After a strong debut, sales of Microsoft's (NASDAQ:MSFT) latest console, the Xbox One, have slowed to a crawl. Last month, rival Sony's (NYSE:SONY) PlayStation 4 outsold Microsoft's console by 2 to 1 in the U.S., and some retailers have begun to offer incentives to move unsold inventory.
Microsoft announced its own program on Monday, officially cutting the Xbox One's price in the U.K., and unofficially reducing it in the U.S. Going forward, the Xbox One will still retail for $499, but starting next month, will also include a free copy of Electronic Arts' (NASDAQ:EA) highly anticipated first-person shooter Titanfall (a $60 value).
Sony can't keep up with demand
Microsoft's sales initiative designed to move its console stands in stark contrast to what Sony is experiencing with the PlayStation 4. Currently, it's difficult or impossible to find Sony's gaming machine in stores, and the Japanese electronics giant expects supply to be constrained for at least the next month.
As I've written before, the demand discrepancy is hardly surprising -- in addition to being $100 less expensive, the PlayStation 4 is also the more powerful gaming system, able to output third-party games at higher graphical settings.
Although Microsoft has sold an estimated 3.6 million Xbox Ones worldwide, Sony has sold more than 5.3 million PlayStation 4s, and although that gap remains small today, it could increase significantly in the coming months. Microsoft's and Sony's previous consoles, the Xbox 360 and PlayStation 3, sold roughly an equal number of units on a global basis, but were dominant in different regions.
Sony's PlayStation is particularly popular in its home country of Japan and much of Europe, while Microsoft's Xbox brand is strong in the U.S. and U.K.. That makes the PlayStation 4's Western popularity all the more alarming for Microsoft.
Electronic Arts should get a boost
Bundling Titanfall should boost sales of the Xbox One, as it's largely considered the console's most highly anticipated game -- it has received widespread acclaim and should be an early contender for game of the year. It's also somewhat exclusive, as it won't appear on Sony's PlayStation 4.
But while it should help Microsoft, the bigger winner could be the game's publisher, Electronic Arts. While I suspect that the majority of gamers planning to buy the Xbox One next month would've purchased Electronic Art's Titanfall anyway, Microsoft has guaranteed Electronic Arts additional sales of the game.
That could boost Electronic Arts' results, both in this quarter and in the future. Titanfall is EA's marquee first-quarter release, and the company is expecting to continue to profit from the game through the sale of digital add-ons. The more gamers that own the game, more digital content Electronics Arts can sell. Moreover, the video game industry is one of sequels -- establishing Titanfall as a popular franchise will be crucial to selling future games in the series.
Still, that works in reverse as well. If sales of the Xbox One remain sluggish, Electronic Arts' decision to back Microsoft's console over Sony's could prove to be a massive mistake. With a larger install base, Titanfall would've likely sold more copies as a PlayStation exclusive. Electronic Arts has said that Titanfall's sequels could come on Sony's platform, but the popularity of the first title will be crucial. As an online-only, multiplayer first-person shooter, Titanfall and its sequels will, over the next few years, compete head-to-head with popular franchises like Call of Duty and Destiny, an upcoming original franchise from the creators of Halo.
Is it too early?
Of course, with the two consoles just three months old, some may say it's simply too early to jump to conclusions. Sony's own PlayStation 3 was initially a disappointment at retail, as consumers struggled to pay its (then absurdly high) $599 asking price. Through a combination of quality exclusives and price cuts, Sony was able to close the gap.
No doubt Microsoft is capable of pulling off something similar, but the recent slowdown in the pace of Xbox One sales is still troubling. The broader tech world is in the process of some significant changes, making comparisons to prior console generations difficult.
If recent rumors prove true, soon Microsoft will find itself competing with Amazon.com. The online retail giant is expected to roll out a set-top box next month, and in addition to playing Internet-based video, Amazon's machine could also double as a video game console. Last month, TechCrunch reported that Amazon had acquired Double Helix games -- the studio behind the Xbox One launch title Killer Instinct.
Add in similar rumors about both Apple and Google, Valve's efforts to bring PC gaming to the living room, and the growth of mobile gaming, and you have a market for gaming devices that's never been more competitive.
While video game enthusiasts may own multiple consoles, most Americans don't -- according to Nielsen, although the majority of households own some sort of modern gaming device, less than a quarter own two, and fewer than 10% own three. In other words, consumers have a tendency to pick a platform and stick to it.
There are also network effects at work: In an era of widespread online multiplayer, gamers want to own the console all their friends own, and game creators want to develop their games for the most popular machines.
While Microsoft can come back, it's important to close the gap with Sony as soon as possible. Giving away Titanfall should help, though it underscores Microsoft's unfortunate circumstance.