Xbox 360 Rollout To Be Slow but Steady

How exactly do you launch a new gaming console? At Microsoft, the plan seems to involve starting slow, then ramping up supply as the system gains momentum.

According to data in Microsoft’s earnings report for its first fiscal quarter of 2006 the company estimates shipping between 4.5 and 5.5 million Xbox 360 consoles by June 2006, but isn’t trying to make sales of the new gaming console to take off like a rocket during its first months. Rather, analysts estimate the company will ship up to 2 million consoles at launch, but then slowly increase supply of the Xbox 360 as more games become available and competing consoles from Sony and Nintendo come to market.

Why? Launching in the U.S. on November 22, Microsoft’s Xbox 360 will be the first of a new generation of gaming consoles, and it’s even making it to retailers in time to participate in consumers’ end-of-year holiday purchasing. Wouldn’t it make sense for Microsoft to sell as many consoles as possible while the Xbox 360 is the only game in town?

Not necessarily: the economics of video game consoles aren’t so straightforward. Historically, most video game console manufacturers lose money on every unit sold, making up the shortfall in game sales, royalties, and (more recently) subscription fees. A manufacturer’s loss-per-console is greatest when new systems are introduced and hardware costs at their highest. As more manufacturing capacity comes online and hardware costs decline, the makers lose less money on each console, and may eventually begin making a profit on the systems.

Microsoft’s current Xbox system has always had a negative gross margin, meaning the Redmond company theoretically loses money on every sale. That loss will widen with the Xbox 360, which has higher manufacturing, hardware, and marketing costs, so Microsoft can reduce its potential losses on console sales by avoiding an initial spike in Xbox 360 sales.

If Microsoft can defer sales of Xbox 360 consoles to the first half of 2006, it may be able to reap two fiscal rewards: one through improved (though still negative) margins on each Xbox 360 console as additional manufacturing capacity from Celestica, and another through increased game sales and royalties, as more Xbox 360 game titles ship from both Microsoft’s in-house game development unit and developers like Electronic Arts and Take-Two Interactive. (And the third installment of Microsoft’s Halo franchise

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