold ALL available units, and there was still huge demand in the markets they INITIALLY launched in. While there were plenty of markets YET to be launched in!

  • Report this Comment On January 17, 2014, at 10:35 PM, KenLuskin wrote:

    Sony had 5 weeks to sell 4.2 million consoles, while MSFT had 4 weeks to sell 3 million consoles.

    PS4 sold on average 840,000 consoles a week.

    Xbox1 sold on average 750,000 consoles a week.

    CLUE IN, and stop with the BS!

    There is stronger demand among the hard core gamers for the PS4, but there is stronger demand among everyone else for the Xbox1.

    There are TENS of MILLIONS of people who want the most ELEGANT internet access device for their 50 to 60 inch TVs.

    The Xbox1 appeals to ALL those people who want 1080p SKYPE VIDEO calls from the comfort of their couch!

    Watch and LEARN.. youngster!

  • Report this Comment On January 17, 2014, at 10:40 PM, KenLuskin wrote:

    When MSFT wants to INCREASE demand, they use the MOBILE phone model.

    MSFT subsidized the UPFRONT cost of the Xbox360 with a monthly charges from Xbox LIVE.

    MSFT has said they will use this model at the appropriate time with the Xbox1.

    STOP being such a SILLY young boy!

  • Report this Comment On January 17, 2014, at 10:42 PM, KenLuskin wrote:

    MSFT in a $250 MILLION JV in CHINA for TV programming as a lead in to CONSOLE sales.

    People LOVE AAA gaming, the Xbox and Xbox360 will be HUGE seller in China!

    NOW that their market has finally opened after a 13 YEAR BAN!

    TALK about PENT UP DEMAND!!!

    CLUE IN!!

  • Report this Comment On January 18, 2014, at 10:06 AM, Iseeclearly wrote:

    The numbers look awesome on paper but what do they mean?

    On german amazon they have xbox one in stock but no ps4, around christmas they had in One single store 100? Piled up and i saw no1 buying it.

    Maybe its just freak accident and the 360 numbers look awesome, but even if they sell how much did Microsoft spent on advertising?

  • Report this Comment On January 18, 2014, at 2:30 PM, ShadowOfTheVoid wrote:

    Considering the fact that Sony and MS shipped fewer units of the PS3 and 360 in the period from launch to the following March 31 than they sold of the PS4 and XBO last quarter alone, I'd say both systems are doing extraordinarily well. The PS4 and XBO respectively have the best and second-best launches of any system ever. The PS4 could be doing even better if it weren't supply-constrained. The XBO only barely outsold it in America according to December NPD numbers. While demand is high for both systems, it's higher for the PS4 right now even in Xbox's home turf (though there's no guarantee that'll stick in the long run, and I think it'll be competitive between the two in the States).

    As for post-holiday software droughts, let me give you some perspective. The Wii U had essentially zero software releases of note between launch day and the release of Pikmin 3 eight months later. That is the single worst software drought in history for a major console. Meanwhile, even though January is pretty dry for the PS4 and XBO, the coming months still offer a wide selection of games. The XBO is getting Titanfall as its next major exclusive in March, while Driveclub and Infamous: Second Son are coming to PS4 around the same time. Third-party titles being released in the first half of 2014 include Thief, MGSV: Ground Zeroes, Dying Light, and Watch Dogs. This isn't a complete list, either, mind you. There will be no shortage of games for either system in the late winter and spring months. Ergo, we should not expect a situation like the Wii U went through where there's a massive drop in sales after the holidays. I expect both systems to pull at least 1.5 million in America alone and 2-3 million worldwide in just this quarter.

  • Report this Comment On January 18, 2014, at 2:58 PM, Iseeclearly wrote:

    But what does it mean for investing?

    Microsoft is already worth a few hundred billion and Sony i believe is undervalued but what does it help, will they bleed to death in their other divisions?

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