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Last week, Microsoft (NASDAQ: MSFT ) offered U.S. gamers $100 credit toward the purchase of an Xbox One if they "ditched" (traded in) their Sony (NYSE: SNE ) PS3s. This offer, which lasts until March 2, has raised the eyebrows of investors and gamers alike.
In a previous article using data compiled by GameSpot's GameTrax, I noted that only 10% of surveyed Xbox One buyers previously owned a PS3, compared to 28% of PS4 buyers who previously owned the Xbox 360. Those unbalanced conversion ratios indicated that Sony would gain an edge over Microsoft as the eighth generation console race progressed.
There's one question on everyone's mind: "Is Microsoft really that worried about competition from Sony's PS4?"
Meanwhile, the most recent sales figures from Vgchartz.com show that Microsoft has sold 3.37 million Xbox Ones, while Sony has sold 4.88 million PS4s. Both consoles, which were launched last November, are closing in on Nintendo's (NASDAQOTH: NTDOY ) Wii U, which has sold 5.62 million units since November 2012.
There is now a trail of clues indicating that the gap between the Xbox One and the PS4 is widening:
On Jan. 31, Sony unveiled sales figures from market research group GfK's Chart-Track service that indicated the PS4 was outselling the Xbox One by 50%.
On Feb. 3, the PS4 version of Square Enix's Tomb Raider: Definitive Edition in the UK outsold the Xbox One version 2:1.
On Feb. 4, Amazon.com (NASDAQ: AMZN ) UK's Ketu Patel made an ominous statement that the Xbox One has "a lot of catching up to do," but Electronic Arts' (NASDAQ: EA ) Titanfall (a PC/Xbox 360/Xbox One exclusive) might help it catch up.
There are now persistent rumors that Microsoft plans to drop the price of the Xbox One and possibly remove the Blu-Ray drive. Microsoft has denied these claims.
The logic behind Microsoft's $100 trade-in offer
All of these clues indicate that sales of the Xbox One are slowing more than expected. What could offering a $100 trade-in rebate to PS3 owners accomplish? Let's crunch the numbers.
An Xbox One has an estimated manufacturing cost of $471 and sells for $499. A price cut to $399 would cause a loss of $72 per console, so that wouldn't be employed unless Xbox One sales completely stalled out.
Removing the Kinect ($75) and the headset ($10) could shave $85 off the production cost, which has led to speculation that the Kinect, at least, could be removed in a cheaper version later this year.
A pre-owned PS3 sells for $200 to $230 at GameStop (NYSE: GME ) . However, GameStop only pays $100 for a 500GB PS3 system. Therefore, all Microsoft is really doing is offering the same trade-in deal as GameStop, but using it as a publicity stunt to desperately boost its conversion rate of PS3 gamers.
Gamers who don't want an Xbox One can simply go to GameStop and trade in their used PS3 systems for $100 in store credit to reduce the price of a new PS4 to $299 instead.
Why Titanfall might not matter
EA's Titanfall, which is scheduled to be released on March 11, is widely expected to boost sales of the Xbox One. The Xbox One and PC versions will arrive first, and the Xbox 360 version will be released on March 25.
It's fairly obvious, based on the fact that Microsoft's "$100 for your PS3" promotion runs to March 2, that Microsoft expects Titanfall to provide the boost it needs to catch up to the PS4. In other words, Microsoft expects Titanfall to be to the Xbox One what Halo: Combat Evolved was to the original Xbox.
While that's certainly an optimistic view of things, there are five huge problems with that theory:
According to GameSpot GameTrax's January 2014 survey of 3,500 gamers, Titanfall ranked 16th in the most anticipated games of the year. Only 67% of gamers were even aware of the title, and of those gamers, only 30% planned to purchase it.
EA's profit-maximizing strategy of releasing the game on the PC and Xbox 360 will inevitably dilute sales of the Xbox One version.
The cross-generation release of the game also makes Titanfall look like a mere half-step up from seventh generation consoles.
Titanfall doesn't have a single-player mode, meaning the player is required to play online at all times.
Considering EA's terrible track record with "always online" games like Simcity, server problems could crush the game's reputation the moment it launches.
Moreover, Titanfall doesn't look much different from Crysis, Halo, or most other modern shooters. The only thing that stands out about the game is its acrobatic freedom and seamless swap from ground-based combat to mech-based combat.
It's definitely pretty, but there's nothing so Earth-shattering about the title that makes it a "must buy" title for eighth generation consoles, especially without a dedicated single-player campaign.
I'm not sure why Microsoft believes that Titanfall could be the Xbox One's Halo, especially since Activision's (NASDAQ: ATVI ) Destiny, from Halo developer Bungie, has a much better chance of claiming that title.
The bottom line
In conclusion, Microsoft's $100 PS3 rebate is just the latest in the company's new strategy of petty pokes against its rivals, and will do very little to boost Xbox One sales.
Encouraging gamers to "ditch" their PS3s isn't much different from its attack ads on Apple's (NASDAQ: AAPL ) iPads using Siri's narration, or its "Scroogled" campaign against Google -- it's simply desperate, immature, and embarrassing.
Perhaps Microsoft believes that the rebates could hold it over to Titanfall's arrival, but I have serious doubts that it will be the Xbox One's salvation.
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