Is the Kinect-less Xbox One a Flop for Microsoft?

The introduction of a $399 Xbox One SKU wasn't enough to drive sales of the platform above Sony's PlayStation 4. What does this mean for Microsoft?

Jul 23, 2014 at 10:05AM

June 9 saw the release of a $399 Xbox One SKU that doesn't include the Kinect camera. The move coincided with Microsoft's (NASDAQ:MSFT) highly games-centric E3 conference and arrived after months of Sony's (NYSE:SNE) PlayStation 4 posting superior sales. With the introduction of the Kinect-less Xbox One, versions of the competing consoles now retail at price parity, but that hasn't been enough to elevate sales of Microsoft's new platform above the competition. Does this mean that the new SKU is a flop for Microsoft? What will be the company's next big gaming moves?

How effective was the $399 Xbox One in raising sales?
Sales tracking from NPD Group lists combined Xbox One sales for the month of June at 197,000 units, while the PlayStation 4 sold approximately 269,000 units in the same period. Putting this in context with previous months sales, Xbox One sold approximately 77,000 units in May and 115,000 units in April, with May sales having been depressed by the announcement of the new SKU. Over the last two months, Microsoft's new console has sold an average of 137,000 units in North America, hardly representative a big jump over April's numbers. Meanwhile, PlayStation 4 sold approximately 200,000 units in April and 197,000 units in May. When looking at sales over a three-month period, it doesn't appear that the introduction of the $399 SKU has dramatically improved Xbox One's market prospects. That said, the introduction of the less-expensive console is one of the first moves in a more long-term strategy to better challenge the PlayStation 4.

It's still far too early to measure how successful the Kinect-less Xbox One is, as the real metric for its performance will be whether it creates a sustained hardware bump. The fact that PlayStation 4 still outsold the platform by a substantial amount indicates that Microsoft must improve the system's value proposition in ways other than bringing cost down. June's sales gap may make the console manufacturer more likely to implement price reductions across SKUs within the fiscal year, but it also needs to address other aspects of its platform.

Will Microsoft purchase game developers?
With Xbox One and PlayStation 4 now available at the same price point, Microsoft is tasked with convincing consumers that its less-powerful hardware represents the better purchase. Given that most multi-platform games will run better on PS4, this means that the appeal of Xbox One is largely dependent on its exclusive content offerings. Microsoft's platform looks to enjoy an edge over its chief competitor in terms of high-profile exclusives this year, but it may need to increase its holdings if the goal is to gain market leadership over the hardware cycle.

Relative to competitors Sony and Nintendo, Microsoft is in much better shape to acquire promising development studios. The company has recently reaffirmed its commitment to Xbox and gaming, and growing its business on these fronts could be dependent on making the right acquisitions. At present, purchasing game companies or exclusive rights to high-profile software looks to be one of Microsoft's best options for combating Sony's mind and market share advantages.

With Microsoft now emphasizing a games-first strategy, flexing its financial muscle to secure top-notch content would help Xbox One's value proposition. Purchasing a company like Japanese publisher Capcom could give Microsoft access to some of the most celebrated series in gaming, as well as resources for making an inlet into Japan's highly lucrative mobile market. Recent comments from Microsoft indicate that the Xbox brand might play an increasingly large role in the company's mobile efforts, and Capcom's properties and mobile infrastructure could prove helpful. Microsoft might also want to look at German games company CryTek, which is currently in the midst of some financial trouble and may be looking for outside help. Of course, these two companies represent just a small fraction of those that Microsoft may be interested in, but some games-related acquisitions remain a likely move.

What does the Kinect-less Xbox One mean for Microsoft?
The introduction of the $399 Xbox One can be viewed as one of Microsoft's first steps in a broader comeback strategy. The system's June sales show that there's solid interest in the platform, but also that more will have to be done if it is to match or outperform PlayStation 4. Sales remain relatively close in North America, but Sony's platform continues to build a commanding lead in other territories. Now that Microsoft has introduced a more gaming-focused version of its platform to market, attention turns to how it will convince consumers that Xbox One offers the best software. Acquiring developers and exclusive content stands a likely answer to that question.

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Keith Noonan has no position in any stocks mentioned. 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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