Xbox Shortage Leaves Fans Out in the Cold

Gripping the controller of the coveted Xbox 360, Jesus Sanchez watched as the Raiders clashed with the Broncos on a high-definition flat-screen TV. The details in the “Madden NFL 06” video game looked so sharp that it was almost like seeing an actual football game.

Sanchez was mesmerized, but unfortunately for him the 360 wasn’t his. He was playing a demo machine at a Best Buy store in Atwater Village because, like countless other frustrated gamers, he hasn’t been able to get one of his own.

More than two months after its debut, Microsoft Corp.’s newest console remains hard to find.

To be sure, temporary shortages after the launch of a new machine are common in the video game business. But Microsoft’s continued inability to meet demand for Xbox 360 has irritated customers and disappointed video game publishers, raising questions about whether the company has squandered an opportunity to grab market share before consumer electronics giant Sony Corp. releases its PlayStation 3 later this year.

For its part, Microsoft said it expected the shortage to ease in coming weeks, thanks to an additional manufacturing plant coming on line, and the balance between supply and demand should stabilize before the end of June.

June may be too late, according to some Wall Street analysts.

“Microsoft’s first-mover advantage is eroding if it takes them very long to get the first 5 million boxes out,” said Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles. “If 4 million show up in the month of June and Sony launches in the month of June, there’s not much of an advantage” for Microsoft.

Whether gamers like Sanchez, a 28-year-old art student from Santa Clarita, will forgo plans to purchase an Xbox 360 to hold out for a PlayStation 3 remains to be seen. Sanchez said his wife wanted to buy him an Xbox 360 for Christmas, but couldn’t find one.

“I heard the PlayStation 3 is coming out pretty soon too, but I haven’t really compared it yet,” said Sanchez. He said he was waiting to hear more about the Sony console before deciding whether it was “worth the wait.”

Microsoft and Sony are locked in a battle for dominance in home entertainment. The Redmond, Wash.-based software behemoth, still relatively new to the hardware scene, hopes to use its $399 console to overtake market leader Sony.

Industry observers have drawn comparisons between Microsoft’s launch of Xbox 360 and the release of new gadgets by Sony, which has vast experience at manufacturing consumer electronics. It also has been compared with Apple Computer Inc., a company flying high due in large part to its line of iPod music players.

“Steve Jobs will announce a product and it will ship that day and be in pretty good supply,” said Geoff Keighley a host on G4, a cable channel devoted to video games. By comparison, Keighley said, Microsoft created “an object of desire they weren’t able to deliver to the vast majority of people who were intrigued.”

The scarcity of Xbox 360s -- which play games, music and videos in addition to exploiting the latest in video game graphics and high-definition television -- was particularly acute during the crucial holiday shopping season. Throngs of shoppers camped out overnight in retailers’ parking lots; some left empty-handed. Others sought the consoles on EBay, where more than 40,000 of them were sold in the eight days after the model’s Nov. 22 launch for an average price of about $800.

“You like to have the Cabbage Patch Kids’ effect where there’s a scarcity, but there was just a little too much scarcity,” said Frank Gibeau, general manager of North American publishing for Electronic Arts Inc., the world’s largest independent game publisher.

Microsoft reported Thursday that it sold a total of 1.5 million Xbox 360 consoles in its fiscal second quarter ended Dec. 31, including 900,000 in the U.S., 500,000 in Europe and about 100,000 in Japan. Microsoft executives blamed shortages of parts for the lower-than-expected sales, but said they were nonetheless thrilled with the console’s launch, noting that it was already available in 19 countries and that software for the device was selling at a nice clip.

“We’re off to a strong early start,” Scott Di Valerio, corporate vice president of finance and administration, said during a conference call with investors. “Coupled with the continued uncertainty of our competitors entering into the next generation, we are right where we want to be.”

The third manufacturing plant scheduled to come online next month is expected to help Microsoft meet its target of shipping 4.5 million to 5.5 million consoles by the end of June. The company also said it now expected to sell 2.5 million consoles in its first 90 days on the market -- down from 2.75 million to 3 million previously estimated by company representatives.

Shortages are typical for new video game consoles, said Aaron Greenberg, group marketing manager for online video game service Xbox Live, noting that PlayStation 2 and the original Xbox suffered the same problems after their launches. Microsoft’s decision, to pursue a worldwide launch over the holidays generated “global demand” for Xbox 360, he said.

The controversial strategy, which Greenberg defended, forced the company to ship scarce supplies to Japan, where sales got off to a slow start, as well as across North America and Europe. Meanwhile, demand for the devices soared in the U.S. where, according to the NPD Group, sales of all game players, software and accessories topped $10.5 billion in 2005.

“We sure could have used those units in North America,” EA’s Gibeau said.

Gibeau said the video games EA published for Xbox 360, including “Madden NFL 06,” sold well despite the console’s limited availability, giving the company a “high share of a smaller pie.”

But EA cited lower than expected sales of Xbox 360s as well as the new console’s damping effect on sales of original Xboxes when it warned investors last month that it might not meet its earnings guidance for its third quarter.

Executives at Take-Two Interactive Software Inc., publishers of the popular Grand Theft Auto series, revised their first-quarter guidance this month to reflect disappointing holiday sales, which they attributed to lighter than expected Xbox 360 shipments, a sluggish software environment and purchasing delays by consumers evaluating the new consoles.

In one promising sign for Microsoft and its publishing partners, Xbox 360 owners have gone on a buying binge, purchasing about twice as many accessories and games -- about four games per console -- compared with previous console launches.

“They’re also purchasing everything -- the hardware, software and accessories -- at higher price points than we’ve historically seen,” said Edward Williams, an analyst at Harris Nesbitt.

Buyers paid 25% more for an Xbox 360 than an original Xbox based on an average price of $375 for an Xbox 360, Williams said, and 15% more for games, which averaged $57 a piece. A standard Xbox 360 sells for $299. One with a detachable hard drive, wireless controller and headset retails for $100 more.

Another bright spot for Microsoft is the high number of Xbox 360 owners connecting to Xbox Live. Gamers can use the service, which requires an Internet connection, to play each other online, download free game and movie demos and purchase simpler games such as “Joust” and “Bejeweled II.”

More than half of Xbox 360 purchasers have signed up for Xbox Live compared with 10% of those who purchased the original Xbox. The service costs $49.99 for a year for Xbox, but is being offered in two tiers with Xbox 360, one of which is free with fewer features. Xbox 360 owners downloaded nearly 4 million items such as free games and demos during the console’s first month at retail, arming publishers with a powerful new marketing tool.

A free demo of a new boxing game, “EA Sports Fight Night Round 3,” has been downloaded more than 150,000 times since Microsoft Chairman Bill Gates and CEO Steve Ballmer played it on stage this month at the Consumer Electronics Show in Las Vegas, Gibeau said.

Typically, EA would have had to burn the demo onto discs and ship them to retailers and customers, Gibeau said.

Microsoft also says there are indications that Xbox 360 is expanding the market for high-definition televisions, coveted for their sharper pictures and more detailed resolution than conventional TV. Results of research commissioned by Microsoft found 90% of Xbox 360 customers either own or intend to purchase a HDTV within the next six months, with nine out of 10 intended buyers citing Xbox 360 as the reason.

“It’s driving people into the HD era,” Xbox Live’s Greenberg said.

How quickly Microsoft is able to build on the gains, analysts say, hinges on its ability to flood the market with consoles over the next several months.

Williams, the Harris Nesbitt analyst, said Microsoft had until spring to get Xbox 360s to as many gamers as possible, based on his belief that Sony won’t release PlayStation 3 until the fall. After retailers begin taking preorders for PlayStation 3, which Williams predicts will happen in May, publicity for the console will begin to build.

“I don’t think there’s material damage to Microsoft,” Williams said, “unless the lack of the supply persists into the spring.”