Since it has been at the bottom of the console pile for the last month or so and was outsold by the PS3 by almost 120,000 units last week, the question arises is the xbox 360 a system in decline and if so what can be done to change its fortunes or should MS just go ahead and get their next system prepared for launch in Fall 2010 under the name xbox natal or just Natal?
The 360: A console in decline
By Kyle Kulyk 
Recently, Microsoft Xbox 360 director of product management Aaron Greenberg boldly proclaimed “What I can tell you is we remain confident that Xbox 360 will not only outsell PS3 for the full calendar year, but for this entire generation.”
Strong words for the man behind a console clearly in decline.
Microsoft introduced its Xbox 360 console in 2005, its second stab at the videogame console market and so far it has been a veritable roller coaster ride of highs and lows for boththe 360 console and for its fans. From its lukewarm reception at launch through to the highs it reached in 2007 withHalo 3, from its struggles with hardware reliability to decreasing sales and economic depression, Microsoft’s 360 console has had quite ride up to this point. Now, as the 360 approaches its 4th birthday it appears that hard times are ahead for Microsoft’s videogame flagship. After defying the odds for 4 years the signs of the 360’s decline are all around us, despite Greenberg’s recent comments to the contrary.
Xbox struggles to maintain sales
When the 360 initially launched in 2005 many gamers eagerly snatched up Microsoft’s newest offering in anticipation of all that the “hi-def” era of gaming had to offer but many came away disappointed. Hardware shortages definitely hurt Microsoft’s launch as did lack of 3rd party titles and while potential 360 owners sat back and waited for their consoles to become available news reports of scratched disks and general hardware failures began to make their rounds. Microsoft was quick to comment that hardware failures were within acceptable limits but as time went on and Microsoft extended their warranty from 90 days to a year, then from a year to 3 years consumers caught on that something was amiss and their gaming dollars stayed put.
Indeed, sales for Microsoft’s console showed little growth in its first 2 years until a price cut preceding the launch of the eagerly anticipated Halo 3 spurred hardware sales into the holiday season but the surge following the 360’s price cut quickly dissipated and sales fell well below levels set in 2006. At this point, Microsoft stopped reporting 360 sales on their quarterly reports for 2 quarters as they tried to shift attention away from the year over year declines, only reporting 360 sales figures again when those numbers were boosted by the holiday season.
After lagging significantly behind the PS3 console for the calendar year 2008, the 360 received another major price cut in September temporarily boosting them back over their main competitor but the general malaise surrounding 360 sales quickly returned and Microsoft reported 360 sales for the 4th quarter of 2009 had hit two year lows, despite being half the price of their main competition. The most recent fiscal update for Q1 2010 also showed year over year declines.
Outside the 360’s primary territory, the US, this trend is even more pronounced. Like the original X-box before it, Microsoft has faced difficulty with gamer acceptance in the other main gaming markets of Europe and Japan. Also hampering the consoles acceptance is the 360’s atrocious failure rate, an issue of ongoing concern for both Microsoft and consumers alike. It’s hard to imagine how any console can be considered a success without the ability to crack, let alone succeed, in these influential markets.
Does the 360 even make any money?
Added to Microsoft’s sales woes is the 360’s profitability which, according to analysts, is also a concern for the company. Recently, analyst Curtis Shauger of Caris & Co. warned that slowing Xbox sales had the potential to start impacting Microsoft’s bottom line. Shauger’s comments raised a few eyebrows as it was widely believed that Microsoft profited off 360 hardware sales, however evidence of this can be seen as far back as September of 2008 when Microsoft Entertainment, the division in charge of the 360 posted increased revenue on increased 360 sales but at the cost of almost half a billion in profits leading some to speculate at the time that the 360 hardware was sold at a loss. Microsoft has neither confirmed nor denied.
Microsoft has also taken tremendous losses due to the R&D that went in to developing the 360, the losses due to the 360’s initial pricing point and later the billions lost in extending the 360’s warranty due to shoddy hardware and inadequate quality control. Despite posting a profit of over $400 million in 2008 and over $100 million in fiscal 2009, the last three quarters have seen Microsoft Entertainment – who’s primary source of revenue is the 360 console, hardly breaking even. For those keeping score, that’s $3.1 billion in losses Microsoft’s Entertainment division still needs to make up (originally $3.6 billion) before they’ve dug themselves out of the 360’s hole.
Add to this the growing issue of video game piracy on the Xbox 360. Microsoft’s decision to release the Xbox 360 using DVD technology has made the 360 the pirate’s choice for consoles. Many new releases are readily available via bittorrent well before the games are released in stores and the problem is escalating. In contrast, Sony’s PS3 security has yet to be cracked, and the current cost of Blu-Ray burners and blank media make the prospect of pirating PS3 titles less appealing then the easily copied 360 titles.
In fact, the only bright spot from Microsoft’s financials have been revenue from their XBL service which in their most recent fiscal update Microsoft claims is up 50% although exact numbers have not been released. Xbox gamers, in order to play online, must pay ongoing subscription fees which other consoles do not charge – a fact that’s lining Microsoft’s pockets but may prove a detriment against in the long run when up against the free online play offered by the now similarly priced PS3 console. It’s no wonder Microsoft isn’t keen on drawing attention to exactly how much they take in via these subscription fees.
Where have all the games gone?
Another sign of the times for the 360 is in its blockbuster titles, or lack thereof. Most 360 owners will remember fondly the days of 2007 when excellent 360 exclusives like Halo 3,
Bioshock, Forza 2, Dead Rising, Crackdown and others seemed to be never ending but 2007 appeared to be a peak year as opposed to a promise of things to come. More than a year passed before Microsoft provided gamers with more heavy hitters. Gears of War 2 and Fable 2 both released in rapid succession to each other. Then gamers were again faced with a year long drought and their thirst for quality exclusives not met until the well received but painfully short expansion, Halo: ODST was released recently. Now it looks like the exclusive drought will continue into 2010, with only a smattering of exclusive titles to look forward to. So, how does Microsoft intend on dealing with the 360’s decline if not with quality games?
Bring on the casuals!
Why, by turning their backs on their core audience, of course. Microsoft seems hell bent on trying to woo the Nintendo Wii’s casual audience over to their specific brand of motion control, project Natal. Project Natal’s camera system promises controller-less gameplay for those gamers who don’t mind bouncing around their living rooms like hyperactive toddlers and Microsoft is having their main developmental studios focused on making us look foolish in our own homes. Microsoft’s Natal demos have made it clear, they are going straight for the casual market hoping to wrest control of some of those money sacks from Nintendo’s sweaty, sweaty hands. However the question remains, will gamers embrace the controller-less add-on or will this go down as just another expensive gimmick, destined for the scrapheap of poorly received video game add-ons like the 360’s HD-DVD add-on?
Writing on the wall
Outwardly, Microsoft continues to put on a brave front despite their inability to outsell the PS3 since Sony’s console launched worldwide not quite 3 years ago but the signs are clear and you can be sure in the backrooms of Microsoft Entertainment division there are some hard decisions being made. Some have even speculated that Microsoft needs to withdraw from hardware altogether and refocus on their main strength, software. In the month following the launch of the PS3 Slim and price-cut, the PS3 moved 491,800 consoles in the US alone according to the NPD group. To put that in perspective, when the 360 cut the price of its entry level console to $200 last year, sales for the month of September in the US hit 347,200, and that was up 40% from the month before. With a slew of excellent exclusives under its belt for 2009, even more highly anticipated exclusives for 2010, a more palatable price point for the masses, the successful Blu-Ray format under its hood and rock solid hardware, the PS3 is the system to beat going into this holiday season and beyond. If Project Natal fails to stimulate 360 hardware and software sales worldwide, how long before the 360 meets the same abrupt end as its predecessor?
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