Last week NPD released their market share numbers and the nice thing about NPD’s numbers are that they report what is actually sold (granted they use a sampling method which means there are inherent inaccuracies). But most of the other numbers you see reported don’t take into account inventory and thus they inflate the positions of those that had manufacturing advantages; in other words, they do not report how many consumer purchased them, just how many were sold to stores. Another problem is these numbers only represent the lucrative US market and they, and this piece, don’t represent the rest of the world ( Japan is a major battleground).
Last year Nintendo remained manufacturing constrained which means they couldn’t fulfill demand and some of that demand likely bled over into the Microsoft and Sony camps. If you remember your economics, this showcases that demand for this segment is highly elastic in that it seems to swing dramatically based on the price of the device.
However there are some clear indicators that I think should be pointed out, let’s cover those.
PS3= Boat Anchor
One thing was blindingly clear and that was that if Sony had skipped the PS3 they would have been in vastly better shape. It came in dead last with a little over half the sales (797,000) of either the Xbox 360 (1,260,000) or the Wii (1,350,000). But what was really amazing is that it undersold the PS2 (1,100,000) significantly, indicating that that this market voted with its pocketbook and the PS2 was favored over the PS3. The PS2 ended with an installed base estimated at a whopping 41 million consoles or over 4x the Xbox 360 (9,150,000) the nearest console competitor.
That base is a huge magnet for game developers , who when faced with the choice of building a PS2 game which is both less expensive to create and has over 10x the installed base of the PS3 (3,250,000) that they will almost always choose the older platform. Sony actually made cost reducing moves which made the PS3 less compatible with PS2 content and probably partially to force game developers to reconsider, but the difference is just too great and they likely will regret this move when this is all over.
Ironically, with Blu-Ray now in an almost insurmountable lead for the next generation high definition optical market, the only high volume connected player which won’t be obsolete when Blu-Ray 2.0 comes out is the PS3. But it is doubtful Sony will make enough from Blu-Ray royalties to offset the massive subsidy the PS3 carries. They need it to be a game console because games carry stronger royalties.
In the end, based on these numbers, the PS3 was largely a mistake and they can spin it how they want, but the numbers say that if they hadn’t created it, the far more profitable PS2 would have likely sold significantly more than either the Xbox 360 or the Wii.
Wii = Hurt by Manufacturing
Given the Wii is showing the highest demand and actually sold the most units, it is likely at least some of the PS2, PS3, and Xbox sales were due to folks being unable to get the Wii. Products like the Wii (which are break out products) often have short life cycles because the broad market often decides to move on to other things in the following years. Given this thing has been hot two years running it looks like that may not be the case this time and the idea of a game console being a family device with health benefits may actually have legs.
That health side is something no one else has figured out yet and while there was at least one controller that could be purchased to work with the Xbox or PlayStation it was expensive and largely unknown so didn’t do particularly well.
The Wii is drifting away from conventional games as is core and that could mean that folks will buy it in addition to one of the three still active products (PS3/PS2/Xbox 360) which, if this is true, could give Nintendo an extended run unchallenged by competition.
However, I really doubt if either Sony or Microsoft is going to let Nintendo have this space unchallenged and Microsoft has already come out with the Arcade version of the Xbox 360 to partially address Nintendo’s competitive edge. Had Nintendo manufactured more consoles, they likely would have had a solid installed base lead at year-end but, because they didn’t, they now trail the Xbox 360 and I expect that will come back to haunt them this year. (Xbox installed base = 9.15 Million, Wii installed base 7.3 Million.)
Xbox 360 = Hurt by Cost, Helped by Games
With Halo 3 (4.82 million) and Call of Duty Xbox (3.04 million) the Xbox 360 had the most lucrative game titles on the market. The game console market is largely a razorblade model (yes I know that Nintendo argues they are different, but not enough to change the dynamics of the rest of the market dominated by Sony and Microsoft). This means it isn’t the number of consoles you sell that makes you profitable, it is the number of games and here the Xbox clearly stood out. Halo 3 alone sold nearly 5M copies while Call of duty 4 sold 3M to get to 8M generating pure profit for Microsoft. In perspective this is more than the PS3 sold consoles during the year and given it is estimated Sony takes a $400 hit on each console you can probably expect Microsoft’s CEO is a lot happier with these numbers than Sony’s CEO is.
In fact, it appears that overall, the Xbox 360 was a better magnet for the lucrative secondary revenue market than either the Wii or the PS3 likely because there were just more good games and accessories available for it.
However, Xbox console sales with plenty of inventory, lagged the Wii suggesting this platform is losing momentum and there is no indication that the secondary movie and music features are doing much to sell this product. People still seem to buy game consoles for games and neither the Sony Blu-Ray capability nor the Xbox 360 download or HD-DVD capability seems to have mattered much to the buyer as much as the cost of the device did. And I think the products, given it has been in the market much longer than the other two, is now feeling to many like it is out of date and it desperately needs more than a cosmetic refresh (and probably could use some cost reduction much like the PS2 enjoyed some time ago).
The Big Winner: Nintendo DS
One thing that really jumps out though is the Nintendo DS selling nearly 2.5 Million units, more than the Wii and Xbox 360 (the two top selling consoles) combined. If you look at the installed base of the PSP and the DS, a whopping 27 Million units, you see numbers that are in the iPod range suggesting that the real action may no longer be with the consoles as much as it is with the handheld gaming systems and it makes you wonder when Microsoft will get its mobile act together and go after this seemingly more popular market.
Nintendo hit well with the DS and Sony is trying to take pricing actions to adjust the PSP to make it competitive (and the PSP remains the better value in terms of pure technology) but the market voted and it voted the DS over everything else; consoles and mobile systems alike. Kind of makes me wonder if Sony was late to a meeting that Microsoft missed altogether.
Wrapping Up: Keep it simple, inexpensive, and make it mobile
You look at the DS and it is less expensive and much simpler than the PSP and outsells it. The reason the Wii is in such heavy demand is because it’s less expensive and simpler than either the Xbox or the Playstation. The lesson for the market (and this is why the Palm in its day was so popular) why the iPod remains popular, and why the iPhone has done so well is: keep it simple. The other lesson is that $200 remains the magic price break point. Under $200 things sell really well, over $200 demand drops sharply and the farther you are above $200 the worse this is.
Atari owned this market first, Nintendo second, and Sony third. It looks like Nintendo took the market back last year and they did so by remembering these two things: Keep it simple and keep it inexpensive. They also tossed one more in the mix, and that is to make it mobile because folks often aren’t at home when they want to be, or want their kids to be entertained.