Gaming giants turn to titles as console launch buzz fades

April 14, 2014, 9:59 PM UTC
Sony PlayStation 4 (PS4) videogame consoles on display at a Bic Camera electronics store in Tokyo, Japan.

FORTUNE — Anyone looking t­o declare a victory in the videogame console showdown between Sony’s PlayStation 4 and Microsoft’s Xbox One had better be prepared for a long wait. The systems, which each launched last November, are actually off to a strong start; so much so that even finding a PS4 in Sony’s home turf of Japan could be a task worthy of a videogame adventure.

Sony (SNE) has surpassed the 6 million mark in sales worldwide for the PS4, and this includes 300,000 consoles that sold in the first week that the system went on sale in Japan in February. However, the number of sales dropped to less than 30,000 in the second week. It wasn’t that gamers weren’t interested in Sony’s latest gaming console, but rather that the consumer electronics giant had experienced supply constraints — partially as a result of trying to get more systems out in North America. The PS4 is available in North America for $399.99.

“Sony is ahead of where they expected to be,” said Lewis Ward, research director of gaming at IDC. “They expected to reach about 5 million sales by the end of the March — meaning that many systems would be shipped to stores. In fact, they have seen sell-through to consumers that topped 6 million. Sony is way ahead of where they wanted to be, but they are not taking a victory lap just yet. Sony as a company has been struggling in recent years, so they aren’t exactly popping Champagne.”

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Sony took the unique move to raise the price of the system in Canada from C$399.99 to C$449.99, which the company said was needed “to respond to changes in the market environment.” This could be an indicator that the company is very much focused on its own profitability as it addresses supply and demand challenges.

“Sony has been working hard to manage its inventory and regional product shipments. In the most difficult cases this can mean flying in consoles rather than shipping, and this sort of action can increase costs to Sony,” said Piers Harding-Rolls, director and head of games research at IHS Technology. “Also it is clear that the U.S. dollar has strengthened against the Canadian dollar since launch, and with the company’s costs in the region in U.S. currency, the price increase is there to smooth out the imbalance. A quick-fire move like this suggests that SCE is ready to do what it takes to drive profitability into the division as early as possible in the cycle. Understandably, this financial prudence is easier to implement while the PS4 is selling strongly.”

Microsoft’s (MSFT) Xbox trails Sony with about 4 million units sold worldwide, and while on a global basis it is clear that the PS4 holds the lead, it is a much closer race in North America.

“The sales gap is closer, and with [the newly released game] Titanfall well-received this will have aided Xbox One further,” Harding-Rolls told Fortune. “Sony hit all the right notes with its pre-launch strategy and stuck to its simple ‘for the gamers’ message. The console audience responded to this non-wavering concentration on gaming, whereas Microsoft’s message was more generalized around a broader entertainment offering and watered down.”

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Then there is the issue of price. Microsoft’s Xbox One came out at $100 more than Sony’s PS4, and “the higher price also meant it was at a disadvantage,” added Harding-Rolls. “In some markets a lack of price elasticity overcame residual brand loyalty and resulted in better momentum for the PS4 — the U.K. is a leading example. However, both platforms have sold above and beyond expectations globally, and on this basis, there is a strong platform there for future success for both consoles.”

A turn to titles

Microsoft could also look to close the gap as bundles of the Xbox One with the aforementioned Titanfall (as a downloadable version) have been offered by big-box retailers such as Best Buy and Walmart for $449.99. Given that the game itself retails for nearly $60, the bundle actually made the Xbox One cheaper than the PS4. The sci-fi epic is seen as one of the few true “killer apps” for Microsoft’s system and could do for it what the Halo franchise had done for the original Xbox and the Xbox 360.

But it will take more than a single title to make either of the next-generation systems a mega-hit. Lacking a “must-have” game, Sony and Microsoft may look at exclusive offerings from third-party game developers to spur interest.

“Given the somewhat anemic launch lineup, the systems have done have really well. This is a sign that console gaming isn’t as dead as people said it is,” said Paul Semel, a videogame reviewer and freelance editor for Electronic Gaming Monthly. “It is still a ways off, but this coming holiday season will be the real test, as that is when there are more exclusive titles for each system. Right now what we’ve seen is that the hardcore gamers have gotten really excited about these systems, but they were going to buy one or the other anyway.”

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A lack of notable games is still the biggest problem that both companies will need to resist losing momentum in the many months before the next holiday season.

“These systems did not arrive with massive software lineups, which does limit the reason to opt for a new system, especially when the biggest games like Call of Duty are on the old systems,” said Scott Steinberg, head of Phoenix Online Publishing and industry consultant. “But this isn’t just something you can lay at the feet of Sony and Microsoft. Developers and publishers need to get up to speed, but at the same time publishers are taking fewer and fewer risks especially as games cost an arm and a leg to make. There is the added problem too that these new systems don’t have the install base, so there is less incentive for the developers and publishers to want to be there right away.”

It’s a “chicken or egg” issue that will undoubtedly be resolved. With the latest consoles, both companies may look to smaller or independent game studios to find potential hits without the risk or expense of developing them elsewhere.

“The indie game development studios could make a big difference this time,” said IDC’s Ward. “Microsoft did big business with Mindcraft, and while it didn’t make or break the Xbox 360, it got a lot of buzz. As a result, everyone is trying to court the indies right now. It is much easier to tie up a micro-studio or small indie studio on the way up and get serious exclusives. That is where the companies can get more bang and get a lot of press as a result. They won’t sell a lot of hardware from it, but it gives a little more differentiation on the hardware front.”

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Sony and Microsoft have certainly managed to create a lot of buzz around their new videogame consoles, partly by lengthening the life cycle of the product and creating pent-up demand for something new.

“What they’ve done right is to make a lot of noise and establish a reason with gamers for wanting to purchase the systems,” Steinberg said. Now all the companies have to do is figure out a way to maintain the momentum.