Intemperate Punditry: why (some pundits can’t see that) the Xbox 360 can’t help but lead in next-gen gaming

Politics is rife with it: witness, on opposite sides of the spectrum, Glenn Greenwald and Rush Limbaugh–blind opinion-marshalls of opposite corners of the political ring. According to Rush, the better known of the polemicists, everything “Liberal” is ripe for scorn. Rush has been around long enough that most listeners know that he’s pure entertainment–it’s easy nowadays to laugh at him. According to Glenn the Arrogant, to cite an example from the left and from a lesser-known of the bombast-class, the practice of “extraordinary rendition” has been used in an “unprecedented way” by the Bush administration because, well, Greenwald simply hates the Bush administration and therefore, Greenwald is justified in making up (false) facts. (Set aside, suspend disbelief, if you well, regarding whether you personally like the Bush administration–Greenwald’s the issue here.) Greenwald, of course, is so relatively new that many take him seriously–give him time, that too will pass.

And now the segue: Gaming has it too, the punditry, the bombast, it’s the same “game” in gaming. Here, the story is the Xbox 360 and the convergence of “tales of woe” this past week. Xbox Division leader Peter Moore departed MS and headed over to be EA’s President. This past week, the PS3 overtook the Xbox 360 in sales by approximately 5,000 consoles, immediately on the heels of the $100 PS3 (and apparently temporary and a “clearance sale”) price drop. A desk-bound pontificator at the Wall Street Journal opined that MS should spin-off the 360 business so that MS wouldn’t be tied down by the 360’s hardware losses, but could be buoyed by software sales. And somebody filed a suit alleging that the 360 scratches game discs (which I’ve never experienced, but all I’ve seen says it’s caused by moving the console when you’re playing discs–which most people know isn’t a good idea in the first place). Then, of course, there’s the RROD and $1 billion charge-off issue. Is the 360 going down the tube?

Spare us. The facts, please.

Of course the 360 isn’t going down the tube. Microsoft itself has massive resources, and will continue to pour money into the 360, planning on recouping any losses through sales of game software (as is typicaly for the industry). Microsoft’s Live Search in June gained 13.2% in the search engine market. Even more importantly, Forbes.com reports that Microsoft’s fourth-quarter profit rose 7 percent despite the FY 07 chargeoff for the extended 3-year warranty against any RROD failures on 360 consoles.

Total revenue at Microsoft grew an even higher 13% to $13.37 billion, from $11.80 billion in 2006. That’s ahead of the Wall Street Journal’s estimate of $13.27 billion. Windows OS sales grew 14%, server and tools software salesrose 15%, and web advertising revenue grew 33% to $544 million. While Xbox and Zune sales fell 10% to $1.16 billion, MS projected 2008 sales to grow 10% to 19%. Moreover, losses in 2007 are across the industry–nothing particular to the 360, as widely reported. It’s significant that Sony reported 4th Quarter, FY 07, a 62.8% fall in Financial Services income, and a $914 million operating loss in Sony’s Game segment in the 4th Quarter, “mainly due to the sale of PS3 at strategic price points lower than its production cost during the introductory period.” Of course Sony, like Microsoft, reports FY 08 will be a profitable Games year.

You all know my prediction, and the anecdotal evidence suggesting a Xbox 360 price drop. All indications are that the 360’s production costs have dropped enough for MS to easily be able to drop consumer pricing, and still make money on the units. Sony is nowhere near that point: if MS drops prices soon, it’ll predictably gain the same sales boost that the PS3 enjoyed with its $100 (temporary) price-cut. 360 software sales lead both Wii software sales (by a small margin) and PS3 software sales (by over two to one) every week. A surge in PS3 sales is, frankly, to be expected, given the price drop. Consumers clearly respond to price drops.

Microsoft? Hello? (It’s coming. Don’t worry.)

What with Halo 3, Bioshock, and the numerous other stellar games coming the 360’s way, IPTV, and everything that makes the 360 to the gaming world what Apples are to the cell phone, music, and computer world, the 360 is on a strong path forward. Don’t let arrogant or fickle pundits tell you otherwise. Whether the 360’s lead will continue through the end of FY 08 or not is certainly debatable. However, Sony’s own financial troubles and greater cost of production, Microsoft’s year-long lead, and the 360’s relatively strong uptake during its first year, all suggest that the lead will continue for the next year.

There’s a very good case to be made that MS has a number of moves open to it. If MS acts reasonably, it’ll most likely make the right business moves (suggested here, by financial whizzes elsewhere, and across the blogosphere) to keep 360 sales in the lead (as against the PS3, that is) well through FY08. If, on the other hand, MS falters, fails to cut prices soon, and ceases or becomes complacent in the pace of rolling out strong and periodic improvements to the 360 OS, and falls short on delivering the promising upcoming IPTV service, then Sony sales may just accelerate and break through the 360 lead.

Again, time will tell.

Lime out

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Filed under Business, Gaming, Xbox 360

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