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MS CFO: Manufacture of Xbox Consoles may slow down or stop...
- Thread starter Miles Quaritch
- Start date
SHADES
Member
IDK, I think MS could still do decent numbers with XB1 this year as there's many a happy X360 user amongst us who've built up decent accounts and wish to see that continue, but the real stumbling block is price and it's perceived value.
Currently the XB1 as the mantle of being the weaker/overpriced system and not many (at least not as many as MS hoped for) are willing for fork out for an overpriced underpowered system so MS need to get the balance right. Whatever they think its worth in terms of bottom line the market doesn't seem to agree and now that multi-console owners have to pay two lots of yearly subs less are inclined to want to own both.
If MS bite the bullet and drop the price to idk say.. £300 for the Titanfall bundle or any other bundle for that matter I do think a lot will bite at that price point but at present the moniker of being the overpriced/under powered system is holding it back.
Most of the guys I regularly play with are all ex 360 players on PS4 and most are of the above opinions that we'd jump back in once the price was more acceptable as we loved the ecosystem of XBL and the exclusives also.
Yes MS are going to take a substantial loss but they'll make it back in yearly subs and software but also getting people into their ecosystem which I have to admit I prefer at present.
Hopefully at E3 we'll get a decent price point.
TheChewyWaffles
Member
How has the thread title survived? It's not even remotely what the CFO said.
Yes, it is. Inventory drawdown = less manufactured.
Cthulhu_Steev
Member
Well unless you think the term 'channel inventory drawdown' during an earnings presentation has something to do with the tv guide, what else do you suggest it means?
And remember, you said 'not even remotely' so make sure you don't land anywhere close.
Hades Hotgun
Banned
I don't think that is how console pricing works. Once Sony manages to meet demand, they will drop the price about as quickly as they can regardless of whether or not MS does. The meager profits they might get from holding the price point can't compare with the value of further expanding their install base and selling games, accessories, and subscriptions.
The value of PS Plus is in expanding the base of subscribers, which will increase more with better offerings. If anything it makes more sense for Plus to become MORE competitive, not less.
Coulomb_Barrier
Member
Just looked on Amazon and the xb1 is still around the same price as the PS4 with a game. The TF bundle is £389 with Amazon Prime, Infamous bundle £385.
Standalone Bone is £379. I take it that is the permanent price now, right? Around £380.
Standalone Bone is £379. I take it that is the permanent price now, right? Around £380.
No, those statements are not equivalent.
It attributes a statement to the CFO which she didn't make. It's entirely possible to drawdown channel inventory without reducing the manufacturing rate.
The title is simply inaccurate.
Iacobellis
Junior Member
They're already in Wii U land imo. This time last year the Wii U sold, what..? 3.3m? And the Xbox One has probably done between 4 and 4.2m. The Xbox One is in serious trouble at the moment, it's not doing a great deal better than the Wii U was this time last year...but of course Microsoft doomed articles don't generate anywhere near as many clicks as Nintendooomed articles so the gaming press isn't jumping on it as much imo.
Microsoft could have SERIOUS problems with third party support in the not too distant future, particularly after the PS4 manages to get twice the installed userbase of the Xbox One these next few months.
Could be good for Wii U owners though, there's a possibility that we could see publishers adding a Wii U SKU to multiplatform titles to help spread the cost of development.
But she didn't say that. If I were to title a post SHADES: blah blah blah, people would reasonably expect blah blah blah to be something you actually said, right? And then we could discuss the possible implications of your statement.
The key difference between Microsoft and Nintendo is (,among many other things), is that Microsoft are very aggressive with third parties whereas Nintendo aren't. Microsoft won't just roll over and let third parties move on. Even if they get into a WiiU-like position (which isn't where they're at right now), they will be very aggressive and won't give up easily.
But you've also got the other key difference between Microsoft and Nintendo, which is also one of the key differences between Microsoft and Sony too - Nintendo and Sony have far superior and far bigger stables of system selling IPs and first party developers.
All Microsoft have is Halo, Forza and Gears.
How much longer are they going to be able to moneyhat third parties if the Xbox One continues to flop..?
Warehouse them yourself instead of expecting your retail channel to do it for you. Not that I don't think Microsoft would slow down production if they have the option, but it's not entirely clear that they do. The thread title is a potentially misleading restatement but it's also effective at focusing the conversation on the relevant issue. Putting something about retail inventory drawdown in the title would just be dodging the issue. Perhaps "CFO hints..." might have been more accurate, but the details are right there in the OP for anyone who actually cares. The title is just a hook.
AgentP
Thinks mods influence posters politics. Promoted to QAnon Editor.
You throw them into landfill pits? If your sales slow down and your manufacturing does not, you cannot draw down inventory. You need to ship less to stores than they sell, which means either make less or stock pile them, which is a complete waste of money.
Store finished units in a warehouse. It might be cheaper than paying production penalties, especially if you expect the situation to resolve quickly.
Cthulhu_Steev
Member
That must be why they're clearing all those ET cartridges out of the way in New Mexico.
twilitezoner
Member
I guess I am in the minority of having an Xbox One and a PS4 and actually playing the X1 more.
Seriously...
Seriously...
BigSpleenRupture
Banned
Relevant how? Every individual is different this should not be shocking.
I use my Xbox One more but I still own both. I think that most people only buy one console so I would say you are in a minority anyway.
How does this have anything to do with the thread?
By a very literal definition of minority, yes, you are a minority because more people have PS4s than Xbox Ones and few people have both, but this isn't a serious point and still not relevant to the thread.
Are you surprised? His posts on issues such as these, or poor perfs of exclusive games, are always textbook examples of spin attempts which are incredibly reminiscent of MS's dynamic spin duo aka Nelson & Penello. Incidentally he's good friends with the former.
Wait, so you think sitting on excess inventory is what was actually being talked about? That isn't exactly better. Higher inventory restricts cash flow and since you dont know when the excess inventory will be sold of it also creates its own cash issues, specially if they have a price drop within a time frame, that said inventory, is still in warehouse; inventory overhead is not cheap. Typically when you manufacture excess, and maintain it in a warehouse you are expecting to sell it in a certain time frame. What you are saying if true, would infer they must be expecting a relatively huge jump in sales sometime soon.
It took Wii U till around November/December 2013 to get to around 4.3M, XB1 is going to race past that within the next month or two. Nintendo also had sales spread between US/EU/Japan. XB1 is seeing pretty strong sales in one territory(US) which gives a much easier target for developers to aim for.
If XB1 sales start dropping as we move past the Titanfall launch window then there may be a case to say that they're in significant trouble.
It's entirely possible. They took a billion dollar write down on surface tablets last year, so they obviously aren't averse to holding some excess finished inventory.
And we're not talking about a lot of units. They were almost certainly already planning for a slow quarter, just due to seasonality. If their original projection for the quarter's shipments was something like 1.3M, and they now think they'll come in at 1M, is sitting on 300K excess units really a big deal? Of course not. $150M in finished inventory is nothing for them. Last June they had $1409M in finished inventory on their balance sheet.
A fortune 40 company doesn't talk about inventory control over 300k units, when projected forecast for a year are beyond the scope of said units... at least it is incredibly odd if they are. Thinking that is what they are talking about doesn't make much sense to me. It has to be significant enough that they are talking about it, to either get ahead of it or set some expectations, for them talking about it to make much sense.
It was a throwaway line in the earnings call. Here's the full context: "Let’s start with Devices and Consumer. In licensing, we expect revenue to be $4.1 billion to $4.3 billion. This range reflects an expectation that the benefits of XP End of Support will moderate. In hardware, we expect revenue to be $1.3 billion to $1.5 billion in what is a seasonally slower hardware quarter. This number also reflects channel inventory drawdown for Xbox consoles."
I can't find a YOY comp because they reshuffled everything but the revenue for this quarter was $1.9B up from $1.4B the prior year. The 360 averaged 1.3M shipped in the April-June quarter, so there's no room for an enormous collapse. This just isn't a big deal.
SHADES
Member
Actually, yeah you're correct. I'm sure yesterday when I first posted in this thread the title did originally have the draw down quote and I was still under that assumption.
The title needs the exact quotes not the speculation or needs to be titled as speculation, but yes I agree the title does seem misleading.
BlackBuzzard
Banned
This wouldn't be surprising. April NPD could be weak for MS.
February was 64K a week, March dropped to average 62K. This was despite the Titanfall launch in the second week and all the promotional activity going on. Titanfall likely had a good launch week and spiked hardware sales. Weekly sales could have dropped progressively after. Could be something like:
62K+72K+62K+59K+56K = 311K
Which could lead towards an April NPD nearer 200K. Depending on the real curve this could be higher or even a fair bit lower if Titanfall launch week was particularly strong.
That isnt a a throw away comment... If all they said was draw down that would be one thing, but they specifically said channel draw down, which means they wont be stuffing retailers as much. This indicates there is excess stock in the warehouse already. I doubt they will continue manufacturing for warehouse inventory if they don't want to keep front loading stock into retailers to make their numbers look bigger. Also, them saying "this number also reflects" it means that these forecasts are what are making them decide to draw down from retail stuffing. They are literally saying they are cutting back on the amount of xbox ones available to the end user, this infers their original targets were not lining up. If I was an investor for the company, I wouldn't be looking at that as a throwaway comment, but something to pay attention to for the future. PS4's will probably have manufacturing drawn down in warehouse inventory, but I doubt they will have a channel draw down, the inventory stuffing just inst as prevalent at retail for PS4's.
They are not talking about reducing inventory as a whole though, they specifically mentioned available to user draw down. If they said we are slowing down manufacturing due to a slower sales season that would actually be better then saying you are putting less goods into consumer outlets.
I think you're making lots of unfounded assumptions, and using them to jump to conclusions. In my opinion, all she's saying is "revenue is going to be lower next quarter, in part due to seasonality, in part due to too many units in retailers hands, which means they won't be ordering as many as usual." For what it's worth, not a single analyst bothered to ask about it, so it didn't set off any alarm bells with them, either.
This isnt a static thing and I doubt this was an all the sudden revelation. Xbox Ones have been in high supply in most area's, the titanfall bundles that were/are on sale sold very well, but you still have excess supply if you are expecting channel drawdown(all those non titan xbox's). I think your opinion of what she is saying and how it relates to their manufacturing is silly. If they are pulling back inventor at retail, it wouldnt make much sense to continue the manufacturing until they no longer have to worry about channel draw down. Beyond this draw down, until it hits a new high, could be a long one. I dont think this is just a no big deal. And as for why analyst's didnt bother to ask? I doubt this is real news to them, they probably new this was coming, and I think the titanfall bundle was evidence of that. Beyond that, Microsoft has more on its plate right now then just the entertainment division.
The channel draw down will become more relevant, the longer it lasts, so we will see how long it goes. That said, a channel draw down rarely comes with keeping the same rate of manufacturing, it just wouldn't make sense. Xbox One as a console may be selling fine, but the Xbox One as a business plan(OR MS in general, honestly) I dont think is quite as fine.
But they're already not selling-in 100% of their production output if we take their 2013 production capacity for reference and assume they have yet to slow down production.
Code:
in 2013 Microsoft sold-in 3.9M Xbox One units while Sony sold-through 4.2M PS4 units.
If we were to believe that Sony sold-through 100% of their manufactured consoles
and Microsoft sold-in 100% of their manufactured consoles
Microsoft's production capacity was at 92,857% of Sony's.
In 2014 Sony sold-through another 2.8M units as of their last announcement.
Assuming Microsoft haven't decreased their production, they manufactured another 2.6M units during that timeframe.
We know, they only sold-in 1.2M leaving about 1.4M for their inventory. Take that for what you want.That's a fair point, but unbias was claiming it should be alarming to investors.
Are you confused about what is happening? They aren't taking units back from retailers. They're just expecting fewer orders than usual for his quarter, because retailers are already holding plenty.
I don't think we have enough accurate numbers to do that kind of analysis.
When did I say alarming? I said pay attention to, drawdowns are very important for investors to pay attention to, its part of risk assessment, you would have to be stupid not to pay attention to it. My initial response was in your complete downplay of a channel pull back. Beyond that, that was my point, that retailers are full. Retailers dont need anymore consoles, which means they(MS) are not moving units at a rate they expected or wanted(otherwise it would just be a manufacturing drawdown). You were the one who assumed that their manufacturing rates would remaint the same despite them hitting a channel drawdown.
Which would be silly. If you are in a channel drawdown and you dont slow down production, that just wouldn't make much sense. You manufacture at the estimated availability of retailers and their ability to sell, you dont produce simply for the sake of it.
You can't calculate production rates from shipment numbers without knowing when production started.
Liabe Brave
Member
As I've previously mentioned, that 's definitely not all she's saying. Yes, sales will be lower next quarter, due to seasonality. However, channel draw down doesn't just mean "They'll order less, so we'll ship less." It means "They'll order less, and we're going to ship even less than that." (Because if you don't ship less than retailers sell, the channel won't get any emptier.) In the most neutral language possible, she's saying that retailers will order less, and yet Microsoft will not ship even that many.
1. During launch quarter, Microsoft shipped ~3.9m and sold ~3m.
2. During Jan-Mar, they shipped ~1.2m and probably sold more than that.
3. During Apr-Jun, they project to ship less than 1.2m, and considerably less than they sell.
Microsoft overestimated launch demand, by an extra million consoles (25%). You might say, "Yes, but those extra were just to ensure no supply constraints." However, in the time since, they're shipping less than what they're selling. And even still, there have been recent retailer-led discounts and deals to clear stock. That shows the channel was overstuffed to start, not simply full. Therefore, even if Microsoft's production contract ramped down for post-holidays, it's still likely to have overestimated demand for that period too.
What's more, their initial projections would've been based on underfilling or just topping off the channel. So the fact that they've had to draw down channel inventory two quarters in a row means that even in the unlikely case that their projections were 100% accurate, they'd still be manufacturing too many right now, and for months to come.
You're right that nothing explicit has been stated about manufacturing. But the overall pattern strongly implies that either unexpected warehousing is happening, or unexpected lowering of manufacturing will happen. (The actual choice will be based on whichever puts a smaller dent in Microsoft's wallet.) So while manufacturing reduction wasn't mentioned, it's one of only a small possible number of conclusions, given what was said.
Yeah, so there's an oversupply at retail so they are shipping less of their manufactured units to retailers. If they continue to manufacture at the same rate then that will lead to oversupply in manufacturing. So either they start to cut manufacturing at some point to get to reasonable supply at both manufacturing and retail or they warehouse the units waiting for sales to increase. If they wait till Christmas they'll more easily burn through most of their oversupply. Depends on whether maintaining production and storing units is cheaper than ramping production down and up I guess.
Nydius
Member
I'm not even so sure about that. Unless they drop a bombshell at E3, there's very little to really push the console sales this holiday season. Consider: It didn't sell like gangbusters during its first holiday season when it was new and had some decent launch titles. I have a feeling Destiny will end up being like Titanfall in that the people who wanted an XBO for Destiny already have the console ahead of time.
I just don't see Forza Horizons 2, Project Spark, Quantum Break, and Sunset Overdrive (plus various multiplatform titles) being a big enough sales push when Forza 5, Ryse, KI, DeadRising 3, AND Titanfall (after the fact) weren't.
I don't think we're actually disagreeing. When I refer to retailers, what I actually mean is retailers and/or resellers. I believe he vast majority of consoles are distributed directly to retailers, so when I say retailers won't order as many, I'm referring to the companies actually purchasing the units from MS. Obviously MS will ship as many as those companies order, but they will order fewer units than they sell to customers, and that will reduce the channel inventory.
As far as the math goes, I think we can't do those calculations without knowing how big the channel is supposed to be. Do you know how many units are required to fill retailer's shelves? I have no idea.
Good post, but not sure I agree with point 2. We have NPD data to figure out jan-mar US sales, and should be able to estimate RoW. Might be slightly lower or even bang on that 1.2m, but can't see it having sold more than that
Let me quickly check that out:
Code:
[U]NPD 2014 combined:[/U] 714 000
[U]rest of the world ~40% estimate:[/U] 444 663
[B][U]total 2014 WW sales:[/U] ≤1 158 663[/B]Liabe Brave
Member
I've never disagreed with your fundamental point: that the statement isn't about manufacturing, and that Microsoft has an option (warehousing) to avoid cutting back production. My issue was with you saying several times that the statement only meant "we'll ship less due to slower retail". My point was that it means more than just "ship less", and actually establishes a specific expectation: however much sales slow down this quarter, shipments will slow down even more.
I don't know much about the customer-facing retail end. But I do know about the distribution networks behind them. The actual DCs (at least in the U.S.) typically shoot for maximum 21 or 28 days in inventory (i.e. 3 or 4 retail weeks), and you have to add transit times to go from southern California to wherever the DC is. So we're talking a range of 22 to 34 days, with an average of right around 4 weeks. So however many units get sold in a month, that's how many the channel would like, roughly. Of course, going over this number for short periods is perfectly acceptable, as overcapacity is built into the network. But chronic overcapacity is a big negative, and will result in returns or fees.
If this pattern holds worldwide, Microsoft's inital channel stock of nearly a million pieces is far too high for non-holiday seasons. I would then expect to see many months of shipping less than sales.
Well, my "probably" is a bit strong. The previous post tackled this, but let me note I remembered 719k not 714k, so my calculations were a bit off. But if the U.S. represents anything less than ~60% of worldwide sales, then total sales were greater than total shipments. If it represents a higher percentage...well, then I'm wrong about sales exceeding shipments. But it would also mean the channel stuffing got worse after the holidays, not better.
Whipped Spartan
Member
So what number do we have proof of? 4.2 million sold, 5.1 shipped now? Sounds pretty good. If PS4 wasn't killing it right now there would be no story.
Also isn't this what most people wanted/thought would happen. Not much of a story. Would be if it was other way around.
Also isn't this what most people wanted/thought would happen. Not much of a story. Would be if it was other way around.
Eh, even if it isn't about manufacturing, it would be silly to assume that if they are having a channel drawdown that their manufacturing rate wouldn't compensate for this. The channel drawdown has probably more to do with incorrect estimates then simply a slow seasonal time frame, otherwise they wouldn't have stuffed retail as much. I doubt they will maintain the same production rate for a product that is slowing down, and retail has enough supply. I mean, unless them slowing down production is more expensive for them, due to the cost of ramping up; but if that is the case, that in itself is a problem as well, since warehouse stock is decreased cashflow. So by extension every increase in warehouse stock is a hit during the drawdown(which is a very important indicator to investors).
It's a story simply because it hints at an overestimate of how fast they were expecting to sell the consoles. This is probably less of a story to gamers or those caring with is winning and losing, as more as it is just an interesting story about the actual market of the system. A drawdown is a point where investors start ascertaining risk and ect to a more discerning degree, so it is more of a wait and see story, but still a story, imo.