Who Wins the Game Console War?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coming this Winter
Both Microsoft and Sony are planning to launch new game consoles in time for the holiday selling season. This has big implications for the entire video game industry, since the release of game machines is a key demand driver. In fact, with new machines slated for later this year, game sales are likely to be relatively soft as customers await the new consoles.
While both companies have been touting the features of their new game boxes, the big news just came out: price! The Xbox has taken the high road, with Microsoft pinning a premium price tag of nearly $500 on its machine. That's a steep price compared to the PlayStation, which will be $100, or 20%, cheaper.
About the Same
The thing about the two game systems is that they are very similar to each other. Sure, each has its own unique technology, but the games they both play are pretty much the same, so a 20% lower price could be a big selling point. For the same amount as buying an Xbox One, a customer could buy a PlayStation 4 and two $50 games.
Both units are also looking to get further into their customers' family lives. That means a shift from the gamer in the house's bedroom to the living room. Or, it means attracting a broader audience. Microsoft appears to be fighting itself on both fronts.
Hurting the Core
While hard-core gamers are more than willing to pay up for top-notch machines, mom and dad usually look for the best experience at the best price. That will favor Sony's machine, since it handles games and movies and costs less.
Meanwhile, gamers have been upset by Microsoft's heavy focus on living room features. So while Sony has targeted its early marketing directly at gamers, highlighting features like games that can be played while they download, the Xbox's ability to replace a cable box, stream video, and other media focused aspects have been highlighted by Microsoft. In fact, the Xbox One was originally set to limit the ability to buy, sell, and trade physical copies of games, showing just how badly Microsoft had positioned its machine. Gamer outrage led to a quick reversal of that decision.
If Microsoft's business decisions, including a premium price point, alienate gamers, the Xbox One may never even make it into the house to begin with. In which case, it doesn't have a chance at getting into the living room. So far, this game machine battle is tilted in favor of Sony.
Out in the Cold
Interestingly, Nintendo (NASDAQOTH: NTDOY.PK) is the also ran. The company changed the face of gaming when it introduced the Wii, leading sales to more than triple from $500 million in 2003 to $1.8 billion in 2008. Since then, however, sales have fallen every year and now stand at about a third of their peak.
The thing is, Nintendo updated the Wii last year, bringing out the Wii U. Since sales have continued their downward trend, the new system obviously wasn't well received. In fact, in January the company cut its sales projections for the device by nearly 30%. That's a big problem for Nintendo, and exactly why investors should steer clear until it brings out something new. It doesn't look like that's going to happen this holiday season, though, so Microsoft and Sony are the names to watch.
Media and Other Stuff
Both Microsoft and Sony have much bigger businesses, so their new game consoles aren't make-or-break products. Still, the Entertainment & Devices division made up about 13% of Microsoft's top line last year and the Game group accounted for 10% of Sony's revenues in fiscal 2013. Clearly, there are good reasons to keep a close eye these dueling device launches.
Sony's device business, which makes everything from TVs to game consoles, has been struggling for years. In fact, the division's malaise has led activist hedge fund manager Daniel Loeb to push the company to break off its content arm, which is doing quite well, from the device division. If Sony can score a big win with the Xbox it might have an easier time silencing the dissidents.
The company's top line has been weak since 2008 and it has lost money in each of the last three years. Although the shares have roughly doubled over the last six months or so, they remain well off of their 2008 peak. There's still turnaround potential for more aggressive investors.
The Living Room or Bust
Microsoft, meanwhile, has also seen its shares pick up of late. That said, the shares are well off their all-time highs and remain in a decade long trading range. However, the recent price advance seems to be a recognition of the fact that, aside from a 2009 dip, sales have trending higher for a decade. While earnings have been more volatile, the company is highly profitable and has increased its dividend annually for ten years.
The company has the wherewithal to see its push into the living room through, even if it means meeting Sony on price and rejiggering the device a little before it launches. Of the two, Microsoft has a better financial footing. The shares still have turnaround appeal for those seeking less risky fare. A yield of around 2.6% isn't bad, either.
The War is on
With the prices out, the war between Xbox and PlayStation is on. Investors should find both Sony and Microsoft interesting, but their risk profiles are very different. More aggressive types should favor Sony. Investors of all breeds, however, should avoid Nintendo.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Nintendo. The Motley Fool owns shares of 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!