It's been a difficult year for Microsoft's (NASDAQ:MSFT) latest video game console, the Xbox One. Despite a number of aggressive promotions, and a dramatic shift in strategy, the Xbox One has not been able to keep pace with rival Sony's (NYSE:SNE) PlayStation 4.
The Black Friday shopping holiday could be Microsoft's last chance to turn its console around. If it's latest initiative -- its most aggressive yet -- fails to put the Xbox One ahead of the PlayStation 4, it seems unlikely that the console will be able to recover.
The Xbox One has two major problems
To be fair, the Xbox One has not been a total flop -- far from it. Yet, since its debut last year, it has been badly beaten by its chief rival, with sales of Sony's competing machine outpacing the Xbox One by a ratio of, perhaps, around 2-to-1 (unlike Sony, Microsoft has not released detailed sell-through data).
Both the Xbox One and PlayStation 4 are likely to be sold at retail for many years to come (the Xbox 360, which debuted in 2005, is still shipping to this day), giving Microsoft's console -- in theory -- ample time to catch up. But in reality, Microsoft's machine faces two significant problems, both of which are likely to amplify Sony's lead over time.
The first is that the PlayStation 4 and Xbox One are almost perfect substitutes -- though they have a handful of exclusive titles, most of their best-selling games (Dragon Age, Call of Duty, Madden, Battlefield, among many others) are available for both systems. Although a few dedicated gamers may purchase both, the vast majority will choose one or the other. In 2009, research firm NPD found that among Xbox 360 owners, only 18% also owned a PlayStation 3. Among PlayStation 3 owners, only 34% also owned an Xbox 360.
These trends are likely to persist with their successors, and may even strengthen over time as the second problem comes into play: network effects. Given the online-focused nature of both devices, gamers are highly incentivized to own the same console their friends own. So far, the two biggest new intellectual properties released this year -- Titanfall and Destiny -- are online-only, multiplayer games. In years past, video games were primarily single-player, offline-only experiences, limiting any potential network effects. But the increasing dominance of these online-only games has given the modern console market a social network-like profile.
Reacting to Microsoft's latest promotion, the editorial board of GameSpot -- a video game focused publication -- came to a similar conclusion: "this offer can't affect ... the buying decision of those who have already picked up a PS4 -- and are therefore influencing what console their friends pick up. Nobody wants to be that one person with a different system than everyone else."
The Xbox One is now significantly cheaper
But if there's any hope of Microsoft's console catching up, it's this month, and Black Friday in particular.
In October, Microsoft announced a $50 price cut on all Xbox One consoles: gamers can purchase an Xbox One bundle that includes two games for just $350. That gives the Xbox One a sticker price that's $50 less than the PlayStation 4, and, if one values the bundled games at their full retail price, widens the gap to a full $160.
The deals become even more aggressive on Black Friday, with the discount jumping to $70. Target is even throwing in a $50 gift card, though quantities will be limited.
For its part, Sony is not resting on its laurels -- the PlayStation 4 will still retail at $400 on Black Friday, but will include two of the console's most-popular games. Still, at $330, the Xbox One will be significantly cheaper.
November NPD will be key
Already, Microsoft has sort of declared victory, noting that the Xbox One outsold the PlayStation 4 in the U.S. during the first two weeks of November. But Sony is unfazed, telling GameBeat it feels no pressure from Microsoft's recent price cut.
More so than any other month, NPD's November console data will be key. It may be unlikely, but If the Xbox One can, for the first time all year, overtake the PlayStation 4, Microsoft may be able to mount a comeback.
Sam Mattera 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.