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Microsoft's Xbox One was outsold almost 3-to-1 in Q2 2014

Microsoft Corp.'s (MSFT) Xbox One console suffered another setback this week, when it was announced that it had been badly outsold by archrival Sony Corp.'s (TYO:6758) PlayStation 4.
 
I. Sales Thud -- PS4 Outsells Xbox One 3-to-1
 
The announcement was perhaps to be expected after Microsoft's earnings report disclosed rather anemic Xbox console sales of 1.1 million units (Xbox One + Xbox 360) in calendar Q2 2014 (April-June).  The PlayStation 4 outsold the Xbox more than 3-to-1, moving 3.5 million [PDF] PS3s and PS4s in the same period.
 
There are many factors that could be viewed as potential culprits in the sales flop.  
 
One cannot discount the negative publicity from early incidents such as Microsoft's DRM plans (which would have made used games unplayable offline and illegal to resell in third party markets) and plans to abandon users with poor internet connections.  However, Microsoft apologized for these incidents and fired many of the people involved.

Xbox One always on
The Xbox One's windup to launch was marred by ugly arguments with gamers over DRM and always-on internet requirements. [Image Source: Xbox 720 Guide] 

After the reversal, gamers by and large forgave Microsoft for the stumbles, hungrily eyeing the potential of the Xbox One as an entertainment hub and gaming machine.  Thus in December reports indicated both the PS4 and Xbox One were both at about 2 million units sold.  But Microsoft's supply shortages and failure to launch in more markets as Sony's PS4 quickly expanded into new countries doomed the Xbox One to fall far behind Sony.

Xbox One Kinect 2
 
Much of Microsoft's supply shortages related to its controversial "always-on" Kinect 2 voice/movement control sensor, which until recently was a required feature.  The Kinect 2 also raised costs, making the console less attractive to some neutral buyers.
 
II. A Year Behind Schedule
 
The sensor was also tied to one of Microsoft's biggest issues -- delayed regionalization.  Microsoft only launched in a limited number of markets in November 2013 -- less than a third as many as Sony did.
 
Originally, Microsoft's plan was to launch in 21 markets.  It announced this plan at the 2013 Electronic Entertainment Expo. Then in August 2013 it announced a nasty surprise for preorders in some of these markets.  It wrote:

At E3, we announced that Xbox One would be available in 21 markets around the world at launch. This was an aggressive goal and the team has been working very hard to deliver Xbox One to as many markets as possible.

Our priority is ensuring our customers get the best Xbox One experience the first day it is available. To do that, and in order to meet demand, we have adjusted the number of markets that will receive Xbox One in November to 13 markets, including Australia, Austria, Brazil, Canada, France, Germany, Ireland, Italy, Mexico, Spain, United Kingdom, United States and New Zealand, in November. 

It added:

We remain committed to launching Xbox One in Belgium, Denmark, Finland, Netherlands, Norway, Russia, Sweden, Switzerland, as soon as possible in 2014.

Scandinavian countries
Kinect 2 sensor shortages and difficulties in localization of the natural language processing with the sensor has made the Xbox One still unavailable in many lucrative markets like the Scandinavian countries. [Image Source: TheForeigner.no]

Microsoft repeated this promise in September:

Many more markets will follow in 2014.

Technically that's true, but based on its most recent announcements the cancelled launch markets will only receive the Xbox One in September 2014 -- nearly a full year after the date Microsoft had originally promised.  Microsoft will in September launch in 26 more markets -- Argentina, Belgium, Chile, Colombia, Czech Republic, Denmark, Finland, Greece, Hungary, India, Israel, Japan, South Korea, Netherlands, Norway, Poland, Portugal, Russia, Saudi Arabia, Singapore, Slovakia, South Africa, Sweden, Switzerland, Turkey, and the UAE.
 
Most recently it also announced it would be launching the console in China in September, a decision made possible by the Chinese National Party's decision last year to drop a 14-year-old ban on video game console imports.  So in September, including China, the 26 new markets, and the 13 original markets, the Xbox One will be available in 40 markets -- a massive expansion from the current 13.
 
III. Sony Capitalizes on Kinect 2 Woes
 
But that arrival is almost a year too late.  Sony in November launched 32 markets (nearly three times as many as Microsoft):

When does the PS4 system come out in different countries and regions?
  • North America: November 15, 2013 (Canada and the United States)
  • PAL Markets:
    • November 29th, 2013. (Australia, Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Russia, Spain, Sweden, Switzerland, the United Kingdom)
    • December 13th (Czech, Hungary, Slovakia, United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, Turkey)
    • 2014: (Iceland, Lithuania, Latvia, Estonia, Croatia, Slovenia, Serbia, Romania, Bulgaria, Kazakhstan, Ukraine)
  • Latin America: November 29th, 2013 (Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Mexico, Panama, Peru)
  • Japan: February 22nd, 2014
  • Asia regions: The middle of December 2013
  • Other regions: TBA
So at launch it was set to reach 32 markets, and would quickly expand that number to 48 by December 13.
 
PlayStation 4

Sony did not suffer delays like Microsoft.  True to its word, on December 13 it expanded to 13 new markets:

As of this morning, players in the Czech Republic, Hungary, Greece, Slovakia, Turkey, United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and South Africa can get their hands on the most powerful videogame console ever created.

In addition, PS4 also goes on sale today in Bolivia, Nicaragua, Paraguay, and Uruguay, bringing the total number of countries in which PS4 is available to 48, with more to follow later this year and into early 2014.

By the end of 2014 it had reached yet another six markets including some of the wealthiest parts of China (Macau, Hong Kong).  It added another four markets in January and in February finally added Japan (perhaps the only irony/eyebrow raiser in Sony's launch given that it took four months to launch in its home nation).  That brings the grand total to 59 markets in 58 countries.  The Xbox One, to reiterate is only available in 13 markets -- less than a third as many.
 
Sony is planning to expand to 12 more markets by the end of year.  So by the time Microsoft hits 40 markets, Sony will possibly be in nearly 80 markets.  And Chinese buyers in recent surveys indicated they are more interested in buying a PS4 than they are an Xbox One.  In fact it wasn't even close.  Only 10 percent of Chinese console buyers expressed interest in the Xbox One, while 57.3 percent admitted to eyeing a PS4.
 
IV. Microsoft Ditches the Kinect 2 -- But Still Gets Outsold
 
In a way Microsoft's problems mostly trace back to the Kinect 2 sensor.  It's caused supply shortages; its sophisticated voice control has proved a double-edged sword as it required greatly expanded regionalization, slowing the global rollout -- and by proxy, slowing sales.  Last, but not least it forced Microsoft to price the Xbox One at $100 more than the PS4 -- $499 USD.  Sony's $399 USD PS4 was breaking even or profiting from day one, despite its much lower price.
 
On June 8 Microsoft finally launched a SKU without the Kinect 2 for $399 USD -- quite possibly turning its first profit on console hardware.  Sales promptly doubled.

Kinect-less Xbox One

In order to stick to its currently ambitious plan of more than tripling its number of available markets in September, it will likely have to ship to some regions without the Kinect 2 to avoid further delays from hangups in the localization of natural language processing.

Further, ditching the Kinect 2 could be advantageous in alleviating concerns in regions like China who have accused Microsoft of helping the U.S. government spy on international citizens.  Having an always-on camera and microphone attached to your console is sort of a tough sell when your hardware is shipping from a nation increasingly synonymous with spying on the rest of the world.
 
Kinect 2
The always-on Kinect 2 camera and microphone represent privacy risks.

We can make an educated guess at Xbox One sales.  In February, March, and April Microsoft sold:
  • Feburary 2014: 114K Xbox 360s / 258K Xbox Ones (69.3% Xbox Ones)
  • March 2014:  111K Xbox 360s / 311K Xbox Ones (73.7 % Xbox Ones)
  • April 2014: 71K Xbox 360s / 115K Xbox Ones (61.8 percent Xbox Ones)
But we know that Xbox One sales rose in May and doubled in June.  So something around 170K in May and 340K in June is a reasonable estimate.  That gives us a total of around 625K Xbox Ones (and 475K Xbox 360s) for the quarter.  That in turn gives lifetime sales of around 5.6 million units.  That's about the average guess.  It could vary in the 5.5 to 5.8 million range, but it's highly unlikely to have reached 6 million.
 
But the troubling part for Microsoft that according to Sony's earnings report Sony Computer Entertainment sold 3.5 million consoles (inc. PS3s) -- of which likely 2.5-3 million were PS4s.  That's roughly one million consoles per month on average.  In other words, even after Microsoft ditched the Kinect 2 in its new SKU and doubled sales as a result, it still appears to have likely sold only about a third of the consoles Sony did in June. 
 
Edge Online
[Image: Edge Online]

Again, the regionalization was largely slowed, by all appearances by the complicated voice controls entailed with the Kinect 2.  This isn't all bad.  Microsoft is working to integrate natural language translators into Skype and other core products across its multi-platform upcoming Windows 9 "Threshold" OS.  So it isn't exactly wasted work.
 
But on the downside, the Kinect 2 has been an undeniable boondoggle in terms of stunting console unit sales globally in multiple ways.  In a way Microsoft's decision to abandon the Kinect 2 in at least one SKU was a necessary to give its lagging console a fighting chance.  But it's also sort of a testament to Microsoft's realization that Kinect 2 has been killing the Xbox One.
 
V. Xbox One Also Appears to be Trailing Badly in Software Sales
 
Sony's PS4 has been the top selling console from February through July in the world's most lucrative gaming market, the U.S.  Total lifetime PS4 sales are at about 10 million units [source: 1, 2].  
 
Software sales (inc. PSP Vita and PS3 titles) rose from 68 million units last year to 85 million units.  That indicates likely 35-50 million PS4 software sales in Q2 2014 -- especially since Sony observed a "decrease in PS3 software sales".  The PSP Vita sales remained relatively flat rising from around 600K units in calendar Q2 2013 to 750K units in 2014.
 
Add in the 20.5 million PS4 titles Sony had sold by the end March, and you're likely taking somewhere around 55-70 million software titles sold.

Watchdogs
Despite a high per-console attach rate, poor consoles sales have capped Microsoft's software sales.
 
Microsoft at the end of March announced sales of 5 million consoles and 2.9 software titles per console (14.5 million Xbox One titles).  Add in the 1.1 million consoles sold in calendar Q2 2014 and you have lifetime sales of 6.1 million units -- roughly half of the footprint of the PS4.
 
The games per console figures were released for February, March, and April:
Two months have passed since then, so let's generously suppose that the attach rate growth has accelerated in the past two months (May, June) to reach 3.5 to 4 games.  Well, you're talking about lifetime sales of 21 to 25 million titles; probably around a third as many software sales as the PS4.
 
VI. What Now?
 
So the PS4 appears to have a nearly 2-to-1 lead in lifetime console sales, a 2-to-1 lead in monthly consoles sales, and a nearly 3-to-1 lead in lifetime software sales.
 
Microsoft's September expansion of the new SKU without the bedeviled Kinect 2 sensor to 40 markets can't come soon enough.  But as mentioned even then Sony will likely still be in nearly twice as many markets and in some of the largest markets (like China) Microsoft appears to be losing the hearts of gamers.
Sony PS4 controller 

It's still too early to say if Microsoft has truly lost this round of the console war. But if it cannot right the ship with the broader international rollout and pull even or pass Sony in monthly sales by the end of 2014, it may be all but over for Microsoft in terms of hoping to have the top console.  
 
In that regard Microsoft's Xbox One appears to be eerily mirroring the Sony PS3's struggles in the last generation -- from cost issues from a weird component(s) (CELL and blue laser diodes, in the PS3 case), to low sales, to supply shortages (also due to the troubled components in each case).

Xbox hugger
[Image Source: BreakingNews.ie]

As Kermit the Frog once said, "It's not easy being green."
 
And right now, it's especially tough if you're wearing Xbox green.

Sources: Sony [PDF], Microsoft [press release]





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