Digging through Microsoft's third quarter earnings uncovers evidence that suggests sales of the company's Xbox 360 games console may be past their peak, falling dramatically over the last quarter.
Microsoft sold 1.4 million consoles during January to March of this year, a precipitous drop of 48 percent compared to the same period last year. This in turn resulted in a fall in revenue for the Xbox business of 33 percent, down to $584 million. Sales of the Kinect motion controller were also down, but Microsoft did not state by how much.
The only part of the Microsoft's Xbox business that saw growth during the period was Xbox Live.
Overall, Microsoft saw revenue from its Entertainment and Devices Division fall by 16 percent to $1.62 billion, with the company placing much of the blame on a "soft gaming console market."
There's no doubt that the Kinect 'hands-free' controller has helped to keep sales of the console, accessories, and games buoyant following its release in November 2010, but an accessory can only go so far is keeping an aging console relevant.
The problem with the Xbox 360 -- and Sony's PlayStation and Nintendo's Wii for that matter -- is the age of the platform. Microsoft's latest iteration of its popular console first debuted in November 2005, and while it has seen a few revamps since then, the underlying technology has essentially remained unchanged, with most of the design changes relating to cooling.
Can you imagine playing the latest games on a PC that was over six years old? It doesn't bear thinking about, but when you fire up that console of yours -- no matter if it's an Xbox 360, PS3 or Wii -- you're gaming on technology that is over five years old. Not only is console gaming suffering because of aging technology, it's having a knock-on effect on PC gaming also since many of the PC versions are actually ports of the original Xbox game.
The financials give us a hint that work on the next Xbox is well underway. Microsoft's Entertainment and Devices Division saw its research and development costs jump by 35 percent over the quarter to $335 million. It's hard to imagine that this increase is down entirely to research and development on the Windows Phone platform.
Not only are consoles expensive to develop, the process takes time. This development time is then followed by a period where Microsoft then works with game studios to bring a selection of must-have titles to the platform. The entire process consumes dollars, which is why Microsoft wants to squeeze all it can from the 360 before moving on.
How long will we have to wait for a new Xbox? Most of the rumors and predictions seem to predict a 2014 launch, putting the replacement console two holiday seasons away. It's possible that Microsoft has overestimated the lifespan of its Xbox 360, allowing sales to peak years before the replacement console is ready. If sales are already 'soft' then I can only imagine that they are going to get worse as the quarters go on.
Microsoft's Entertainment and Devices Division could be in for a rough ride.