The highly anticipated gaming consoles, the PS4 and the Xbox One, are both scheduled for release later this month. Sony Corporation (NYSE: SNE) is looking to reveal its new creation to the masses on November 15 with a launch price of $400, while Microsoft Corporation (NASDAQ: MSFT) is planning to compete with the PS4 by unleashing the Xbox One on November 22 with a launch price of $500.
The PlayStation and Xbox brands are highly recognizable; the chances are you either own one of these consoles yourself or know someone who does. To date, around 80 million units of the PS3 and the Xbox 360 each have been sold, roughly 160 million collectively. To put this into perspective, that’s about half the US population. Clearly, these brands have been hugely successful and will likely continue to be.
These two multi-billion-dollar corporations, Sony and Microsoft, will be going head-to-head this Christmas. But what’s interesting is how close together they’ve decided to launch. The consoles’ predecessors, the PS3 and the Xbox 360, were each released roughly a year apart between 2005-2006. Going way back to 2000-2001, the story was similar for the PS2 and the first Xbox.
In late 2013, the next additions will be available to the gaming world just a week apart from each other. But how will this affect holiday consumer spending?
The Outlook on Holiday Consumer Spending
According to NPD’s most recent annual Holiday Spending Survey, “the majority of consumers intend to spend the same as or more than last year, with fewer saying they plan to spend less.” It’s probably safe to say that holiday spending will be in full swing this Christmas; the companies haven’t positioned their console releases in time for a frugal holiday.
The same survey from the NPD Group, Inc. states that in 2013, consumers will be allocating 2% more of their holiday spending to “Video Gaming Systems or Video Games”, compared with last year. The survey also noted that consumers plan to spend 5% more through online stores this year. Both of these are positives for the new gaming consoles.
Will The New Consoles Dominate Holiday Spending?
It would be a little extreme to say that the PS4 and the Xbox One will completely take over holiday spending. These consoles will likely do well, but many people will remain happy with their “old” consoles until the prices of the new ones come down, or until the all-in-one bundle deals become even more attractive.
With some recent and highly successful PS3 and Xbox 360 game releases, including GTA V, many fans will remain occupied and content for the time being. A lot of buyers prefer to wait until the pre-owned listings show up. But still, Electronic Arts, Inc. (NASDAQ: EA) predicts that combined sales of the PS4 and Xbox One will reach 10 million units by March 2014.
Plus, if you go into stores now, you'll already see the accessories for these new systems on shelves, and many game titles, such as Call of Duty Ghosts have already released titles for these new consoles before the consoles are even in stores!
PS4 and Xbox One: Easy Money?
The fact is that these gaming consoles make easy solutions for parents. Every birthday and Christmas, parents in the developed world struggle to come up with gift ideas for their children. While many people won’t have enough disposable income to afford such items, sales for these new consoles will still flood in initially. Game sales will likely follow, albeit slower to begin with until the consoles really take off and get into the hands of millions more gamers, throughout 2014 and beyond.
Unlike clothing, fragrances and other electronics, you ultimately know what you are paying for when you buy a console from Sony or Microsoft. Due to their high brand equity and customer loyalty, most people can feel confident in buying these consoles online without ever inspecting them first-hand, despite their relatively high price tags.
However, an area of concern for consumer spending (and retailer earning) will be how much substitution takes place in stores. Will consumers simply opt for buying the game consoles instead of boys action figures or other toys? There may simply be flat consumer spending growth, but the shift to lower margin electronics could negatively impact retailer earnings this holiday season.
Sony and Microsoft: Show Me the Money!
We can say that Sony and Microsoft will do well this Christmas, but just how well exactly? Let’s say combined unit sales reached 5 million before the beginning of 2014. All you have to do now is multiply the average console price assuming an even split, (($500 + $400) / 2) = $450, by those hypothetical sales figures which leaves us with ($450 x 5 million) = $2.25B.
You are looking at potentially more than $2B worth of consumer spending on the PS4 and Xbox One around this holiday period, of which could have potentially been spent on other goods and services. This would create a fantastic start for the companies, who will bring in a lot more revenue down the line with various other sales efforts, including online multiplayer subscriptions.
What Does This Mean for Other Companies?
In the short-term, this does truly present some serious competition for other companies that who don't even technically compete directly with either of the two consoles, such as Apple and Google with their respective tablets (iPad and Nexus). With these companies fighting it out, and Apple's iPhone 5c being a dud, it allows an opening for other companies to jump in. While consumers are not limited to buying just one electronic item, people generally like to diversify and not spend all of their money on electronics. These are relatively high-ticket items for most people too, so the gaming consoles could pose as a major threat to other markets, including not only tablets but also laptops and other related electronics.
The trouble will be for retailers, who will suffer margin compression and may not see a growth in store sales. Because most consumers expect to spend the same, I think that more substitution will take place, negatively impacting earnings.
As the survey mentioned above also suggested, consumers intend on allocating over 40% of their holiday spending solely on clothing, with over 30% on toys and over 20% on movies/DVDs. Regardless though, the PS4 and Xbox One are both bound to grab their share of consumer holiday spending this Christmas. The two competing companies, Sony and Microsoft, will make a combined force to be reckoned with.
Will You Be Buying a PS4 or Xbox One This Holiday Season?