Analysts warn of "struggle" for Xbox

Senior industry analysts have voiced concerns over the future of Microsoft's Xbox business, labeling the US firm's attempts to market 360 to casual audiences "disastrous", and predicting that the console will "start to struggle in the market" over the coming year.

Speaking during a panel session at last month's Nordic Game 2008 conference in Malmo, Sweden, analysts covering the UK, Europe and North America were called upon to assess the current state of the global games market, and predict key trends for the next 12-18 months. And for Microsoft, the picture in their crystal ball was anything but rosy.

"When you look at an installed base basis, the Xbox 360's going to come in third place when all's said and done," said DFC Intelligence analyst David Cole. "The concern I would have with a company like Microsoft is, one of these days they're going to have to make a profit on this business otherwise why are they in it?"

Nick Parker, MD of Parker Consulting and an analyst for Screen Digest, argued that 360's failure to succeed in key continental Europe territories pointed to a fundamental image problem. "The trouble with Xbox 360 is it hasn't managed to shake off this urban, irreverent adult male feel; so it hasn't gained traction in the more casual gaming markets of mainland Europe such as France, Spain and Italy, where it's stalled," he said. "And there are already rumours of Xbox 360 being delisted from certain retailers."

Parker, a former VP of strategic planning at Sony Europe, maintained that Microsoft had failed to learn from the mistakes of its first console: "I think they started off badly with the Xbox itself: blood and breasts. This alienated it immediately to a lot of consumers around Europe, and they never got over that. The brand image never went away. And although Halo 3 is a big game, it just emphasises again what the Xbox is all about.

"If you go talk to people in Seville, in Rome, they're not interested in that. They're much more casual gamers, they don't want to have such competitive games."

Cole argued that, despite Microsoft's perceived failure to appeal beyond its core audience, it was still possible for publishers to do strong business in 360's bread-and-butter areas. "If you're doing a first-person shooter title, you're clearly going to want to be on Xbox 360, and that's for years to come," he offered. "[But] their efforts at marketing outside of the first-person shooter crowd have been disastrous." In March, Microsoft hired former Nintendo Europe boss David Gosen to spearhead its drive for casual gamers on the continent.

While 360 remains particularly strong in its home US market and the UK, bitter rival Sony's PlayStation 3 has overtaken it on installed base in other territories, despite launching over a year later. Sony Europe boss David Reeves claimed last month that the console had already surpassed 360's sales across Europe.

Globally, Xbox 360 has sold through over 19 million units since it launched in November 2005. Sony revealed last month that it has sold 12.85 million PlayStation 3s since November 2006, with worldwide Wii hardware sales standing at 24.4 million units as of April 2008.

Xbox 360 last month hit the 10 million milestone in the US, prompting Xbox boss Don Mattrick to proclaim: "History has shown us that the first company to reach 10 million in console sales wins the generation battle." However, the panel accused Mattrick of "clutching at straws".

"[Microsoft] get very defensive because they realise the US is their last stronghold now as their sales go into decline across the rest of the world," said Parker. "So they're a little bit desperate and they're clutching at straws now to cling on to what they've got in the market which is primarily the US." Parker also pointed to the "tremendous brand loyalty to PlayStation" amongst its consumer base, causing many to hold off from entering the new generation until the release of their favourite brands, rather than buying an Xbox.

Asked whether there was any chance Microsoft might reconsider its place in the console business, Cole said: "I think there's always that risk. They will have to assess their position after this round, and clearly they were very committed to saying they were going to stick with this business through another console system. They haven't really talked much beyond that and I know that really at some point they are going to have to figure out how they're going to make money out of this business."

He added that DFC Intelligence expected to "see the Xbox 360 start to struggle in the market" over the next 12 months, but added that Sony faced a similar challenge into turning its PlayStation 3 business into profit.

Despite its huge success, the panel also sounded a note of caution over the long-term prospects of the Wii, specifically in relation to its portfolio and the gaming habits of its casual audience. "There's a risk that they [casual users] could actually put the Wii in the wardrobe if there isn't a steady stream of games that please them," argued Swedish games industry analyst Martin Lindell.

"You've got to remember there's a difference between buying and playing - the fact that you get your grandma to play the game doesn't mean she's going out to buy it," added Parker. "I'm still in that kind of faddish feeling about the Wii."

For Cole, Nintendo's historical issues with third-party support poses a risk: "It's a huge issue that Nintendo dominates the platforms they own, as that's how they make all their money," he said. "We see the Wii having a higher installed base but the PS3 generating, by about 2010-11, more revenue in terms of software."

Microsoft did have one champion at the session, however. When the panel began criticising the multi-SKU strategies of Microsoft and Sony, with specific reference to the 360 Elite, a hitherto unusually silent Epic Games boss Mark Rein called out: "Are you guys crazy?", claiming that Elite had been the only profitable SKU for Microsoft. Parker responded by stating that the real issue was consumer confusion.