Analysis: Kinect Continues U.S. Xbox Momentum In January

[As part of our monthly NPD U.S. video game retail sales analysis, Gamasutra analyst Matt Matthews looks at continued momentum for Kinect and Xbox 360, with an estimated Kinect installed base approaching 3 million and 1.2 million standalone copies of Harmonix's Dance Central sold to date.] A year ago when Microsoft's Kinect was known as Project Natal, we were dubious about the system's value to the Xbox 360 market. At the time we wrote that we doubted that “Microsoft's Project Natal will actually lift and sustain the platform significantly.” While three months is still early in the game, there is no question in our minds that Microsoft has done exceptionally well convincing consumers of the value of the Xbox 360 Kinect platform. While not in precisely the same class as the Wii fervor of 2007 and 2008, we were impressed to see the Xbox 360 move 381,000 units in January, a 14.4 percent increase over last January's record 333,000 units. For a system in its sixth year on the market, which hasn't had a proper price cut since September 2008, and whose average price has increased to over $300, those kind of January sales are unheard of. We have previously drawn parallels between the Xbox 360 S Model's June 2010 launch and the PlayStation 3 Slim launch back in late August 2009. However, with holiday and January sales now known, we find it productive to return to that comparison. Starting in September of each system's relaunch year, the monthly sales rates are shown below. There are some important details here. First, recall that the Xbox 360 S Model launched in June 2010, and so this comparison excludes at least some of the initial rush to buy that model; conversely, the PS3 figures in September may include some discounted older models. Second, there is the issue or price. When we looked at hardware prices for October 2010, the average price of the Xbox 360 was $256, suggesting that consumers favored the $300 Xbox 360 model over the $200 model. With the launch of Kinect in November, that price rose about $25 to $281. As of January, the average Xbox 360 is selling for around $306, according to official NPD Group data. That means that any significance of the price differential has actually disappeared in the more recent months, the ones in which the Xbox 360 has been outperforming the PS3 Slim in seasonally comparable months. The increased hardware sales are also correlating with increased software sales. To view this, we have put together an annualized sales graph for Xbox 360 hardware unit sales and retail software revenue, which is shown below. That is, for the hardware curve, we are measuring total hardware unit sales in the trailing 12-months. Similarly, the software curve is retail software revenue in the trailing 12-months. (One side effect of this view is that it mitigates seasonal effects.) As the hardware (blue) curve above shows, the annual rate of hardware sales has increased from around 5 million systems per year prior to the launch of the Xbox 360 S Model in June 2010 to nearly 7 million per year as of January 2011. Moreover, both November and December of 2010 were key hardware growth months. Clearly Kinect is the primary driver of interest in the Xbox 360 at the moment. According to statements made by Michael Pachter of Wedbush Securities, the Xbox 360 Kinect system hardware bundles have totaled around 1.7 million since launch. Moreover, with the $250 million increase in accessory revenue since November 2010 (compared to the same period in the prior year), it seems likely that the total Kinect installed base is between 2.5 million and 3.0 million. Looking back at the hardware and software graph above, we can add some comments on the software trend. After a relatively flat period, software sales have begun to creep up, roughly corresponding with the increases in hardware sales. The launch of Halo: Reach in September 2010 appears to have been the starting point for the recent growth. While we don't yet know how much Kinect software is driving sales, we can at least identify Dance Central, published by MTV Games and developed by Harmonix, as the defining title of the Kinect launch. According to exclusive data provided by the NPD Group, 217,000 copies of Dance Central were sold in January 2011. Moreover, the title has now shifted more than 1.2 million copies of the standalone version. These figures don't include copies of Dance Central included with Xbox 360 Kinect system bundles or with Kinect accessory bundles, so the total number of copies exceeds the 1.2 million figure. As we enter nearly four months on the market, the pressure will mount on Microsoft and its third party partners to produce more software for Kinect of the same quality as Dance Central. Moreover, we have yet to see the impact of Kinect-compatible games sold through Microsoft's Xbox Live Marketplace. Microsoft appears to have a strong product with strong marketing and a good first wave of software. We will be watching through 2011 to assess their follow-through.