boobless Posted May 26, 2002 Share Posted May 26, 2002 Microsoft hurt most by price cuts Game console price war may vastly widen Xbox losses By Mike Tarsala, CBS.MarketWatch.com Last Update: 1:13 AM ET May 25, 2002 LOS ANGELES (CBS.MW) -- Price cuts made in recent days by the three major game console manufacturers are expected to pinch Microsoft's bottom line more than it will squeeze total profits at Sony and Nintendo. Microsoft cut the price of its flagship Xbox game machine last week to $199 in an effort to sell more consoles and software. Sony led the round of price cuts by lowering the price of its flagship PlayStation 2 by $100, down from $299. Microsoft and Nintendo followed with cuts of their own. But due to more expensive chip components and features that allow the Xbox to play DVDs and connect to high-speed Internet lines, it costs Microsoft about $400 each to make each of its game machines, estimates Richard Doherty, analyst with Envisioneering Inc. In comparison, Sony earns about $14 each on its $199 PlayStation 2, according to Doherty. And executives from Nintendo said this week from the Electronics Entertainment Expo in Los Angeles that the company is close to breaking even with its $149 GameCube. "If you want to bankrupt Microsoft, just go out and keep buying Xboxes, Doherty said. "They can't keep wrapping $200 bills around every Xbox they sell. It's not going to make Wall Street happy." Microsoft (MSFT: news, chart, profile) says it expects to have 3.5 million to 4 million Xboxes in the market by the end of fiscal year 2002, which ends June 30. The company has not made public any Xbox sales targets for fiscal 2003. Redmond, Wash.-based Microsoft won't disclose the manufacturing costs of each Xbox, said David Hufford, a Microsoft Xbox marketing manager, at the annual Electronics Entertainment Expo held this week in Los Angeles. Hufford wouldn't say if the company ever expects to turn a profit on the machines, or whether the long-term plan is to use them as a loss leader for games sales. Throughout the industry, many consumers spend more on new game titles each year than they do on the one-time price of hardware. To be sure, price cuts will hurt video game revenue growth for all manufacturers this year, says George Harrison, a marketing executive for Nintendo. Video game hardware and software sales rose more than 40 percent to $9.4 billion 2001, and they'll increase to about $10 billion in 2002, he says. Hear Harrison's outlook for Nintendo. But many games makers say that lower hardware prices will lead to higher sales of software titles, which are more profitable. The industry charges an average of $50 each for games, and earns high double-digit profit margins on them. Hear why game-maker Sega is thrilled with console price cuts. Despite the possibility of higher software sales, hardware revenue cuts will hurt overall revenue in 2001. And it could take a bigger chunk out of Microsoft's bottom line than it will for the other two games makers. Profit for Nintendo In Nintendo's case, Harrison says Nintendo is in position to profit. The company had been making money on each GameCube unit sold until management cut the price of the system to $149 last week, down from $199. And he says the company could soon break even at the lower price. "We'll be in a breakeven position over the course of this year," Harrison said. "We've been able to lower the costs of some of the components in the machine. We are moving some of the production over to China to help us save on assembly costs." He added that Nintendo has built a high-quality gaming machine without a lot of add-ons, which should help its bottom line. The company is expected to report earnings results on May 30. Prices of all three manufacturers' consoles are likely to remain the same for at least the rest of this year, says Tim Bajarin, analyst with Creative Strategies in Campbell, Calif. So Bajarin says the key to beating sales targets this year will be in the success of new software titles. As much as half of all game sales are made during the holiday season. Each is racing to make new games available -- especially exclusive games that aren't available on the other two platforms. Microsoft has about 75 total games available for Xbox. The company expects to have 200 available by the end of December. Sony (SNE: news, chart, profile) expects to have 400 PlayStation 2 game titles by the end of the year, up from 230 at the end of last year. Nintendo has 45 game titles available now, and will have at least 150 by year's end. Sony's edge According to Bajarin, Sony stands the best chance of benefiting from new games, due to its larger number of titles and its larger potential software sales base. The company has about 43 percent of the console market share with PlayStation, and 14 percent of the market with PlayStation 2, according to NPD Intellect. Xbox and GameCube represent about 3 percent of the market each. Outside of game sales, both Microsoft and Sony have an eventual opportunity to profit by charging service fees for online gaming -- something the GameCube isn't designed to accommodate, and an opportunity where the company says it can take a wait-and-see approach. Microsoft introduced its Xbox Live service this week, and Sony intends to offer its add-on equipment for online gaming starting Aug. 27. While online could be the next frontier in the games market, Bajarin says it will take at least a year to get a sense for which company will lead, and if the market has the potential to take off. Meanwhile, gaming will be a contest to produce the lowest-cost hardware, while putting out the most successful games. At least in the near term, it's a competition that could be expensive for Microsoft, analysts say. http://cbs.marketwatch.com/news/story.asp?...%7D&siteid=mktw Link to comment Share on other sites More sharing options...
altezza Veteran Posted May 26, 2002 Veteran Share Posted May 26, 2002 Sony got the edge! :p Link to comment Share on other sites More sharing options...
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