Microsoft on Thursday lowered sales forecasts for its Xbox video game console, blaming weak sales in Japan and a slow start in Europe.
John Connors, chief financial officer for Microsoft, said in a conference call after the company's announcement of third-quarter earnings that Microsoft now expects to sell 3.5 million to 4 million units for its 2002 fiscal year, which ends June 30. Previous forecasts called for sales of 4.5 million to 6 million units during the period.
Financial analysts had expressed mounting doubts in recent weeks about Microsoft's ability to meet the sales targets, as the game machine found modest acceptance overseas.
Sales in Japan, where the Xbox went on sale in February, have been miniscule, with research firms in the country reporting sales of a few thousand units a week in recent weeks.
Sales in Europe, where the console arrived last month, have also been tepid, due partly to a selling price considerably above the Xbox's main competition, Sony's PlayStation 2. Microsoft responded by announcing a price cut of almost 40 percent early Thursday for the European Xbox. The console will now sell for for $266 in mainland Europe and $288 in Britain, compared with initial price tags of $419 and $434.
Matt Rosoff, an analyst for research firm Direction on Microsoft, said the price cuts come none too soon, as Microsoft needs a viable European market for the Xbox to be a success.
Based on Microsoft forecasts, retail patterns and comments from Microsoft insiders, Rosoff and other analysts have calculated that Europe needs to account for a third of worldwide Xbox sales for the company to reach overall targets.
"They need to see a real upswing in sales to get there," Rosoff said.
Microsoft may have to cut Xbox prices in North America as well if Sony follows through with a rumored price cut for the PlayStation 2. The Xbox and the PS2 both sell for $299 here.
Sony has maintained it has no immediate plans to cut the American price of the PS2, despite reductions last year in Japan and Europe, but P.J. McNealy, research director at research firm Gartner, predicts the company will change its tune soon.
McNealy said he expects Sony to cut the American PS2 price by the time of the Electronic Entertainment Expo (E3), the game industry's main trade show, which begins May 22.
"They've historically made big hardware pricing announcements at E3," McNealy said, adding that Sony is feeling competitive pressure from solid Xbox sales in North America. "I think they're acting a little more defensively than they did a year ago."
McNealy and other analysts expect Microsoft will have to match any Sony price cuts, something Microsoft Chief Financial Officer John Connors alluded to Thursday when he discussed how the Xbox will weigh on the company's near-term earnings.
"Price erosion is a reality in this business," Connors said in a conference call with financial analysts following the announcement of Microsoft's third-quarter earnings.
Microsoft is less likely to make any price moves in Japan, where the Xbox is already competitively priced with the PS2, said Direction on Microsoft's Rosoff.
"The issue there is really that they're on Sony's home turf and that they haven't rolled out enough of the right games," he said. Rosoff added that Microsoft never expected Japan to be more than a tertiary market for the Xbox, noting that manufacturing partner Flextronics International has Xbox assembly plants in Europe and North America but not Asia.
Charlotte Stuyvenberg, director of Xbox communications, said Microsoft was building relationships with Capcom and other game developers to produce more titles tailored for Japanese tastes, the main factor in ensuring long-term success for the Xbox in Japan.
"In Japan, it's really a content objective for us," she said. "There's a flavor of content consumers are looking for that's very different than what consumers want in North America and Europe...It's going to take us some time."