Xbox 360 Rollout To Be Slow but Steady

October 31, 2005 By Geoff Duncan

Microsoft hopes to launch its forthcoming Xbox 360 console slowly, avoiding shortages, and increase supply as more Xbox 360 games come on the market. Why? More money for Redmond!

How exactly do you launch a new gaming console? At Microsoft, the plan seems to involve starting slow, then ramping up supply as the system gains momentum.

According to data in Microsoft’s earnings report for its first fiscal quarter of 2006 the company estimates shipping between 4.5 and 5.5 million Xbox 360 consoles by June 2006, but isn’t trying to make sales of the new gaming console to take off like a rocket during its first months. Rather, analysts estimate the company will ship up to 2 million consoles at launch, but then slowly increase supply of the Xbox 360 as more games become available and competing consoles from Sony and Nintendo come to market.

Why? Launching in the U.S. on November 22, Microsoft’s Xbox 360 will be the first of a new generation of gaming consoles, and it’s even making it to retailers in time to participate in consumers’ end-of-year holiday purchasing. Wouldn’t it make sense for Microsoft to sell as many consoles as possible while the Xbox 360 is the only game in town?

Not necessarily: the economics of video game consoles aren’t so straightforward. Historically, most video game console manufacturers lose money on every unit sold, making up the shortfall in game sales, royalties, and (more recently) subscription fees. A manufacturer’s loss-per-console is greatest when new systems are introduced and hardware costs at their highest. As more manufacturing capacity comes online and hardware costs decline, the makers lose less money on each console, and may eventually begin making a profit on the systems.

Microsoft’s current Xbox system has always had a negative gross margin, meaning the Redmond company theoretically loses money on every sale. That loss will widen with the Xbox 360, which has higher manufacturing, hardware, and marketing costs, so Microsoft can reduce its potential losses on console sales by avoiding an initial spike in Xbox 360 sales.

If Microsoft can defer sales of Xbox 360 consoles to the first half of 2006, it may be able to reap two fiscal rewards: one through improved (though still negative) margins on each Xbox 360 console as additional manufacturing capacity from Celestica, and another through increased game sales and royalties, as more Xbox 360 game titles ship from both Microsoft’s in-house game development unit and developers like Electronic Arts and Take-Two Interactive. (And the third installment of Microsoft’s Halo franchise

Showing 5 comments

Tracey Holloman at 10:06pm 23rd November 2005 It's a shame that Microsoft don't care enough about the people you are willing to spend the money to purchase these EXPENSIVE consoles. Microsoft advertise the xbox 360 and even put the game in the stores so all of our kids can play it. Then they don't even make enough of the units for the demand. That's very disappointing to the children who WON'T have the xbox 360 under the tree for Christmas. Microsoft should let consumers know if there is going to be a second rollout before Christmas. For me, I am not going to play cat and mice with Microsoft. Whenever the consoles become available, I am not going to purchase it. I will wait on Playstation 3. Maybe Sony value loyal consumers. I will not give Microsoft my hard earned money and be mistreated as well.
fungku at 4:19pm 3rd November 2005 but isnt everyone saying they are indeed creating a shortage by doing this? Not everyone will be able to buy one for the holidays because not enough of them will be available. I would think this would create the same backlash.
Geoff Duncan at 8:49am 2nd November 2005 My impression, based on Microsoft's roll-out plans and published financial data on the Xbox business in recent (but especially the most recent) quarterly reports, is that they're not concerned about having the steepest possible rate of adoption for the Xbox 360. They're first out of the gate with the new generation of consoles, but there's no "must have" game for the 360 yet. Halo III won't ship until the second half of 2006 (at the earliest); the Halo franchise both propelled sales of the original Xbox and has the advantage of being an in-house title. If that's going to be massively popular, Microsoft wants a)Xbox 360 manufacturing costs (and per unit losses) as low as possible when Halo III ships, and b) wants as much Halo III hype as possible to fuel royalty revenue when it actually ships.

Fueling massive demand out the gate leads to a) more sales at the Xbox 360's highest loss margin, b) reduced (ahem) "halo effect" on royalties from console sales because comparatively few XBox 360 games are available and none are "killer" so far, and c) with one Xbox 360 mfging line still not producing, a mad rush could create a negative backlash among customers if shortages appear.

So, again, speculating from the numbers in MSFT's quarterly report, they're planning to meet initial demand for the Xbox 360, but then increase supply and availability over time (particularly in international markets) as more games ship and as competing consoles from Sony and Nintendo appear.

And I could be totally off my rocker - it's happened before. But there's nothing in MSFT's quarterly numbers to indicate either massive manufacturing capacity, a massive fulfillment push, or a Windows-style market-saturating ad campaign to support the Xbox 360 launch. They seem to want to start slow and build up. Usually when they build up like that, you can see it coming a mile away.
fungku at 5:11pm 31st October 2005 I'm confused. If they roll it out slowely to offset manufacturing costs so they can reap more royality profits from games, it would seem the rate of adoption would be slower. Its like shooting yourself in the foot.

You dont want sell a ton at beginning because the loss is high, but you still sell games (people arent going to buy it without buying a game or two at least.)

You may lock out a bunch of people from buying it for the holidays because you dont have enough made. 3 months later, their money will most likely have gone to something else.
Sara at 8:33am 31st October 2005 I think xbox 360 is going to be a great console but not better then playstation 3.