Microsoft to benefit from steady Xbox production - analysts

Reed Stevenson

SEATTLE: Microsoft Corp.'s new Xbox 360 video game console may get off to a slower start than initially expected, but the software giant's plan to keep production steady and expectations low may help it win against rival Sony Corp., analysts said on Friday.

Current-generation Xbox sales have slowed ahead of the launch and Microsoft cautioned that early Xbox 360 sales would not be as high as expected, sparking an initial sell-off in the company's shares.

The world's largest software maker, in its quarterly earnings announcement on Thursday, said that it expects revenue in the last three months of 2005 to be $11.9 billion to $12.0 billion, slightly lower than the average analyst revenue forecast of $12.26 billion in the December quarter.

The shares have recovered after analysts noted that Microsoft would benefit from avoiding a big sales spike after the Nov. 22 launch. Disgruntled customers were a problem for Sony when it launched its best-selling PlayStation 2 console in 2000.

"They want to have more of a constant supply," said Matt Rosoff, analyst at Directions on Microsoft, an independent research firm.

"They don't want a huge spike in December and then a slump in January and February," Rosoff said, "They're trying to avoid that."

Microsoft's Chief Financial Officer Chris Liddell said there wouldn't be a big initial spike and promised that the software giant would be able to ship between 4.5 and 5.5 million Xbox 360 consoles by the end of the business year to June 2006.

For the launch in a month, analysts expect Redmond, Washington-based Microsoft to ship between 1.5 million and 2 million consoles.

Microsoft is expected to have another factory producing Xbox 360 consoles in January, which will also increase supply ahead of Sony's spring launch of its next-generation PlayStation 3 console.

"It's much more important longer term to get production up and running," said Shawn Milne analyst at Friedman Billings Ramsey.

SLOWER IS BETTER

Console makers such as Nintendo Co. Ltd., Sony and Microsoft initially lose money on each console and make that up in game title royalties. Only after hardware costs come down do console makers reach break-even and make a profit on the machines.

"Given the business model for the consoles the more Microsoft can backload those hardware sales, the better it is for them financially," said Rosoff.

Most analysts agreed that Microsoft's fiscal year-end Xbox unit sales target was achievable, and most expect sales to reach 6 million.

"What's clear is that the annual numbers are fine for the Xbox," said Charles Di Bona, analyst at Sanford C. Bernstein & Co.

More important, said Milne, is for Microsoft to have a library of popular game titles for Xbox 360. Because there aren't any clear game hits to spur console sales, Microsoft won't need to ramp up product ion too aggressively, Milne said.

Electronic Arts Inc., the world's biggest video game publisher, is set to launch five new video game titles for the Xbox 360 launch, including "Need for Speed Most Wanted" and "FIFA 06: Road to FIFA World Cup"

But the third iteration of the "Halo" hit video game franchise developed by Microsoft's in-house gaming studio, which was credited for driving sales of the first Xbox after it debuted in 2001, isn't expected until at least the second half of 2006.

The three companies contracted by Microsoft to build the Xbox 360 are Flextronics International Ltd., Wistron Inc. and Celestica Inc. The Celestica plant is expected to come online in early 2006.