Analysis: The Closing U.S. Gap Between Xbox 360 And Wii 2

[As part of our monthly U.S. NPD retail video game sales analysis, Gamasutra analyst Matt Matthews examines how the gap has been closing between Xbox 360 and Wii at U.S. retail, predicting the "Xbox 360 will best the Wii in both units and revenue in 2011."] For Sony and Microsoft, there are at least some obvious paths to take in the course of 2011 in order to maintain solid hardware sales. For Sony, it should cut its hardware price and execute on its software plans. Microsoft needs to maintain its Kinect momentum and, if necessary, keep its hardware priced competitively against the PS3. For Nintendo's Wii, the future is less clear. While its hardware sales rates are still comparable to the Xbox 360, Microsoft's platform is on track to outpace the Wii in annual sales within the next two months. To put it plainly, the Xbox 360 sold 6.81 million systems in the past 12 months, compared to the Wii's 6.92 million. That 110,000 unit advantage could easily disappear by the end of March 2011. Just in January the gap closed by 62,000 units. More alarmingly, Nintendo's platform hasn't seen a single month of year-over-year growth in software revenue since December 2009. While we do not have access to unit sales figures, we do know that the Wii just barely edged out the Xbox 360 in unit sales during 2010. Under current trends, it seems like that the Xbox 360 will best the Wii in software units and revenue in 2011. To see the situation graphically, we have produced below an annualized hardware and software sales chart: While the annual rate of hardware sales has declined 26% from 9.38 million systems per year in January 2010 to 6.92 million per year in January 2011, the estimated annual software revenue rate has declined 20%, from just over $3 billion to just over $2.5 billion. Following the trendlines, it is possible that Sony's PS3 will generate more software revenue in the coming months than will Nintendo's platform. Given the disparity between the two systems – the Wii installed base is more than twice the size of the PS3 base – those revenue figures should concern Nintendo. Regrettably it may be too late to do anything substantial about the situation for this calendar year. While it is possible that Nintendo has a refresh of the Wii platform waiting in the wings, it isn't altogether clear how that will fix the longer term software issues. In a recent investor question-and-answer session, Nintendo president Satoru Iwata commented on the Wii software environment: “[A]lthough in the beginning there was a complaint that only Nintendo's own software could sell well on Nintendo DS, that feeling has waned in the midcourse. Unfortunately, however, we have not been able to create a similar situation for Wii, which is one of the points we need to improve on.” It is possible that this comment was intended primarily about the Japanese market, it is a commonly held and long-standing belief that the same is true in the U.S. Whatever Nintendo does, we will be watching, and we suspect that it will make for some interesting discussions. Finally, we note that Nintendo will soon have three platforms on the market, as the 3DS handheld is due for release by the end of March 2011. For the third time in as many years, Nintendo will be introducing major changes to its handheld lineup, and we may be nearing the point at which the Nintendo DS begins to make a graceful exit from the market. Estimating based on historical data and comments made by Michael Pachter of Wedbush Securities, it appears that combined sales of the three Nintendo DS models (Lite, DSi, and DSi XL) reached only 291,000 units in January 2011. Excluding January 2007 and January 2008 when the Nintendo DS Lite was supply-constrained following unprecedented December sales, the January 2011 sales rate was nearly the worst the platform has seen since the Lite model launched in mid-2006. Only August 2006 had a lower weekly rate of sales. We have seen no indication that the Nintendo DS was supply-constrained this year. Fortunately for Nintendo, the launch of the 3DS should revitalize its handheld business. By all accounts, the hardware's 3D features are very impressive and we expect that it will sell well in the short term based only on these features and strong initial third party software support.