Earlier this week, Microsoft had their investors call; a meeting with investors where the Chief Financial Officer (CFO) Amy Hood discussed their quarterly results. A bunch of interesting facts came to light during the meeting, and it’s clear from these facts that the Xbox One is not performing anywhere near how Microsoft expected it would.

In fact, following the sales data from March, – the launch month of the fabled Titanfall – it’s clear that Microsoft need to change something if they want to compete with the PS4. “But we thought the Xbox One was doing great!”, you might say. Unfortunately, looking at the data available, the situation is more complicated than it seems. In fact, Microsoft might be slowing down or even stopping the production of the Xbox One temporarily until demand catches up with supply.

So, let’s first take a look at the NPD sales data for March. NPD is commonly used to track the number of units sold of physical video games and console hardware in the U.S. through all brick-and-mortar and online retailers that are large enough to matter (the list is quite long). In an earlier article, I mentioned that the short term success of the Xbox One was dependent on Titanfall, despite the game not being exclusive to the device. Unfortunately, even during the launch month of Titanfall, the PS4 outsold the Xbox One. Titanfall as a game outsold Infamous: Second Son (the month’s big PS4 exclusive), but that can be attributed to the fact that the game came out ten days earlier on two platforms (the NPD data doesn’t state games per platform). While this doesn’t seem too bad, it gets worse.

Considering the U.S. is the bastion of Microsoft, the region where the Xbox 360 sold most successfully, losing out to Sony probably didn’t make them too happy. In fact, since NPD’s March tracking was over 5 weeks and their February tracking was over 4 weeks, doing some math (with these numbers) shows that the Xbox One sold less per week in Titanfall month than before. Titanfall’s March sales on the Xbox One are rumored to be around 1 milion (take this with a grain of salt as it’s just a rumor), whereas Infamous sold over 1 million units in 9 days, which makes it seem like without bundling PC and console sales together and with an equal time on the market, Infamous could have easily outsold Titanfall’s Xbox One version. Which doesn’t bode well.

But hey, Microsoft shipped 5 million Xbox Ones and Sony sold 7 million, right? That’s not too bad! In fact, it’s doing better than the Xbox 360! Unfortunately, that line of thinking falls prey to Microsoft’s PR maneuvering. Microsoft shipped 5 million units to retailers, whereas Sony sold to consumers 7 million units. Let’s do some math here. Earlier this year, Microsoft announced that the Xbox One sold 3 million units last year, and they shipped 3.9 million. During the investor call, it was revealed that they shipped about 1.2 million units this quarter. In the time it took Microsoft to ship 1.2 million units, Sony sold 3 million. If the ratio of shipped-to-sold holds up from last year, it’s pretty clear that the Xbox One is losing momentum. As a testament to this, Amy Hood said during their call that there will be a “channel inventory drawdown for Xbox consoles”, which means manufacturing of both the Xbox 360 and Xbox One will slow down or halt temporarily.

While some of his guesses aren’t always correct, analyst Michael Pachter is usually insightful when it comes to industry dealings. He asserted that Microsoft started manufacturing Xbox Ones in September and that they would manufacture a million units per month. This is in line with the 3.9 million shipped in 2013, as 4 million would be the amount they would have manufactured. But now, they would have 8 million consoles manufactured, 5 of which are shipped and 3 million of which are sitting in a warehouse in Microsoft HQ. In this case, it would make sense that they’re slowing down manufacturing until demand catches up with supply. Large-scale manufacturers make contracts for certain manufacturing speeds and periods, so for Microsoft to modify that process and change their plans means there could be something serious going on. Considering the Surface tablet had $900 million worth of units just sitting in warehouses unsold was a pretty embarrassing situation for Microsoft last year, they wouldn’t want to repeat that.

Another depressing fact is that comparing the sales of the Xbox One in its second quarter to the 360 in its second quarter, the One is doing worse. And the 360 was supply-constrained, they couldn’t make them fast enough, whereas the One is oversupplied. A lot of the sales of the One were clearly early adopters and preorders, and interest dropped sharply after that. In fact, Day One editions (supposedly only available on preorder/launch day) are still available unopened in some retailers. As January to March NPD values show, sales of the Xbox One are actually on a downward trend over time and the gap between Xbox One and PS4 sales is widening.

What’s Microsoft’s next move? Clearly they aren’t doomed, but they need a shot in the arm if they want to keep competing. They’ve already announced that they’re launching in “tier 2 countries” in September this year. The fact that the Xbox One has launched in less countries than the PS4 is often used to address the sales discrepancy of the systems, but considering those “tier 2″ countries are areas where the 360 did poorly, and the PS4 is consistently outdoing the One even in the U.S. shows that it won’t really matter. What Microsoft really need is a strong E3 with two crucial factors. A price drop and a vast array of must-get exclusives. There is no way around it this time.

However, even the usefulness of that remains to be seen. The Xbox One has seen several bundles and price drops over the past month, some even dropping the effective price of the system to lower than the PS4, but the sales still didn’t budge. A sub-PS4 price with a bundled game might make a dent in that arena, but for that they might have to drop the Kinect. Dropping Kinect is a whole other can of worms, as the UI of the system is heavily dependent on it, but 6 months into the release of the system there are still few (if any) compelling games released or even announced for it. As for exclusives, Microsoft only have so many studios. They obviously have their Halo, Gears of War and Forza factories, but other than that their output so far is low. What they can do is purchase exclusivity from third party developers (like Ryse, Sunset Overdrive, Quantum Break), but that is costly and it gets harder to do as the sales of the PS4 overshadow the Xbox. This would require significant monetary investment from Microsoft, and they better get this done by E3 if they want to boost public image. Even then , this doesn’t change the fact that the Xbox One has weaker hardware, but that never stopped the Wii, so a cheaper machine that plays a ton of exclusives can be worthwhile.

Whether this is a sustainable strategy is doubtful, though.

Either way, Microsoft will need to take some losses and dump money into the Xbox to bring it up to a competitive level. That still doesn’t change the fact that the system is weaker than its direct competitor, but with enough exclusives and a very compelling price, some might still take the bite. Whether that bite will be big enough still remains to be seen, but I’ll let you go with a 2008 quote from former head of Xbox Don Mattrick:

“History has shown us that the first company to reach 10 million in console sales wins the generation battle.”

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