Games Aren't Driving Xbox One or PS4 Sales

With both Microsoft and Sony releasing next generation console systems for the 2013 holiday, it appears the reason driving consumers to buy them has changed.

Jan 22, 2014 at 10:06AM

Customers are buying Microsoft's (NASDAQ:MSFT) Xbox One and Sony's (NYSE:SNE) PlayStation 4, but they appear to be buying them for different reasons than the one that powered previous console launches.

Though each company has sold more than 3 million consoles since their November launches, those sales have not created a surge in game sales or even a hit title for either console.

Go back to the Atari 2600 (the great-grandfather of the modern videogame system) and it was a game -- in that case, the first home version of Pac-Man -- that brought customers flocking. The same was true when Super Mario Bros. led the original Nintendo to the top of the gaming heap. Games have more or less been the driving force behind console sales ever since. Even with the latest generation of consoles, both Sony and Microsoft devoted much of their launch press events to showing off the lineup of games made exclusively for their machines.

But while customers are buying the new consoles in large numbers, videogame sales have actually fallen. Wedbush analyst Michael Pachter noted that December U.S. console/handheld software sales were down 17% compared with last year, coming in at $1.28 billion, well below his estimate of $1.53 billion.

Why are sales so soft?

While some of the drop might be because consumers blew all their discretionary money on the $499 Xbox One or the $399 PlayStation 4, that argument carries little weight. Videogame consumers have historically wanted to put their new consoles through their paces with the hottest titles. Since neither console in its basic configuration comes bundled with one, you would think the 6 million people who bought new consoles would have picked up a game or two.

Liam Callahan, an analyst at NPD, told the Wall Street Journal that this year's new releases have not sold well. Further, NPD reports,  games specifically created for the new devices, such as Microsoft's Roman soldier game "Ryse: Son of Rome" and Sony's "Killzone: Shadow Fall," did not even sell in large enough numbers to make NPD's top-10 sales charts.

This lack of a jump in game sales, despite the launch of the new consoles, is bad news for game makers and companies dependent upon game sales. Electronic Arts (NASDAQ:EA), GameStop (NYSE:GME), and Activision Blizzard (NASDAQ: ATVI) all saw stock prices that were flat or down in December.

The news, however, is not as bad for Microsoft and Sony. Both companies have traditionally made money from the sale of games while the consoles were breakeven propositions. Research firm IHS recently took apart the Xbox One and estimated that Microsoft's console cost $471 for materials and manufacturing. The numbers are similar for Sony -- IHS says the PS4 costs $381 to manufacture.

Fool contributor Daniel Kline is long Microsoft. The Motley Fool owns shares of GameStop and 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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