Zune and iPod sales discussion

Replied to a MacRumors discussion:

I have no idea where you got that one from. The original Xbox never made a profit. Microsoft is deliberately selling the Xbox 360 at a loss to capture marketshare. However, the PS3 and Ninetindo Wii are selling like hotcakes, are latest big things, and have the buzz. The best laid plans …

[My reply after the jump]

I think the first statement is correct or close to it. They may have had a single profitable quarter when Halo 2 was released. I’m not sure because they bury Xbox losses in a Microsoft Entertainment and Devices Division. Which includes their smartphone stuff (now that it has stopped bleeding money) and their profitable and acclaimed mice, keyboards, and other stuff (all manufactured by other companies, sort of like Dell, but with a nicer design).

The second part I believe is now wrong. I think the Xbox 360 is no longer a loss lead, though that might change as there is some speculation that they will be dropping the price to undercut Sony soon. I believe the fact that it is no longer a loss lead is causing a confounding with the “360 is profitable” commentaries here, which it isn’t true yet because Microsoft doesn’t get the entire retail cut and there are other costs like advertising.

Another commenter mentioned how smart it was was the Xbox had a hard drive on it. I’d say if it is so smart why did Microsoft remove it in the base model 360? I’ll point out that this happened because the price of hard drives do not get any cheaper! In fact the price of commodity hardware design doesn’t get any cheaper! Huh? Hard drives get bigger, not cheaper. Processors and chips get more powerful, not cheaper.

What went on is that successive iterations of the Playstation and Playstation 2 would allow Sony to combine chips to reduce the price (and make smaller PSOne and slim-cased Playstation 2). This outlet wasn’t available to Microsoft because of the commodity nature of their design and the floor expense of the bundled hard drive. This is why the XBOX was a losing money for it’s entire run and Sony played games by dropping their price before it ever turned a profit.

Those two things are “of a piece.” While commodity hardware was an interesting idea, it was a failure. This is why the Xbox 360 is not built from commodity PC hardware. The hard drives are a necessary evil of the “Live” strategy so they’re left in as an option and bundled with the Playstation 3. This is why these 6G consoles are expensive and not dropping in price fast.

Right now all this is moot since the thing to watch is the Sony gamble on a blue laser. Obviously it will get cheaper fast, but the question is how fast and how cheap? The horrible yields on the Cell processor isn’t helping things. The fact that they are losing $250 a console at the time they are in a PR and financial disaster with the battery recall and CCD recall makes for an ugly quarter.

Currently, the Xbox 360 has sold very consistently at around 1.5 million units a quarter. The XMas quarter last year had supply issues which is why it only sold 1.5 million units amd the last quarter was bad because of anticipation of the Playstation 3 release. That’s hardly dominating.

In fact, I think the Playstation 2 outsold the 360 in each of those quarters even though the device is six years old. Let’s put some numbers here. Last year, over 100 million Playstation 2’s had been sold, six months ago, they were selling 380k/month in the US. The XBOX 360 sold 6 million units worldwide since its introduction over a year ago, six months ago they were selling 300k/month in the US, at that time they had fixed the channel problems that plagued the release. So the limiting factor here is who was that the platform wasn’t compelling enough.

How many units will Guitar Hero II sell this Christmas? Probably a lot given that the company was recently bought out for $100 million.

Consider this: Nintendo sold 600,000 Wiis in the last eight days. Given the scarcity of the Playstation 3 and the popularity and addictiveness of WiiSports and Zelda (the latter sold on 75% of all Wii Consoles), they should easily crush that 1.6 million opening quarter of the 360. And Remember: each unit at a profit with these two titles putting money directly in Nintendo’s pocket.

I’m not claiming that the Wii will beat the 360. I’m just pointing out that according to sales numbers, the 360 is no iPod, is not trending to an iPod, will never be an iPod. The iPod sits on 75%-85% market share (Google this, if you don’t believe me). The closest thing to an iPod in the entertainment market is the Playstation 2.

Which is a big distraction from the point. And what is the point? That the Xbox is a bad analogy. It is best to consider their Windows CE->Smartphone Microsoft play to see that the Zune is a bad idea. How many years and failed ideas have there been (Windows CE, Windows Mobile, PocketPC, etc. etc.)? How many billions sunk (some years more than the entire capitalization of the PDA market)? How much marketshare? 6% of smartphones, 60% of the dead-end PDA market, and most of the dead ATM teller market (because IBM did a phased pull out, not because Microsoft “won”). And even those markets are being eaten by Linux faster than Windows.

The only thing we can learn from the Xbox and Microsoft is that Microsoft pees on their partners (NVidia) at the earliest opportunity—when you adopt a Microsoft partner, the only winner is Microsoft. But we already knew that as soon as the Zune didn’t support Plays For Sure.

3 thoughts on “Zune and iPod sales discussion

  1. MS never made a smartphone, they make the windows mobile software that runs on others hardware. The xbox is ms hardware and software, just like the zune. It’s a entertainment market, just like the xbox, windows mobile software isn’t in the entertainment market. There are far more direct comparisons between zune and xbox than between windows mobile and zune. As for peeing on their partners, what’s new, I think we all know they don’t play nice, instead they play to win.

    So. Microsoft’s mouse market share is so large that everyone is Logitech is peeing their pants? How about Microsoft’s total dominance of the Apple ][+ CPM card market?

    Give me a break. Show me one area where Microsoft’s hardware has lead to a market share the size of iPod’s hold on MP3 players? I can’t think of a single one, can you?

    But I can think of a lot of software plays: Windows, Office, Visual Studio, Project/Visio. I can think of some moderate successes: Windows CE in embedded space, Xbox 360. As well as a lot of failures: Tablet PC, Pocket PC, Windows Mobile, UPMC, Windows Media Center, Plays For Sure, Xbox.

    See, unlike your narrow minded Microsoft fanboy-isms, I realize that the iPod dominance rests under three legs: iTunes, iTunes Music Store, and the iPod. Over the last five(!) years, Microsoft has used canon fodder to attack the latter two while it provided the first and the DRM for the second. Now the Zune is a direct attack, because two people at the top of Microsoft are jealous that after all these years QuickTime is still alive and well. They remember when they told Avi and Jobs to “knife the baby” and it’s really a thorn when they, the most profitable tech company in history, can’t back up that threat with action.

    But until Microsoft wipes out Samsung and Creative, I think the burden of proof is on you. I pretty much destroyed your “Xbox is the shiznitt” crap: it is, in no way, trending to dominate the market, and it won’t even stop bleeding money until 2Q 2007. They’re just hoping Sony stumbles (which they are, but it looks like Nintendo is the primary recipient of Sony’s largess).

    Do you think it is a coincidence that the partner that Microsoft tapped to launch the Zune (Toshiba) was the only major player with less that 2% of the market? And while we are on the topic. Why the hell is Microsoft introducing a hard drive player when the units that Apple is selling and having trouble stocking are flash-based?

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