The Xbox One has come a long way in a short period of time. The latest Microsoft (NASDAQ:MSFT) console got off to a rocky start thanks to an initial product vision that was out of touch with the gaming market, but the company improved its prospects by changing course and funneling resources to make sure the Xbox One and broader Xbox brand remain viable.
The Xbox One outsold the market leading Sony(NYSE:SNE)PlayStation 4 last November and December in the U.S., but the Playstation was still the best-selling gaming hardware in 2014. The latest sales data from NPD Group shows the PlayStation 4 reclaimed the top U.S. hardware spot in January.
In this context, have efforts to save the Xbox One really been successful?
The road to the present and a distant second place
Worldwide, about 20 million PlayStation 4 units have been sold since the device was released in late 2013, while about 12 million Xbox One units have been sold over roughly the same time period. The sales gap would likely be even larger if Microsoft had not taken major steps to improve the appeal of its latest game system, dropping the once-mandatory Kinect camera, reducing prices, and bundling the console with software.
The PS4 outsold the One in the first 10 months of 2014, but Microsoft won the most important sales months of the year through aggressive efforts to improve the Xbox value proposition. Microsoft launched the Xbox at $499, compared to the just $399 for the PS4, but roughly a year later, gamers could purchase the Xbox with a pack-in game for $349, while Sony held fast on its pricing.
The Xbox went back to $400 for the base console after the holiday stretch and then returned to $349 in the middle of January. While PS4 was the best-selling console in the U.S. last month, more software was sold for Xbox One than any other platform.
Xbox represents a relatively small component of the broader Microsoft business. Determining the exact percentages of total revenue and gross margin for the Xbox franchise is difficult due to the way the company reports its financials. However, even if the computing and gaming hardware and consumer other segments were entirely Xbox-driven, the combined revenue for both segments would be just 24% of total Microsoft revenue for the fourth quarter. The actual percentages for the Xbox business are likely much smaller than this hypothetical.
For comparison, the games and network services segment at Sony accounted for roughly 21% of total revenue and about 15% of operating income.
Despite this smaller footprint at the company, there are still strong reasons for Redmond to secure its place in gaming. Outside of Office and Xbox, Microsoft lacks strong consumer brands and building strength beyond the enterprise sector could offset some of the threat posed by the "consumerization of IT." The Xbox brand also has the potential to be a valuable asset in furthering its mobile ambitions, and the gaming industry is still growing at a rapid clip.
What does "saved" mean?
Efforts to turn the Xbox One around have undoubtedly improved its outlook and better suited it to compete against the PlayStation 4. In that sense, it is fair to say Microsoft saved the Xbox One. On the other hand, total Xbox console sales in the last quarter declined from 7.4 million units to 6.6 million units year-over-year, and the Xbox 360 is losing more sales than the Xbox One is adding.
Microsoft has shown it is willing to forfeit margins to improve the strength of its gaming business, and its strong financial position relative to Sony means it is in better shape to offer continued discounts and promotions. The Xbox One also has a strong lineup of first-party exclusives launching in 2015, which should help the console maintain momentum.
With these factors in mind, the Xbox has a fair chance of closing the gap with lifetime PS4 sales in North America. Even so, sales trends in other territories make it unlikely the Xbox One will ever catch up to PlayStation 4 globally.
Microsoft has succeeded in righting the Xbox One ship and preserving the viability of the Xbox brand, but it is still playing catch up and paying for past mistakes.
Keith Noonan has no position in any stocks mentioned. Keith Noonan owns no Microsoft consoles but was previously a user of the Windows ME operating system. He doesn't hold any grudges. The Motley Fool has no position in any of the stocks mentioned. 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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