In-Depth: Mixed Signals For Video Game Hardware

[As part of his look at March NPD results, Gamasutra analyst Matt Matthews sees a U.S. console hardware market in flux, and finds clues to possibilities of future price cuts for supply-constrained platform-holders.] The U.S. console hardware sales results in 2010, as collated by NPD, appear to show a market in flux. Both Sony and Nintendo have reported that they are experiencing supply difficulties with their systems, the PlayStation 3 and Wii, respectively. Sales of the Nintendo Wii rebounded slightly in March, up 3 percent over the rate it averaged throughout January and February. This could signal an easing of the supply constraints Nintendo had noted or it could simply be a small statistical variation. On the other hand, PlayStation 3 sales were down 20 percent relative to the rate established throughout January and February. Sony first mentioned in mid-February that it would have trouble supplying enough PS3 hardware in the “coming months”. The timing of the announcement suggested to us that sales in February would be low, but in fact February sales were unexpectedly strong while it was March sales that showed a sharp decline. According to comments made by GameStop's COO, even they don't “have clarity” regarding the supply issues for Sony (or Nintendo). Regardless, it is truly unfortunate for Sony that at the very moment when its software begins to shine it also has to explain away hardware numbers with vague comments on its supply chain. Microsoft continues to execute well on its hardware, and its March 2010 sales figures are right in line with the last comparable month's figures in September 2009. In that month, prior to the 2009 holiday sales rush, the Xbox 360 sold approximately 70,000 units per week, or just over 350,000 units for the five-week month (as measured by the NPD Group). With sales of just under 68,000 units in March, we believe that Xbox 360 sales are stable. These hardware figures may provide clues for how each of the platform holders will maintain or drop prices in the coming months. Wedbush analyst Michael Pachter expects that price cuts will come due around September of this year, and that Microsoft holds the first-mover advantage on this point. The stable Xbox 360 hardware sales figures above lend credence to Pachter's argument for a price cut, but we would argue for sooner than September. The last time that Microsoft seriously cut the prices on its hardware was in Fall 2008, and a price cut timed to hit with EA's Madden NFL 2011 in August would be most advantageous this year. One key is that we believe Sony will continue to hold its PS3 pricing as long as possible, probably until after September. Sony held its ground on pricing for an excruciatingly long period in 2008 and 2009 as the company focused on profitability and attempted to rein in losses on PS3 hardware. We believe that Sony will again show patience in the face of calls for lower prices from publishers and retailers throughout the coming months. If Sony cuts the PS3 price in 2010 (and we're not convinced it will), the cut would probably come in October or November, at the very last moment before Christmas sales begin in earnest. Therefore, Microsoft would ideally drop its prices in early August – say $170 for the entry-level system and a higher-end system with a commensurately lower price – and garner the positive press coverage for high hardware and Madden sales just before the September launch of Halo Reach. A subsequent launch of Microsoft's Project Natal would keep Microsoft in front of consumer eyes for the longest possible period prior to the sales rush of the holiday months. A colleague once said to us that launching a Halo game in September allowed Microsoft to “add another holiday month to the end of the year”. Along the same lines, we feel that Microsoft could add August to that end-of-year rush with the right kind of price cut and software promotions. By the time Sony relents and cuts its own prices, Microsoft will have recorded two or three months of superior sales. Obviously this position will have to revisited if Microsoft's sales significantly decline in the coming months or if its sales are overtaken when Sony's reported supply issues are resolved. As it stands now, Microsoft holds the upper hand and a price cut will certainly mitigate any momentum Sony might build throughout the year. As for Nintendo, we see no reason for it to modify its pricing in the next few months. A supply-constrained Nintendo system doesn't need a price cut if it still averages nearly 110,000 systems per week during a first quarter with no major new first-party titles.