Xbox 360 to Double Holiday PS3 Sales?

UPDATE October 27, 2006, 5:35 pm ET: Late this afternoon, a spokesperson for Microsoft confirmed to BetaNews that CFO Chris Liddell's prediction of four million more Xbox 360 consoles sold between now and the end of the year, is an accurate one. The spokesperson did clarify the meaning of "sell:" Liddell was referring to sales to retailers and distributors (wholesalers and resellers), not to end customers. If NPD were to make an assessment of Xbox 360 end customer sales next January, we were told, that number could be different.

With only 65 days remaining in the calendar year, for Microsoft to reach this goal, it would have to sell nearly 43 Xbox 360 consoles worldwide every minute, or at least three units every four seconds.

With Microsoft having experienced some uncharacteristic rough goings toward the end of its last fiscal year, as it began realizing the differences between manufacturing hardware and producing software, the company appears to be just beginning to emerge from out of the storm.

A 70% annual growth rate in its entertainment and devices revenues was mainly credited for helping Microsoft post higher than expected operating income of $4.47 billion, on revenue of $10.81 billion -- on the high side of estimates -- for its fiscal first quarter 2007 just ended.

That growth rate helped eliminate one of the two lead weights that had been a drag on the company's numbers all last fiscal year. But the big news to come emerged during the company's guidance for the next quarter: Microsoft intends to sell 4 million more Xbox 360 consoles between now and the end of this year, which is about nine weeks away.

As Chief Financial Officer Chris Liddell stated, Microsoft has already sold 6 million Xbox 360 consoles since its launch in November 2005. As you'll recall, that launch did not exactly go so swimmingly, with not even a million units sold worldwide by January. In his guidance, he said the company predicts it will have sold 10 million units by the end of the calendar year, and between 13 and 15 million units by the end of the fiscal year (next June).

Keep your calculators out for a minute: Some Sony executives have estimated it will be able to make about 2.2 million PlayStation 3 consoles available throughout the holiday season. But others admit the company will only have 500,000 units available worldwide for its mid-November launch, which is less than half the number of Xbox 360s available for launch at the same period last year.

With NPD Group having estimated Microsoft only sold 600,000 units during a six-week period, and with that number representing about half what the company is believed to have produced, even with demand staggeringly high, Sony may be lucky to outsell Microsoft's year-ago numbers.

Since Microsoft is already known to lose a chunk of change with each Xbox 360 it sells, due to the high cost of production, where is the company's higher revenue for the entertainment division coming from? The answer, we learned yesterday, is in "software attach" - the subsidiary purchase that all new console owners make, otherwise the investment is pointless.

The gaming industry's magic number, Microsoft admitted last year, is four - meaning, with every console sold, a manufacturer hopes that the customer will also buy four games. Late last year at Xbox 360's premiere, that number was actually closer to three.

But now, Chris Liddell told investment analysts yesterday, that number is five, and climbing.

If your calculators are still warm: The industry average price for a console video game is $50. With a software attach rate of 5, that makes $250. Retailers make astonishingly little margin from that figure - around 10%. So take $225, of which the manufacturer's gross margin is around 30%. That's $67.50. Multiply that by four million, and you're looking at Microsoft's upcoming holiday season, in which it expects to earn as much as 75% more than it did from entertainment and devices the prior year.

Also, as Liddell mentioned yesterday, as Xbox 360's design is maturing, it's costing less to produce with each passing quarter. "Last year, we saw slightly higher costs per console, and this year...we're experiencing better costs per console. We're sticking clearly with our view of being cost-neutral over the console life, and this year is shaping up very well."

By "cost-neutral," he means he expects the company to break even, having reaped as much as was sewn in production costs by the end of Xbox 360's marketable life, which could come in three to four years' time.

Add to this the fact that Microsoft's investment in online entertainment services is finally starting to pay off, Liddell said, as membership in the Xbox Live service topped 4 million during the previous quarter. The company's revenue from interactive gaming alone doubled over this time last year, he noted, which is really an admission that its growth rate is about 100% annually.

Does this mean Microsoft's a game company now? Let's look at the figures in perspective: Its Client division (whose principal product is currently Windows XP) garnered $3.3 billion in revenue in the prior quarter alone, up 4% annually. Server and Tools revenue was $2.5 billion for the quarter, up a staggering 17% annually on the continued strength -- from out of nowhere, it seems -- of SQL Server. Only Online Services (mainly MSN) continued its steady decline of 4% annually, to $540 million in revenue.

So while it might be nice to have a video game manufacturing company that reaps a billion and change per quarter, the Xbox 360 represents only 9.5% of the company's business.