Why Early Xbox One Sales Numbers Are Meaningless

While the media likes to act as if the Xbox One is fighting for its life, that's not true and Microsoft can afford to take the long view.

Mar 18, 2014 at 8:40AM

Variants of the headline "Will Titanfall save Xbox One" were all over the Internet March 11 as the much-anticipated console game was released. The premise seemed to be that if Xbox One did not have a breakout hit, it would be left behind in the console wars and Microsoft (NASDAQ:MSFT) would send it to the technology scrapyard where it could play with Zune and Microsoft Bob.

The Xbox One might not be the immediate blockbuster some expected or hoped, but it certainly does not need to be saved.

Microsoft has nothing to fear
Even though the Sony (NYSE:SNE)  PlayStation 4 has an early sales lead over the Xbox One, the second-place console-maker has nothing to fear. This is not a repeat of 2001, when there was a real question as to whether Microsoft's first-generation Xbox could compete with Sony's PlayStation 2, the Sega Dreamcast, and Nintendo's (NASDAQOTH:NTDOY) GameCube.

Now the Xbox is an established brand and Microsoft -- with its huge cash reserves -- has the ability to wait out its competitors and grow its user base over the long term. Microsoft already pushed Sega out of the console market and Nintendo appears to be nearing the edge as its WiiU flops. Sony may not be in quite as dire straits as Nintendo, but the once seemingly invulnerable company has faltered mightily in recent years.

Microsoft doesn't need one hit game or some sort of game-changing Hail Mary to establish the Xbox One. Instead, it needs to follow the same strategy it did with the Xbox 360 and with its Windows operating system.

What is Microsoft's strategy?
When Microsoft releases a new version of Windows it does not expect customers to immediately upgrade from the current version. In fact, Microsoft has supported Windows XP for nearly 13 years (it drops support in April). In a February Fool article I wrote that XP, according to Net Application, "still held a 29.2% market share in January. That places it behind Windows 7, at a 47.5% share, and well ahead of the two released versions of Windows 8, which have about a 10% share, according to the study."

That shows an extraordinary patience with its customer base and a willingness to wait until customers choose to upgrade. Windows customers are likely to stay Windows customers in the long run. The same is true for video game console users and Microsoft has sold 80 million Xbox 360 consoles as of September 2013, according to Gamespot. 

That's a huge audience for the console -- which is far more than a game player -- already used to the Xbox ecosystem. If the Xbox One was poorly reviewed or disliked, maybe PS4 could steal some of those customers. Similarly, if the PS4 was hailed as being something different, (sort of like the first Wii was), perhaps it could steal market share.

Since neither of those things are true, you have to assume that 360 users will remain loyal, but the ones who aren't hard-core gamers (many of whom will buy both consoles anyway) feel no pressure to buy. As Xbox 360s break or a game catches someone's eye, they will upgrade to an Xbox One.

With $80 billion in cash, Microsoft just needs steady sales. It does not need everyone to trade in their 360s all at once. Microsoft can afford to be the tortoise while Sony and Nintendo have no choice but to race for the finish line.

Are Sony and Nintendo in trouble?
Sony may be winning the console wars but the overall health of the company is not good. "Moody's Investor Service has cut the credit rating of Sony to junk status saying that the Japanese group's profitability is likely to remain 'weak and volatile' until the turnaround of its television and personal computer businesses translates into better earnings," FT.com reported in January. 

The company predicted in January that it would lose over $1 billion in its current fiscal year, according to The New York Times. That loss has led to plans to sell its PC business, a move to spin off its ailing TV division, major layoffs, and the company selling its longtime headquarters. Sales of PS4 may be a bright spot as sales were up 64% in the latest quarter, but unlike Microsoft, Sony needs a hit because it needs the cash.

Nintendo may be in even worse shape. The company is losing money and its WiiU has flopped. In January, Nintendo slashed its global Wii U sales forecast for the year by almost 70% to 2.8 million units. 

"We failed to reach our target for hardware sales during the year-end, when revenues are the highest," Nintendo's President Satoru Iwata told Reuters.

The company also warned in January that it would lose 25 billion yen for the year ending on March 31, a substantial reversal from its prior projection of a 55 billion yen profit, Reuters reported. That would be the company's third-straight year of losses. 

Microsoft can play the waiting game
While Homer Simpson spoke the immortal line "the waiting game sucks, let's play Hungry, Hungry Hippos," the waiting game can actually be a winning strategy for Microsoft. While the future of Xbox does not depend on Titanfall being a megahit, it should boost sales for the Xbox One.
 
Almost four months in, Sony has sold 6 million PS4s, compared to 4 million Xbox Ones, Deadline.com reported March 10. That's a deficit, but not a disaster, and Microsoft can afford to build its brand and catch up in the long run. Early adopters are not necessarily indicative of long-term trends when it comes to console purchases. For casual users, the Xbox 360 is still a pretty awesome machine and though the One may be better, it's probably not enough to shell out $499.
 
While Sony and Nintendo are still playing a game based on hits, Microsoft has turned consoles into the car business. Your old car is pretty good and lasts longer than previous models. Sure a shiny new car is tempting but many people will choose to drive the old one until the cost of keeping it on the road is prohibitive.
 
Microsoft can afford to wait for customers to upgrade on that less-frenetic cycle. Nintendo surely can't and Sony certainly doesn't want too. Titanfall being a hit or a failure changes the timing but should not change the end result.
 

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Daniel Kline is long Microsoft. He owns and enjoys an Xbox 360. 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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