Who Will Win the Console Wars?

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

War of the titans! Microsoft (NASDAQ: MSFT), Sony (NYSE: SNE), Nintendo, and now Google (NASDAQ: GOOG) are all tipping their hat into the arena. Microsoft makes the Xbox 360 and is going to start selling the Xbox One this fall. Sony makes the PlayStation 3 and is going to start selling the PlayStation 4 soon. Nintendo made the very popular Wii and also makes the Wii U, which isn't selling very well.

The newest player in the arena is Google, who said they are going to make a Google gaming console to compete with the possibility of an Apple iTV and Microsoft's top selling Xbox 360.

Microsoft is the only game console to see an increase in sales every year, but Sony's PS3 recently overtook the Xbox 360 in lifetime sales. The Wii U had a lackluster roll out, especially in the US.

Sales

The Wii U sold 3.18 million units globally (according to VGChartz), with 1.34 million sold in North America. Compare that to the 44.07 million Xbox 360's sold in North America (77.61 million globally) or the 26.75 million PS3's sold in North America (77.82 million globally) and you can clearly see the Wii U is lacking the demand that the Wii had. The Wii sold 44.71 million units in North America and 99.92 million globally.

Xbox 360: Released November 2005, averaged 844,000 sales a month

PS3: Released November 2006, averaged 973,000 sales a month

Wii: Released November 2006, averaged 1.25 million sales a month

Wii U: Released November/December 2012 (depending on location), averaged 454,000 sales a month

As you can see the Wii U isn't living up to its previous standards and is why Microsoft and Sony have been gobbling up console market share both in the US and globally.

The new player

Google wants to make a console now, and there has been a lot of speculation as to what that will entail. Will it be able to play the popular games like Call of Duty, Battlefield, and other PS3 and Xbox 360 games, or will it be based more so around playing apps from the Google Store? Personally I think it will be app focused and come at a low price point ($99).

Google isn't going to be competing with Microsoft or Sony, it will create a different console market for itself. A console for those who aren't gamers, but are slowing getting into the gaming world through apps on iPads.

PR mishap

First, Sony had a PR mishap when it "forgot" to unveil the hardware at its first press conference, which gave it a small headache. But no one had to deal with a bigger PR disaster than Microsoft and the never on fiasco.

Consumers and critics were worried about having to have the Xbox One always hooked up to the internet and to have to use codes to play used games and that the camera (in light of the NSA snooping scandal) would always be on. So, Microsoft went back on the always on feature and on the codes for used games so they wouldn't lose the console war when the devices come out.

Another annoyance for Microsoft is Sony undercut them by $100, offering the PS4 for $399 while the Xbox One is $499. This could help tip the tide in Sony's favor, and as of right now, Sony is definitely winning. I'm still personally going with the Xbox One because I am a huge Xbox fan, but Sony is still winning.

Fundamentals

Sony gets 10.5% of its revenue from the PS3, so if it can see a significant jump in sales when the PS4 is released, that could provide for some very strong top line growth.

Microsoft makes a lot of revenue from the Xbox 360 hardware, but they also make a lot of profit from Xbox Live subscribers. As of last quarter, Microsoft had 46 million Xbox Live subscribers, which provides for around $3 billion of revenue a year. (Subscriptions can run from $60 for the year to $9.99 for just 1 month.)

Microsoft has two big sources of growth riding on the Xbox One, as revenue from the Entertainment and Devices Division increased by 56% year over year with revenue from the Xbox 360 increasing 55% to $641 million. Now $641 million is only 3% of Microsoft's total revenue, but it still will offer at least 1-2% revenue growth for Microsoft over the next few years.

Google hasn't released its console yet, so it's hard to see how it will affect their top and bottom lines, but I would expect expansion in both as they sell the device (probably) at cost or just below cost and make the money back through app sales from its Google Store. The device will probably also have Hulu, Netflix, Amazon Prime, and will offer TV shows, movies, and music as well.

Google trades at a hefty 26.5 PE so these kinds of moves are what helps justify its higher PE because investors know Google is trying to expand into every market.

Final thoughts

While we still need to see more from Sony and Microsoft about their upcoming launches, whoever wins will see some top line growth, but Microsoft's Xbox Live is way more profitable than selling hardware. On the other hand the PS4 is a larger chunk of Sony than the Xbox is of Microsoft, so if Sony wins they will see a lot more growth than Microsoft would if the Xbox One won.

As of right now Sony is winning for sure, especially after Microsoft's PR disaster, but also because Sony is offering the device for $100 less. For Google to get into the console game, it helps justify its higher valuation and could provide some nice growth in the future. We still have to see what they do with it and if it will have any success at all, but it is important to watch.


Callum Turcan owns shares of Microsoft. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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