In the hardware segment, two established platforms have seen growth in 2009 while all others have lost ground with respect to sales in the first half of 2008. Given that every other part of the industry – software, accessories, online services like Xbox Live – depends on a large and growing installed hardware base, slowing hardware sales can be a key indicator of future results.
The worst news rests primarily with Sony and its PlayStation systems. The PlayStation 3 has suffered the least in 2009, with sales off 30% from the first half of 2008. In the face of two cheaper competing consoles – the Microsoft Xbox 360 and the Nintendo Wii – Sony has made little headway adding value to its system through bundling, and is under increasing pressure to cut the system's price. As we've noted before, a consumer who simply can't afford a $400 console still can't afford it when it includes a free game.
Sony's PlayStation Portable (PSP) and the PlayStation 2 are down 38% and 39%, respectively, for the first six months in 2009. Remarkably, PSP hardware sales increased from May to June (from 25,000 units per week to 32,800 units per week). It is unclear whether this bump in sales is related in any way to the announcement of the new PSP hardware model, the PSP Go, due in stores on 1 October.
The Nintendo Wii continues to underperform relative to its exceptionally strong sales in 2008. So far in 2009, Wii hardware sales are down 13%. (We saw above that Wii software unit sales were flat in the first half of 2009, but according to Mr. Pachter, software sales in the month of June were down 30%.)
For Nintendo's handheld business, things could hardly be better. Even without counting sales of the new Nintendo DSi, sales of the older Nintendo DS Lite are up 4% for the year. The Nintendo DSi, even at a $40 premium over the older model, continues to sell extremely well and could be considered the third best-selling system for the year so far.
With sales surpassing 1.7 million units since its April launch, the Nintendo DSi has had the most successful hardware opening of any system in recent history, including consoles. Even the Nintendo DS Lite didn't exceed exceed 1.8 million units until its fourth month on the market.
Meanwhile Microsoft's Xbox 360 has caught its second wind. Recall that sales slowed significantly through the first half of 2008, but the price cuts in Fall 2008 then increased the system's figures dramatically. For the year, Xbox 360 sales are up a robust 21%. September through December will be the true test for Microsoft's system, however, as it will begin to face comparison to last year's results after the price cut.
Generally speaking, several analysts expect two and possibly three of these systems to get price cuts by the end of the year.
The PlayStation 3 will likely receive the first price cut. Sony itself continues to be coy about its pricing strategy, but virtually everyone agrees that it must drop the price of the PlayStation 3 by at least $50 in the next two or three months.
Given Sony's global hardware sales target and the size of the U.S. market, we continue to favor a $100 price cut, preferably in August. Without such a cut, it seems unlikely to us that the PS3 base in the U.S. will contribute enough to help Sony reach the stated goal of a 30% increase in system sales.
The Nintendo Wii is also in line for a cut, although it is unclear how or when Nintendo will act. No other console has remained on the market at its launch price as long as the Wii, and it is likely that the system's sales would heat up significantly if its price were to drop below $200. Mr. Pachter suggests that as an alternative Nintendo could bundle the upcoming Wii Sports Resort with the system along with a MotionPlus remote while retaining the $250 system price.
Finally, Microsoft could be prompted to act if and when its competitors drop their prices, perhaps in favor of bundling high profile games while retaining its current price structure.
Throughout the remainder of 2009, we will be keeping a close eye on hardware events -- in particular price cuts -- and big software releases. We would like to see Sony drop the price of its PlayStation 3 by at least $50 around the same time that the first big software release, Madden NFL 10, is released in August.
If Nintendo was to announce a price cut, we feel that it will happen in the September - October period. Nintendo's commanding presence in the market allows them some leniency with respect to its pricing decisions, and it will not move precipitously just in response to a price cut from Sony.
The September releases of Guitar Hero 5 and The Beatles: Rock Band will probably dominate much of the industry's attention during that month, along with Halo 3: ODST on the Xbox 360.
If Microsoft is going to respond to any price cuts by competitors, either with its own cut or bundling, expect the announcement to come in October. By the time November rolls around, and with it the release of Call of Duty: Modern Warfare 2, the industry will be well into its year-end rush.
By that point, Sony will be more than halfway through its fiscal year, and we will have a better idea of whether it has any chance of hitting is PS3 sales target. By the time October's results are in, sometime in mid-November, we'll probably also have a better idea whether the industry's annual revenue will fall above or below 2008's record $21.3 billion.