Countdown to Christmas: Next-gen consoles, Zune – and the end of Blu-ray

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Countdown to Christmas: Next-gen consoles, Zune - and the end of Blu-ray

The Playstation 3 sold out in minute and it took 8 days for 600,000 Nintendo Wii boxes to fly off the shelves. Both can now be bought on Ebay for several times their list price, despite the fact that early products will likely have more problems and the value of these things will drop like a rock once supply equals demand. Sales of the stratospherically priced products on Ebay aren’t brisk suggesting folks may be wiser this year than they were last.

On the iPod side, the products, while very good, are becoming very common and part of what drove the iPod into the top spot in a rapidly growing market was its exclusivity. If everyone you know has one, how exclusive is it really? Also, Apple had three known competitive disadvantages: The products wouldn’t play radio, the platform didn’t allow for sharing music nor did it support flat rate pricing, and it lacked support from both the Music industry and retailers both of which wanted someone else to work with. Microsoft had a good shot with Zune but it seems someone missed a critical meeting.

Finally, Blu-ray and HD-DVD are in a fight to the death. Last year, when I learned that Blu-ray would ship with the Playstation 3, which had a market potential of over 30 million units, it was easy to call it the early winner. But as additional facts came in on price, availability, and technical problems, this situation changed. HD-DVD Xbox 360 accessories are selling very well and we may be able to call it the market winner shortly as a result.

Xbox 360 – What a difference a year makes

As we mentioned last week, the Xbox 360 is the most mature of the new generation of gaming platforms. This gives it a massive advantage in terms of available games and accessories. It also gave it a massive advantage in terms of available units. Early numbers (Black Friday, Cyber Monday) suggest that even though both the Nintendo and the PlayStation 3 could have outsold it, manufacturing limitations kept their true potential from being reached. In addition, parents who can’t get either of the constrained systems are now apparently shifting their buying behavior to the system they can buy, the Xbox 360 – rather than giving their kids an IOU or paying excessively high Ebay prices.

This showcases the importance of actually having a hot product available in sufficient numbers when the buyers are ready to buy. Because of shortages of the Xbox 360 last year, both Sony and Nintendo got a little pop, while Microsoft could have sold more than four times the game systems it had in supply last year.

A year later, Microsoft has plenty of supply and the other guys are constrained. And, according to early information, Xbox 360 sales are ramping sharply, indicating that it will be the clear winner in terms of installed systems. This fact is critical as game developers are not religious about systems. Generally, they prioritize their efforts based on the number of potential customers in a given market. If Microsoft has several millions more of these potential users, they will get the cream of the games coming out from independent developers. And it is the games that make or break a system.

No matter how you look at it, this has all the earmarks of a solid win for Microsoft in the gaming space.

Zune: So close, yet so far

For two days, Zune was in the top-10 products sold through Amazon and made it as high as number 2. On day three, it dropped like a rock. The first two days showed the potential the right product could have. The third showed this was a swing and a miss.

The potential for the right product was in excess of 10 million units – and possibly substantially more. This was a similar effort to the Xbox, but unlike the team that put the Xbox together, the team running Zune didn’t understand the hardware. While they did a fantastic job getting the product into 30,000 stores, the compensation program for the record labels and artists that had them rooting for the product as well. Unfortunately the hardware, which is kind of industrial, isn’t what the market is currently buying in this class of product so the other stuff simply didn’t matter.

Look at it this way: If iTunes pulled the iPod, then the result would have been stronger for the Zune. But, believe it or not, the iPod pulls iTunes, and not the other way around.

Microsoft gets software and they are learning about services but Apple is the leading expert is hardware and the MP3 player market is clearly a hardware market now. Much like Apple didn’t understand the power of software in the 80s Microsoft doesn’t seem to grasp the importance of hardware design in the 2000s and that is very telling in this most recent battle.

Much like what happened when Microsoft took on Sony with the Xbox, the Microsoft team had to really have a passion for hardware and that simply wasn’t the case with Zune.

Apple was blind to its iPod exposures particularly with regard to record label support. Microsoft now has demonstrated where Apple is vulnerable and handed Apple some time to address those vulnerabilities. This doesn’t mean that Microsoft can’t beat Apple at some point (sometimes companies can be surprisingly blind to their vulnerabilities even if these vulnerabilities are waved right in their faces), but it does mean that, next time, Apple will be more prepared for an attack.

While it was very generous of Microsoft to help Apple out this way, it was also unintended, and creates a sharp contrast to the excellent job Microsoft did with the Xbox effort.

HD DVD wins, Blu-ray loses

Much like it is with game systems; competing formats for video are not about the best technology. They are about the most prevalent technology. It is expensive to publish movies and, at least for now, you can’t put Blu-ray and HD DVD disks into the same box.

With the Xbox 360 moving so strongly into the market and the top accessory this year being the $200 HD-DVD drive the battle may be over by year end. There is every chance that there may be as many as ten times more HD DVD players than Blu-ray players in the market by the end of the year – even if you don’t factor in that HP, the current leader in PC sales, started shipping desktop computers with a $100 HD DVD option. This, coupled with a much lower overall cost for the stand alone players as well as better support for legacy TVs and dual mode disks (that have both legacy DVD and HD-DVD content on a single disk), suggests that HD-DVD is now the format to beat.

HD-DVD wins because of the Xbox 360 – which is ironic, given Blu-ray should have won because of the Playstation 3. Instead, Blu-ray has delayed the Playstation 3 to a point where Sony may have to wait until the Playstation 4 to recover.

BetaMax, Mini-Disk, MemoryStick, and now Blu-ray. At least Sony is consistent. Also, if there is one company that is really looking forward to a better 2007 more than Sony I don’t know of it. Boy, when you couple in root kits and battery/camera recalls, you are talking about a really nasty run of bad luck for Sony this year.

Rob Enderle is principal analyst for the Enderle Group. He can be reached at [email protected]