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Analysis: Where do Kinect sales go from here?
Analysis: Where do Kinect sales go from here? Exclusive
June 21, 2012 | By Matt Matthews

June 21, 2012 | By Matt Matthews
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    18 comments
More: Console/PC, Business/Marketing, Exclusive



[Gamasutra analyst Matt Matthews takes a look at Microsoft's global Xbox 360 business, which has remained resilient even amid the downturn in the retail video game market.]

I want to move past the gloom over the U.S. retail video game market and focus on Microsoft's Xbox 360 business, both domestically and globally. Even with the current downturn, I certainly can't deny Microsoft's success with its second console, which is about to reach a milestone of 35 million systems in the United States.

After a half-decade of competing against the white-hot Nintendo Wii and the fiercely competitive PlayStation 3, it is a testament to the Xbox 360 and Microsoft's execution that it's still the top-seller in May 2012. If we exclude the PSP and the PS2, both of which are essentially irrelevant today, the top-selling console in today's market is also the oldest, the Xbox 360 which launched in November 2005. On top of that, it was the system with the highest average price at $287, at least $15 higher than the average prices for the PlayStation 3 and PlayStation Vita.

To maintain its strong sales record, Microsoft will have to make some changes in the coming year. To be specific, I expect that Microsoft will adjust its pricing strategy from top to bottom and simultaneously consider adding Kinect to all systems that it sells.

The first move is to get its $100 Xbox 360 out to as many big-box stores as possible. We already know that it will be rolling out to GameStop and Best Buy stores this month, probably because these are the stores with the best-prepared employees for selling the two-year Xbox Live Gold contracts required for the $100 price. According to a report in the Wall Street Journal, Microsoft is still working to "set up a credit-checking system for customers" who sign onto the two-year contract, which may explain why Target and Walmart aren't yet part of the program.

Once the $100 console program is in place, Microsoft can extend the program to systems other than the minimal Kinect-enabled system which typically retails for $300. If Microsoft were willing to make a non-Kinect system part of the program, one could imagine a $50 or even free Xbox 360 system with an Xbox Live Gold contract for two years or more.

However, I think Microsoft is actually interested in going entirely the other way, to offering only Kinect-enabled systems. The fact is, Kinect sensor sales have tapered off in 2012, and I don't think Microsoft wants that to continue.

The figure below tells most of the story. It shows the total shipments of Xbox 360 systems and the total shipments of Kinect sensors since the Kinect launch in November 2010.



We can look at these figures at least three separate ways: absolute Kinect sales, Kinect sales against new hardware sales, or the total Kinect attach rate.

In terms of absolute figures, 1 million Kinect units were sold in the first 10 days, followed by an announcement of 2.5 million in the first 25 days. After four months, the figure was up to 10 million. The next announcement I'm aware of was made at the beginning of 2012, by which point 18 million Kinect sensors had been shipped.

Then in May of this year Microsoft announced that the figure was over 19 million. In five months, an additional 1 million sensors, give or take, had been shipped.

If we compare Kinect sales to new system sales, we see that Microsoft sold two Kinect sensors per each console early in the system's life, but is now down below one new Kinect sensor per new console.

In terms of attach rate (i.e. the fraction of the entire installed base that could have a Kinect sensor) that figure went from zero to 19 percent in the first four months that Kinect was available. By the beginning of 2012, it was up to 27 percent and has held steady there for five months.

If current trends continue, I expect the numbers to show that 3 out of 10 Xbox 360 systems has a Kinect sensor, or an attach rate of 30 percent.

Microsoft believes it can attract a non-traditional gaming audience with Kinect, and the $100 console is designed to appeal to that same audience. The plan, I believe, is to eliminate the Kinect-less models and put a Kinect in the box with every new console, across all prices and configurations. With service plans to subsidize lower entry-level pricing and the higher bill of material costs that comes with the Kinect hardware, Microsoft can reach out to consumers of all stripes, but casuals in particular.

This is important because Microsoft's Xbox 360 division has been showing tremendous growth over the past two years. According to the company's SEC filings, the Xbox 360 business is now generating over $8 billion in revenue for the company each 12 months.

The figure below shows this growth through trailing 12-month (TTM) revenue totals, i.e. each bar represents the revenue of the previous four quarters. (Viewing the data this way smooths out seasonal effects.)



If you look carefully, there was a 22 percent increase in TTM revenue for the Xbox 360 division during the last calendar quarter of 2010, contemporaneous with the Kinect launch. Over the course of 2011 that TTM revenue increased another 21 percent to $8.8 billion every 12 months.

Doing some rough estimations like backing out the hardware revenue and figuring in installed base size, that works out to an average of $60 - $70 of revenue from every installed Xbox 360 every 12 months.

But, again looking at the figure above, the company's Xbox 360 revenue fell last quarter and will likely do so again this quarter. That will likely put its annual software and service revenue per installed system below $60, continuing a downward trajectory that started in mid-2011.

Sure, Microsoft has taken 40 percent of the entire retail video game market in the U.S. so far this year, and is likely performing similarly well in the UK, but as we've seen previously those markets are contracting very rapidly. Half of an ever shrinking pie is not the way to grow a business.

It would be ironic indeed if Microsoft finally conquered the video game business it dared to enter just over a decade ago, only to find that industry an empty husk, abandoned for tablets and social games dominated by a completely new set of players.

Which brings us to where the company will go once it really has tapped out its current system. The answer I believe is a bit more sophisticated than just releasing new hardware, call it Durango or Xbox 720 or whatever.

Microsoft is clearly not oblivious to the changes happening in the retail market and the growth of ex-retail sources of revenue. Launching new generation of hardware presents the company with an opportunity to change how it does business, and there I think there are some intriguing prospects. Look for a column on those opportunities in the coming weeks. (Next time: May 2012 software, in detail.)


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Comments


Eric Geer
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I personally believe that Kinect(at least in it's current form)is basically dead in the eyes of core gamers.

There has not been 1 core title for Kinect that has gone leaps and bounds beyond, actually, there has not been 1 core title that even meets expectations of what was promised with Kinect.

The Family/casual group has probably been tapped out--there's only so many iterations of dance/exercise/minigames before people decide they no longer need anything new.

A market that needs to be tapped into further than the "family/casual" gamers is the programming/hacking community. They have done a great job with some incredible uses for Kinect.

Leon T
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I don't think the family/casual market has been tapped out since those dance/exercise/mini-games are still selling pretty well. I just think that Kinect didn't get a large chunk of that market as it stayed with the Wii. Even with the tiny drops of software the Wii gets that crowed still sticks with it and buys those games instead of moving to other hardware. The problem is there is noting new and exciting to get them to buy new hardware. That's something that is going to continue to be a problem with Kinect and may be a problem for the next generation of consoles about to launch.

Joe McGinn
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Dead for core gamers, and of limited impact even for casuals ... the fact is it's not suited the the vast majority of games because of latency problems and lack of tactile feedback. And in fact Kinect hurts the 360 by reducing Microsoft's investment in core gaming (as seen at e3, where they announced Halo 4 and exactly nothing else).

Kenneth Blaney
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Kinect isn't dead in the eyes of core gamers, its more akin to "non-living" because it was never really alive.

That said, titles like "Once Upon a Monster" really show a certain amount of potential in the family market... why there isn't a service to download interactive episodes of Dora the Explorer on Kinect is beyond me (the show's format is nigh perfect for Kinect, existing episodes could be converted into game episodes with no work).

Additionally, I think we have to divide up the core market in this case. The section of the core that plays competitive multiplayer titles is absolutely a lost cause for the Kinect. However, the section of the core that is more engaged through story or exploration could still be hooked in to a Kinect purchase given the right types of game. A "Heavy Rain" type or the fundamentals of most games made with AGS would both be prime candidates.

On the last part, that the programming/hacking community needs more access, I wholeheartedly agree. XBLIG needs Kinect support.

Joe Zachery
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I would really like to see some real Kinect numbers. I do believe people are buying it, and maybe even some games for it. I don't believe it the reason the 360 is selling. The 360 is selling better than it's rivals, and it's on a 15 month streak. Still it's year over year it down a lot. Compared that to the first year with Kinect it's way down month to month. To in other words Kinect is not bring in a new audience the same way the Wii did or getting Wii owners to upgrade. Also their has never been a Kinect game in the top 10 of the NPD. Will same games that are across all systems can be found on Kinect. Their is a huge chance that people are still buying more of the Wii version aka Just Dance Series. So yes I would like to see real numbers and sales information. It really seems that Kinect only helped them in it's first year, and since then has done nothing.

Matt Matthews
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Joe wrote: "Also their has never been a Kinect game in the top 10 of the NPD."

Kinect Star Wars was the number 2 selling game last month. And that didn't include copies sold with hardware bundles. Also, platform exclusive.

See here: http://bit.ly/K720iF

Edit: You were even the first commenter on that post! :)

Leon T
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"but as we've seen previously those markets are contracting very rapidly. Half of an ever shrinking pie is not the way to grow a business."

I've long thought that the Xbox360's current lead is mainly coming from being the second console for PS3 and Wii owners. It is clearly not expanding the market more going by the quote above. That's not to say that there are no new console owners also buying , because all current gen. hardware is still selling to new owners.It is just that the 360 is getting the best support , while the Wii is getting almost non, and the PS3 is not keeping up in the west.

This is a good situation for Microsoft , but not really for the game industry as the market continues to dry up. With Kinect not growing the market like the Wii did Microsoft sales will just continue to drop along with the PS3 and Wii. Kinect just doesn't have that killer app to push it. I also think most people are holding out for next generation hardware at this point instead of buying a second console.

Their service plan idea can already be done today at rent to own places so I'm not sure how the market will take to that. One would think that if that's how people wanted to buy game consoles they would already do it that way.

Jonathan Murphy
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Once the Wii U launches, Kinect sales will fall into the toilet. Say what you want about Nintendo. But I can find at least 5 great games on it that use motion controls for core, casual games. Unless you like dancing the Kinect has almost nothing to offer.

Chris Hendricks
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I don't know about that... Fruit Ninja is also pretty fun.

Leon T
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It is and you don't even need Kinect to play it.

Lincoln Thurber
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It really does seem that the basic concept could work, but the hardware needs to be upgraded. I'm not sure what the upgrades would be be on the hardware side, yet it appears the current unit does not have the fidelity needed nor is it flexible for a realistic environmental use.

The need a unit that can work when less then 3 feet from the player or as far as 25 feet. They need a unit that can work in diverse room lighting conditions, diverse clothing situations, and diverse furniture setups. In effect Microsoft needs a Kinect that will work in a cramped messy apartment just as well as a tidy open urban IKEA room.

Harlan Sumgui
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the problem with kinect is that it is not part of every base system. the problem with kinect2 is that if it is part of every base system, it will add >$100 to the per unit manufacturing cost.

Of course MS could just hide a few billion in losses, put out a subsidized $199 powerhouse with kinect2 and kill the other two console manufacturers in the space of 24 months and own a dying industry.

kevin Koos
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will add >$100 to the per unit manufacturing cost.

When Kinect was released it was estimated that manufacturing costs were $58. By now its even lower. All the costs for Kinect are in R&D and those are sunk costs at this point

TC Weidner
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just fun little gimmicks that flicker out, there is no staying power with these accessories . Kinect will join Nintendo's ROB in gaming folklore, just a sideshow.

Andy Mason
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Agreed, Kinect is mostly a gimmick....mostly, ROB, Powerpad, Powerglove.
However, being what it is still holds a lot of power to be used in other realms not being of games. I would like to use my kinect as a security camera. can be done. but as far as accuracy goes....meh it is capturing the young and old ends of the spectrum.
In addition to leading sales, i would venture to guess that most(1 out of 3) folks who have owned a xbox 360 since 2005 have purchased a replacement one in that time. ;-)

Chris MacDonald
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The Kinect sensor is selling so well for the same reason why Wii controller sales skyrocketed even though console sales tapered off. People love to tinker with devices and a large hacker community has formed around hacking the Kinect. As soon as the first hacks went public showing a Kinect sensor attached to a PC capturing information, the sales shot up.

Heck, even Ford created an application using Unity and a hacked Kinect for a kiosk.

With that said, I have 10 Kinects in my office waiting to be turned into a 3d scanning lab.

Bob Johnson
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Kinect was always DOA to me. The tech ran into the same problems the wiimote did and perhaps more because it took more effort to setup, took more effort to navigate menus and interpreting whole body motion through a camera is more complicated than interpreting the movement of a sensor. At least the sensor is standard in every Wii setup.

The tech problems the Wiimote had are the lag problems and the problem of interpreting motion. Kinect has same difficulties. You have to complete a motion before it can be interpreted. That itself leads to lag.

Then on the business side the Wii never got 3rd parties to make quality games for it with a few exceptions I'm sure. 3rd parties want to do multi-platform not exclusives. so you got ports, and cut and paste jobs and not many well thought out quality games made for the strength of the Wii - the wiimote.

And if 3rd parties aren't going to do that for the massive install base of the Wii then why would they do it for the relatively small install base of Kinect? The answer is they wouldn't.

Last compare Nintendo 1st party development with MS in house development. I don't think there is any contest there. One is clearly more experienced with more games craftsmanship not to mention has more well known established franchises.

Plus of course Kinect always had the whiff of a WiiDo. The consumer already went through motion control. They went through the Fitness, Dance and Sports games and the mini-games. Kinect came after that party was over, and cleaned up after. Kinect in 2010 was so 2006 even if it had "no controller."

so Kinect was never going anywhere other than being a nice tech demo that one would pay $3 to try out at a carnival. ...See the Future - step right in. Watch as this magic device captures your movement. And puts it inside a game.

As much money as MS is rumored to have spent marketing Kinect you have to wonder if Kinect has made any money.

kevin williams
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It is dangerous to write the KINECT off, especially as MS is investing so much in a sequel unit - that said as the KINECT II looks at multi-user support, I wonder if the real issue is if the games can attract the audience to the firmware rather than the other way round.

MS' batting average is poor at the moment, and though a change of executives may re-focus the company and its business plans, the leaking of its business model could prove disastrous.

Interesting how the Wii-U down plays its motion control roots while the XB760 plays them up1


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