Tech Industry

For Xbox One sales, the real test comes after Christmas

Microsoft's next-gen console may have now sold an impressive 2 million units, but the real action for the Xbox One and its higher price point will be keeping up with Sony in 2014.

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The old saying about the baseball season is that it's a marathon, not a sprint. So too is the footrace between the Xbox One and the PlayStation 4.

Certainly both contestants are off to a fast start. Microsoft announced Wednesday that the Xbox One has sold 2 million units since its November 22 launch, doing so at a higher price point of $499.99 and only three days longer post-launch than it took Sony's PS4 to pass that same milestone. While that number is impressive and far surpasses sales of the Xbox 360 at this stage of the game eight years ago, the real problem for Microsoft lies in the fact that Sony has, and will likely continue to, outpace it in the post-holiday season when unit stocks are back to normal, putting the Xbox One in a particularly tough spot going into the robust gaming landscape laid out for 2014.

Sony made the decision to hone in on price when it unbundled its motion control device, and that factor, coupled with the Japanese entertainment giant's more gamer-friendly image, portends the PS4 cruising comfortably to dominance. If Microsoft wants to stay competitive, it will have to figure out a way to continue substantially differentiating its living room vision through software, or face the unpleasant reality -- say some analysts--- of cutting the price of its console one way or another.

"The reason Sony beats Microsoft is solely the price," said Michael Pachter, a Wedbush Securities analyst, at the Game Monetization USA Summit in San Francisco last week. "Microsoft loses the next generation unless they cut price. If Microsoft drops its price to $399, I expect the sales to be equal to the PS4."

Pachter also pointed out the grim reality for console makers that the installed base of next-gen consoles will not grow substantially over the last. "I don't think you're ever going to see 500 million consoles out there," he said, adding that projections of hundreds of millions of consoles are not in any way realistic. So each and every month of the next year will be a testing ground both for Microsoft's vision for the Xbox One and its resistance to giving in to the cost-slashing tactics of purported console wars.

Factors Microsoft must consider
There are also a slew of other factors to consider when projecting Microsoft's strategy to keep the Xbox One sales steady, from the platform environment of 2014 to the ever-pressing question of whether to leave the Kinect behind.

As far as games are concerned, Microsoft is heading into 2014 with the unfortunate reality that many of next year's most highly anticipated titles are multiplatform. There's Destiny, from Halo creator Bungie, which is no longer tied to the Xbox platform, and Watch Dogs from Assassin's Creed creator Ubisoft -- two wholly original titles that are not playing favorites with console choice. Then there's Metal Gear Solid V: Ground Zeroes and Tom Clancy's The Division, games tied to highly popular franchises that have become staples in the industry and that will likely factor significantly into a wavering consumer's decision to make the next-gen dive.

Every one of these titles can be found on the countless lists tallying the strong gaming lineup of 2014 and all are coming out on both platforms, meaning Microsoft won't be able to rely on the strength of exclusivity it's had in the past with hugely successful series like Gears of War and Halo.

One of the warmly welcomed Xbox One exclusives -- Titanfall, to be released in March -- will be matched in lockstep by Sony with its own exclusive Infamous: Second Son, a sequel to an already strong-selling franchise that could give the PS4 an edge when, come springtime, gamers may look to buy one console over the other depending on the reassurance of quality that its exclusive titles offer.

When it comes to discounting its console, Microsoft is an equally tough position. Despite Pachter's words of advice, other analysts watching the unfolding success of the Xbox One and PS4 do not see a price cut in the cards for either console. History tells us that price cuts before the year and a half mark would signify sales as weak as those of the earlier PlayStation 3, which suffered a disastrous launch, and the Wii U, which just this past summer saw a price cut after Nintendo caved to pressure over the system's paltry sales.

Still, in the unlikely event a price cut does occur, it would mean Microsoft would have to either lose money on each console sold, a strategy that led to Sony losing billions on the PS3, or unbundle the Kinect to drop the Xbox One down to $399.99.

Currently, the Xbox One retails for $499.99 and costs roughly $471 to manufacture. That's an extraordinarily thin profit margin, especially when taking into account the research and development that went into the console, including a mind-boggling $100 million just to slightly tweak the controller. Marking the console down to $400 and thus selling it at a $71 loss would surely prove disastrous to the Xbox division's bottom line. (Sony, on the other hand, fares even worse in this respect, manufacturing its PS4 for $381 apiece and earning only $19 on each console sold.)

Unbundling the Kinect would seem a logical answer to anyone overlooking the fact that Microsoft has built its vision for the Xbox One entirely around a less game-oriented experience. The Kinect is central to that vision, and unbundling just for a price cut and sales boost may be akin to chopping off a limb. "Microsoft thinks that capability is integral to the platform," Colin Sebastian, an interactive media analyst with Baird Research, told CNET in an interview last month on console price cuts.

Not only would that move undermine Microsoft's vision, but it would also signal to developers looking to incorporate motion and voice into next-gen games that the Kinect was at best an auxiliary component to the Xbox One, an element that the company would be willing to throw under the bus for the sake of sales numbers. Given the deeper functionality and integration the Kinect offers over Sony's PlayStation Camera, Microsoft would be taking a rather large risk in stripping down its Xbox One.

Between a rock and a PlayStation 4
Since the moment Microsoft began fumbling over the Xbox One's system for used games, its always-online requirement, and the mandatory Kinect features, it's been pegged as the underdog and deemed the loser by countless gamers before anyone even had a chance to pick one up off the shelves. But Microsoft has rebounded tremendously, dispelling the shadows of that PR nightmare and launching the Xbox One to strong sales and a clear vision for what it aims to do for living room entertainment.

The question now is whether it deems the hyperbolic "console war" conversations a big-enough threat to usher in price cuts or potential detrimental pivots with regards to the Kinect. If sales stay strong, and Microsoft continues to steadily nip at the heels of Sony's cheaper console, all these considerations may be moot points. But until well into next year, Microsoft will have to endure the criticisms and calls for change from outside voices, as well as the internal pressure in Redmond that it act fast to address those concerns.