Opinion: Xbox 360 Software Attach Rate Is 'Alarming'

The latest issue of Jason Kraft and Chris Kwak's 'Video Game Journal' for the Susquehanna Financial Group examines the software attach rate for the Xbox 360, and explores why such an “alarmingly high” rate may not bode well for Microsoft's next-generation console. Specifically, the report cites the recently announced Xbox 360 attach rate of around five games per console sold as confirmed by Microsoft in October, a number that was up from the roughly four games per console attach rate announced by the company at the console's launch in 2005. While traditionally a growth in attach rate is considered to be a positive, the report suggests that such an increase could mean that even though Xbox 360 software continues to enjoy brisk sales, the hardware itself has not seen similar increases in consumer demand. In fact, it concludes: “We believe the unusually high attach rate on the 360 is a sign of an increasingly unhealthy console growth rate, and should be worrisome to publishers and investors.” The analysts further explain their hypothesis by offering that a significant portion of the Xbox 360 consoles currently in circulation were purchased by hard-core gamers, who, by definition, purchase a lot of games. Because of this, even if the hardware installed base were to remain relatively unchanged over the next 18 months, the software attach rate would continue to climb. Thus, while the numbers would seem to indicate a healthy consumer trend for the Xbox 360, the report concludes that “its growth will be capped fairly quickly without an ever-expanding hardware installed base.” The report further adds that the Xbox 360's high software attach rate is “a damning commentary on the limited hardware installed base, most of whom are hard-core gamers.” The analysts add that what is actually needed by Microsoft for its latest console, as well as by third party software publishers, is “quicker adoption of hardware and a rapidly growing installed base on which to sell progressively more game units,” rather than just more games sold per existing Xbox 360 owner. In conclusion, the authors state, “If the Xbox 360 sports an attach rate of ten by holiday 2007, it will probably be because it has failed to gather critical momentum. What does it benefit publishers and investors if ten games are being purchased by a total audience of 10 million 360 owners? It doesn’t take effort to see that a console with an attach rate of 8 and an installed base of 50 million is superior to a console with an attach rate of 12 with an installed base of 20 mln." The analysts also believe that a similar fate could await Sony and its recently launched PlayStation 3, adding: "We believe the PS3 could exhibit similar attach rate characteristics versus the 360. There is a chance the PS3 will have an even higher attach rate in its first year. Lest anyone conclude this is just the step-function trend of next-gen consoles, we caution that a high attach rate is likely a symptom of hardware shortages and a limited installed base. This is bad for publishers."