Xbox vs. PlayStation: Playing Hard to Get

(FORTUNE Magazine) - The trash talk was flying at the Consumer Electronics Show in Las Vegas in early January. Microsoft's gaming czar, Robbie Bach, flush from his launch of the new Xbox 360, crowed that industry kingpin Sony is "behind right now." That same day Sony's U.S. game CEO, Kaz Hirai, brushed off his competitor like so much lint on his lapel: "We know that the next generation of interactive entertainment doesn't really start until we launch it, and in 2006 we are ready to introduce the future with Playstation 3."

So who's really winning in the battle of the boxes? As the (distant) No. 2 in the category, Microsoft (Research) was determined to get its new Xbox out ahead of the PS3, which was expected to launch this spring. It succeeded. But in the process Microsoft created far more consumer craving than it was able to satisfy, and shortages cropped up everywhere.

When market researcher NPD announced holiday season sales estimates in mid-January, the numbers were surprisingly low: A paltry 600,000 Xbox 360s had sold in the U.S. from launch on Nov. 22 through Dec. 31, roughly half the sales of the first Xbox four years ago. A month after Christmas, supply was still so lacking that it remained nearly impossible to find an Xbox 360. (Microsoft says it's still on track to sell 4.5 million to 5.5 million units by late June.) Meanwhile, Sony's venerable PS2 sold 1.4 million units in December. "The problem with the Xbox 360 launch," says analyst Michael Pachter of Wedbush Morgan, "is the mismatch between delivery of the actual product and the creation of demand by Microsoft."

New-product shortages seem endemic to the electronics business--Playstations and iPods, among others, have sold out at various times--but analyst Mike Wallace of UBS says Microsoft made things worse by allocating some of its limited supply to Europe and Japan, where units sat on shelves unsold. (A spokesperson defended Microsoft's unprecedented worldwide launch and pointed out that a third factory will soon be producing 360s.)

But before we award this round to Sony, there's another shoe poised to drop: Many analysts now expect the PS3 won't turn up in U.S. stores until the holiday season. Sony is coy. A spokesperson will say only that the PS3 will launch--somewhere--this spring. Most analysts expect that somewhere to be Japan, with a U.S. debut months later. And as Goldman Sachs analyst Rick Sherlund notes, there's every reason to believe Sony will face its own U.S. supply issues next holiday season. Maybe the Microsoft executives will have reason to crow after all. Top of page