Why Early Xbox One Sales Numbers Are Meaningless

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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Read/Post Comments (15) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 18, 2014, at 8:59 PM, targeyone wrote:

    Taking a superficial snapshot of computer operating systems' market share, and then building your whole argument on the assumption that home video game consoles operate exactly the same way doesn't do much for your article's persuasive ability.

  • Report this Comment On March 18, 2014, at 9:05 PM, gonorrhea69 wrote:

    I'm not a rarah cheerleader for the PS4 but all this spin pieces you are releasing is bordering towards OCD for Xbone

  • Report this Comment On March 18, 2014, at 9:11 PM, JoeLemon wrote:

    The xbox losing means games will be made for the ps4 and ported to the xbox. That is what happened last gen. The extra power of the ps3 didn't matter, since the games were made for the xbox. Getting the early lead means everything. It is why both rushed it to the market.

  • Report this Comment On March 18, 2014, at 9:16 PM, awang0718 wrote:

    Xbox One may not be fighting for its life, but it has not sold in the numbers that Microsoft thought it would. Titanfall will almost certainly boost Xbox one sales, but what will happen 5-6 months from now, when the effects of Titanfall have worn away?

    Xbox One may not be failing as badly as Wii U or PS Vita, but Nintendo has a successful 3DS and Sony has a successful PS4 to keep those company's gaming divisions alive and well. Microsoft doesn't have a second gaming platform, and if XBox One doesn't take off soon, sales will fall very far behind (despite the great holiday start) and more investors will want to pressure Microsoft to sell off the Xbox division.

  • Report this Comment On March 18, 2014, at 9:31 PM, JaredM80 wrote:

    b/c they weren't as good as expected so why be proud, better to ignore than accept.

  • Report this Comment On March 18, 2014, at 10:05 PM, spinod wrote:

    Sorry, but being a fan of PlayStation all we heard last generation for around 2 years was non-stop "PlayStation is doomed!" "Sony is doomed" "Xbox has more sales!"

    THEN PS3 caught up and somewhat passed Xbox and suddenly out of the blue "sales don't matter....." Now PS4 is dominating Xbox One and "sales don't matter" lmao, sure.

  • Report this Comment On March 18, 2014, at 10:15 PM, Bunnyking77 wrote:

    The media did this to Nintendo's Wii U and actually caused a very awesome product to fail in the West. The media on the other hand has treated the XBOXone very different, and it's sad that they destroyed a great product and praise a product that is awful in almost every meaningful way.

    Hypocritical is just the tip of the iceberg when describing the US Media when it comes to every aspect of journalistic integrity.

    I just want to say the XBOXone was supposed to be a next gen gaming machine, what the reality is we have an overpriced computer that can't compete with other gaming machines or it's only competitor. It insulted the community of gamers who support it right out of the gate, with Adam Orht's comments, Don Mattrick's hyperbole and Major Nelsons straight up lies and bogged it's price down with a gimmicky camera that at first was required to always be on and TV interaction.

    I want it to fail because it is unworthy as a next gen console and I would much rather see Nintendo make a comeback because it is a better console when it comes to gaming, even if it is a little weaker, it is many times more awesome than the mess of what is the XBOXone.

  • Report this Comment On March 18, 2014, at 10:33 PM, speculawyer wrote:

    "Network effects". Duh.

  • Report this Comment On March 18, 2014, at 10:35 PM, Darrgoth wrote:

    "Why Early Xbox One Sales Numbers Are Meaningless"

    This article is a joke. Early April Fools!

  • Report this Comment On March 18, 2014, at 11:06 PM, JJ82 wrote:

    Another horrible article making excuses...as I recall, the Dreamcast was by "an established" brand "Sega" and look at them now.

    Also, what are you saying about Nintendo? Nothing more established than them when it comes to game consoles yet look at the Wii U.

    Sorry Mr Kline but I am well past thinking you should no longer write articles about the gaming or PC markets.

  • Report this Comment On March 18, 2014, at 11:16 PM, unclechubby wrote:

    Need to hire writers that can stay consistent with the article's and products that are written about by The Motley Fool. Have several people writing contradicting stories about games systems and companies make's you all look like real fools. Have a real idea and get dedicated writers who know what they are writing about to do these stories and you may actually start being taken serious and not as the daily joke group.

  • Report this Comment On March 18, 2014, at 11:37 PM, BIGFATSHADY wrote:

    Gosh , write a article that is all true and boom! Upset and butthurt Sony fanboys appear like flies to crap. Of course sales matter, its just that ITS ONLY 4 months into 8th gen and its 6 mill vs 4 mill. Its very early, and anything can happen in the next 8 years. Get over yourselves Sony fans and stop the whining. PS4 has the early lead, great!! But unless you have a crystal ball and can see into the future ( I want those lottery numbers btw) then shut the hell up!

  • Report this Comment On March 19, 2014, at 2:14 AM, 3dpenguin wrote:

    To the Sony fanboys they did point out a major trouble for Sony, outside of their gaming and patent divisions the company is hurting. Sony has run in the red for at least the last 3 years, and it gets worse every year. Microsoft is not going to bail out Sony like they did 18 years ago with Apple, they will let Sony fail if it comes down to it, because they have no interest in keeping Sony afloat. Sony isn't even a blip anymore in the computer market, they sold off their phone division to try to turn the business around, and that didn't work. The only thing Sony is to MS is competition. MS had reason to help bail out Apple, because Apple wasn't in direct competition with them, and Apple was forcing other companies to continue to update their technology and software, which meant more money for MS and the rest of the computer industry. Sony on the other hand has proven time and time again that they don't establish anything new. Blu-ray, at the time of launch was a boat anchor Sony had sunk billions into developing as a high format storage medium, and had been in their R&D since the late 90's, the PS3 used the cell processor which was nothing more than a highly compact version, all be it more powerful, of the core technology being used by processor manufactures, the PS4 is nothing more than standard computer components designed to run video games. Sony is not innovative and has never been such, they take research by other companies and then try to figure out a way to make money off of the technology, they are a tech leach, which the tech industry can do without.

  • Report this Comment On March 19, 2014, at 2:32 AM, Droppo wrote:

    It's all about the games. I can still buy games for my Xbox 360 and they look great. I have no problem continuing with that console for as long as they keep supporting it. Unless there is a game that I just HAVE TO HAVE on the Xbox One, I will stick with what I have. I didn't think it was time for a new generation of consoles to begin yet anyway as they were still releasing amazing games for 360. This is probably why the Xbox One hasn't come out of the gates as fast as Sony (besides the slightly higher price). Why bother when you still LOVE the console you already have? They will have to really entice me to "upgrade."

  • Report this Comment On March 31, 2014, at 8:35 PM, geedup6 wrote:

    Guys this is the first legitimate argument for the futility of these "console wars". They are 2 very different companies in very different financial situations. Sony didn't even clear 500 million after costs last year and Microsoft cleared over 26 billion after costs. The PlayStation is extremely important to Sony but will not keep it profitable alone. On top of all that they are both doing extremely well, PS4 has the lead but they are both selling at amazing rates, much higher than both of their predecessors. With Nintendo being completely smashed and on the way out there is plenty of market for 2 consoles to both turn major profit. Think about every other generation of console, there has always been at least 3 and many times 4 major consoles per generation and only Sega was ever pushed out. Realistically there isn't a war, both have their ups and downs and 2 different types of customers. As they come down in price most people will buy both. I have an XB1 but as soon as the price drops a bit I will scoop up a PS4 ASAP, hopefully Christmas this year.

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