Jun 9 2014, 9:48pm CDT | by Forbes
This week the annual Electronic Entertainment Expo—or “E3” among gamers—kicks off, and all eyes are on Microsoft and Sony, makers of the Xbox One and PlayStation 4 game consoles, respectively [Disclosure: Sizemore Capital is long MSFT]. The focus this year for Microsoft—which presented first—was on getting back to basics of gaming.
In this latest battle in the “console war,” Sony is off to a commanding lead, due in no small part to some major gaffes made by Microsoft at last year’s event. The latest comparable sales statistics show Sony booking about 7 million PS4 sales compared to 5 million Xbox One sales for Microsoft.
Last year, Microsoft showed an almost unfathomable misunderstanding of its own loyal customer base. Rather than focus on video games—which might be expected for the introduction of avideo game console—Microsoft chose instead to market the Xbox One as an all-purpose entertainment system for your living room, controlling your TV, music and streaming services like Netflix via its Kinect motion and voice sensor.
The execution couldn’t have been worse. Unlike the PlayStation and popular consumer options like the Roku, Google Chromecast and Apple Apple TV, Microsoft required that users pay a subscription fee to use streaming services such as Netflix (that is, a fee to Microsoft in addition to the normal Netflix subscription fee). Adding insult to injury, Microsoft also attempted to restrict second-hand game sales and to require an “always on” internet connection. All of this dampened enthusiasm for what was otherwise a fine product and gave Sony a marketing advantage that Sony management couldn’t have even dreamed of. Microsoft has since backpedaled and reversed all of these decisions.
Kinect, by the way, also added an additional $100 to the Xbox’s price relative to the PlayStation—which is the single biggest factor in Microsoft’s lagging sales. The Xbox One initially retailed for $499 vs. $399 for the PS4. Gaming enthusiasts had a hard time justifying paying an additional $100 for functionality that they didn’t need or want. And Sony seemed to “get” them when Sony focused it presentation on gaming.
Call it the dying gasp of Steve Ballmer ’s Microsoft. Under new CEO Satya Nadella’s leadership, there would be no repeat of last year’s ham-fisted performance. Microsoft focused its energy on its popular titles, including new iterations on the Halo and Call of Duty franchises.
I spoke to CNBC’s Adam Bakhtiar and Oriel Morrison about the direction that video gaming would take in the years ahead. Today, high-end PC gaming accounts for about 20% of the market, and low-end mobile gaming—the sort of games you could play on an iPad or smartphone—account for another 17% of the market, and growing. The remaining 63% of the market remains the domain of video game consoles, at least for now.
Console gaming probably has another good 5-10 years left in its current form. Beyond that, we’re really left to speculate as to what the future may look like. Might consoles get lost in the shuffle as games are increasingly available cross-platform and cross device? Consider the precedent created by online streaming services like Netflix and Hulu, which can be viewed on virtually any computing device or any one of an infinite number of streaming set-top boxes. In this future, it would be the content creators that reaped substantially all of the profits, not platform vendors.
In any event, this latest battle in the console war promises to be interesting. Microsoft has ditched Kinect and lowered the price of the Xbox One to compete with the PS4. Expect Sony to respond with some aggressive marketing moves of its own. While Microsoft can afford to be an also ran in gaming consoles, Sony cannot. Sony has seen its consumer electronics businesses wrecked by competition from Samsung and Apple, among others. Outside of its movie studio—which may well be spun off as a separate business—the PlayStation is Sony’s last realistic chance at market dominance.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
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