Microsoft, Channel Stuffing and Desperation: Old Tricks for a New Era

Microsoft is in trouble, and this ain't no joke. Vista is a disappointment. Search is weak. Xbox is under siege from the Wii. Paul Graham recently posted that "Microsoft is Dead." Paul might have a taste for the dramatic but you can see where he is coming from. It hasn't been a particularly good twelve months for Ballmer's Boys, and recent news isn't much better. Further, it has come to light that Microsoft, in an effort to embellish its perceived momentum in gaming and its window into family rooms the world over, has been using the oldest and shabbiest of retailer tricks to juice sales figures for the Xbox 360: channel stuffing. No, you say, Microsoft couldn't be doing such a thing. This is a relic of old-line consumer products companies like Philip Morris, or fraudsters like Miniscribe who literally shipped bricks in lieu of disk drives to hit sales targets. Well, the Internet has gotten pretty heated up on this issue, particularly as the inevitable boom-bust results of this tactic are now coming home to roost. Microsoft management is being forced to walk down volume guidance, shining a bright light on the year-end spike in shipments that made the numbers look good - for a while. But that game is over. The jig is up, Softy. So whaddya gonna do now?

Why Stuff the Channel?

Because you are feeling desperate. But why? Xbox is doing pretty well, right? Well, not good enough, and giving ground fast to the Wii. Let's consider what's gone on in gaming consoles over the last two generations. Last go around Sony got the jump on Microsoft and Nintendo with the PS2, beating the original Xbox and Gamecube consoles to market by about a year. The result: Sony kicked some serious butt, selling around 100 million units to 20-25 million units each of the Microsoft and Nintendo offerings. So Microsoft thinks to itself "Ha, I'm going to pull a Sony and get a jump on these bastards for our nextgen console." So it releases Xbox 360 in November/December 2005 versus November 2006 for Sony and Nintendo, a full year jump on the competition. The results to date: 9.7 million Xbox 360; 6.6 million Wii; and 3.1 million PS3. So, the Wii has achieved around 2/3 of Xbox 360s sales volume after only four months, and this after conceding a 12 month head start. From Microsoft's perspective, this can't feel too good or bode well for the future.

Further, both empirical and anecdotal evidence point to increasing interest and resources being devoted to the manufacture of the Wii, with some of those resources coming directly out of those currently associated with the Xbox 360.

From DigiTimes 03/26/2007:

Wistron is likely to gradually discontinue the production of Xbox 360 games consoles for Microsoft in 2008, partly due to declining profits on production of the consoles and partly on market reports stating that Microsoft has added Celestica to the list of its suppliers, according to a March 26th Chinese-language Economic Daily News (EDN) report.

From DigiTimes 03/28/2007:

In order to meet demand for Wii, which presently far outstrips supply, Nintendo intends to find another manufacturer to bolster production of the console, currently being handled solely by Foxconn Precision Compotents (FPC). New manufacturing partners under consideration include Asustek Computer, Compal Electronics, Inventec and Wistron, which are all eager to land a contract with the Japanese firm.

It kind of seems like the story is that as Microsoft is cutting prices for customers and pressuring suppliers to drop their prices as well, that the Xbox 360 isn't the gravy train it was cracked up to be. And that companies like Wistron are excited to shift resources away from Xbox 360 and towards the Wii. So, when things aren't going your way and you have loose accounting practices at your disposal, what do you do? Stuff away!

How to Stuff the Channel

For those uninitiated in this time-honored practice, per Wikipedia:

Channel stuffing is the business practice where a company or a sales force within a company inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling to the world at large. This can be the result of a company attempting to inflate its sales figures. Alternatively, it can be a consequence of a poorly managed sales force attempting to meet short term objectives and quotas in a way that is detrimental to the company in the long term. Many managers will engage in channel stuffing to increase annual/quarterly sales. Even though this would hurt the company because the distributors would have to return any unsold goods back to the company, it would help the manager if his earnings was based on a sales quota.

Occasionally, distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers, and use the phenomenon to their advantage. This is done by holding back on orders until the end of the suppliers' quota period. The suppliers' sales force then panics, and sells a large amount of the product under more favorable terms than they would under ordinary circumstances. At the beginning of the next period, no new orders are placed and barring any action, the cycle then repeats.

Corporations have been known to engage in channel stuffing and hide such activities from their investors. In the United States, the U.S. Securities and Exchange Commission has in some cases litigated against such corporations.

None of the reasons for channel stuffing are particularly noble, glamorous or value accretive, but that hasn't stopped legions from engaging in this unethical practice. There have been some terrific posts on the topic, dating back as far as December, calling out Microsoft on their trumped-up sales figures.

From Blackfriars' Marketing 12/11/2006:

We have a game we play around the office here with Microsoft press releases. The game is, "Find the words that make the headline true." It's not always easy.

Let's start with XBox 360s. Last week, Microsoft said that it expects to sell more than 10 million XBox 360s by the end of 2006. Sounds plausible, right?

Well, sort of. Unfortunately, NPD just released their numbers for November. The outcome was pretty close to Blackfriars forecast last week:

Nintendo Wii: estimate: 600,000+, actual: 476,000
Microsoft XBox 360: Blackfriars estimate: 600,000, actual: 511,000
Sony Playstation 3: estimate: 200,000,  actual: 197,000

Sounds pretty good, right? XBox 360 beat the Nintendo Wii in November with half a million units. They should be fine with the projection, right?

Well, not if you go back to Microsoft's earnings statements and notice that through September 30, Microsoft had only sold 5.9 million units according to its SEC filings. XBox 360 sales in Q3 were averaging 300,000 a month, so let's say October sales were 400,000. Adding on 511,000 for November, that brings us up to 6.8 million. Estimates are that Microsoft will sell about 1.5 to 2 million XBox 360s for Christmas. That leaves the total about a million units short of the 10 million goal.

The secret sentences in the first press release cited above that make the projection possible are the following:

That "sold" number refers to units "sold into retail," which refers to units in transit, units sitting in store inventories and machines sold to consumers.

So how can Microsoft make its stated goal? It's simple: they "stuff" the retail channel by requiring retailers to take XBox 360s over and above those they need by the end of the year.

Now some might argue that retailers won't want to take inventory they don't want this time of year. But Microsoft has a nice trump card to play here. They simply say, "Well, we have a big consumer product launch of Windows Vista and Office 2007 coming up on January 30. Those who don't take XBox 360s might have some trouble getting inventory of those products." And given that those products are pretty much guaranteed to sell in the millions of units for the year at price points of hundreds of dollars, most retailers will just take the XBoxes and call it a day.

Oof, that's brutal, and, of course, true. Carl Howe at Blackfriars' is a rock star. It's forensic analysis like this that makes those with domain experience in the blogosphere so valuable. And then the more recent post, after Microsoft uttered "no mas" and had to come clean.

From Blackfriars' Marketing 01/26/2007:

Microsoft reported earnings this evening, and with it, they announced their actual results for XBox 360 sales over Christmas. The good news: Microsoft shipped 4.4 million XBox 360 units in the fourth calendar quarter of 2006. The bad news: the company only expect to sell another 1.6 million by July 1, lowering its projection of 13 to 15 million down to only about 12 million. These numbers nicely confirm Blackfriars' earlier prediction that Microsoft was shipping excess XBox 360 consoles to retailers to make its 10 million XBox's sold by the end of 2006.

The money quote on XBox 360 sales:

"We are just being cautious about the second half," said Liddell in an interview. "There is a reasonable amount of inventory in the channel."

Second-quarter sales at the entertainment and devices division rose 76 percent to $2.96 billion, but it lost nearly $300 million.

A quick marketing hint for Microsoft: advertising sales targets is just a bad idea. Yes, you get to set expectations so you can exceed them -- but that backfires on you when you don't. And worse, it makes you do things that from a business point of view make little sense, like stuffing the retail channel with products they don't want. Further, doing silly things to make artificial goals just tarnishes Microsoft's brand -- which probably wasn't the original goal.

Well, in the end I guess it all comes out in the wash. The moral of the story: beware of headline numbers and sales projections around year-end, as hype and wishful thinking may get mixed up in a kind of toxic brew (at least to investors).  Let's look at some additional perspective (with some cool and informative charts) on the channel stuffing issue and the relative performance of Xbox 360, Wii and PS3.

From RoughlyDrafted.com 03/27/2007:

Next Gen Consoles: PS3, Wii, Xbox 360

Meanwhile, despite the scorn dumped upon the beleaguered PlayStation 3, Sony has already shipped over two million units in its first couple months.

Sony, like Microsoft, announces units shipped, not actually sold. This allows both companies to advertise sales numbers based on how many units they can force retailers to accept, not on how many units customers actually buy; both have considerable market power to push excess unsold inventory into the channel.

The Wii sold 3.19 million units by the end of 2006, and is on track to catch up to and outsell the Xbox 360 by this fall. Even the PS3 looks set to pass the 360 this year; Microsoft recently dropped its June 2007 sales estimate from 15 million to 12 million.

Microsoft had announced the 15 million goal in November 2006 to distract attention away from the other consoles that were just being released.  It met its earlier goal of 10 million by the end of 2006 by stuffing the channel with unsold inventory.

That move didn’t help to actually sell units; Microsoft’s SEC filings report that at the beginning of October, the company had only sold 5 million 360s.

That means that half of the world's 360s were sitting in retail shelves this holiday season, and a significant amount still are. That has pressed Microsoft to dramatically slow new shipments until the channel clears out excess inventory.

And the hard-core gamers following this stuff are none too pleased, either. Deceptive tactics like this don't play well with the intensely loyal, deeply devoted high-end crowd, and these sentiments were splashed all over the comments in a recent post at Kotaku concerning the release of the Xbox 360 Elite. So, release a high-end model extension with a jacked-up price in the wake of adverse PR around the channel stuffing issue? Great idea - not.

From Kotaku 03/28/2007:

This is a horrible deal. I just can't believe it, MS what are you doing?

I swear this feels like an attempt to stuff the channel some more and make 360 sales look better than they are. I mean, announce it 4 days before the end of the quarter, book sales of 20 units to 25,000 outlets worldwide, that's 500,000 more "sales" this quarter instead of next.

I'm just so shocked from the idea of raising the price on a console, I can't stand it. I know it brings more functionality, but still. When Sony added ethernet to the PS2 (with the Slim), did they raise the price? When the DS Lite came along with better battery life and a new display, did they raise the price?

The only time I can remember the price of a console going up is when original Xbox went from $150 to $175 right before it died. That didn't go well, does MS want to repeat that?

br549 03/28/07 1:07am

I just don't get it.

The Fall-Out

I'm sure Chris Liddell was just thrilled at having to stand up in front of the investor community and do a little tap dance around the Xbox 360 channel-stuffing issue. But, of course, he wouldn't come out and say that, but use some appropriate Alan Greenspan-like euphemisms to convey the point in more oblique terms.

From Reuters 01/25/2007:

LOS ANGELES, Jan 25 (Reuters) - Microsoft Corp. (MSFT.O: Quote, Profile , Research) on Thursday cut its fiscal 2007 forecast for Xbox 360 video game console shipments, citing unsold inventories in stores, and said it is trying to make sure its gaming division turns a profit in the upcoming fiscal year.

Chief Financial Officer Chris Liddell said Microsoft aims to ship a total of 12 million Xbox 360s by the end of its fiscal year on June 30, down from a previous target of 13 million to 15 million.

"We are just being cautious about the second half. It was always going to be a slow half. We've done very well in the first half. There is a reasonable amount of inventory in the channel," Liddell said in an interview with Reuters.

So what is a "reasonable" amount of inventory in the channel, Chris? Does it have anything to do with shipping (not selling, mind you) 4.4 million units in Q4 2006, with a projected 1.6 million units through the first half of 2007? I guess you guys just had to make that magic 10 million number by the end of 2006, didn't you? But what did it really mean? Not much, in retrospect.

Bottom line: strong companies confident in their strategy and performance don't do these things. They don't have to. What kind of a message does this type of behavior send to the investor community and, more importantly, your customers? Weakness. Fear. Short-term thinking. Nothing that represents a positive signal for a better, brighter tomorrow. Might this also raise questions around Microsoft's pushing of Vista, which hasn't exactly been flying off the shelves and has received more than its complement of negative press? There is something seriously, institutionally wrong with Microsoft. This is not the company I knew in the late 1990s. Get back to basics, boys. Because accounting tricks neither fool Mr. Market nor your customers forever.

The author does not hold a position in the securities of these companies.

Microsoft is in trouble, and this ain't no joke. Vista is a disappointment. Search is weak. Xbox is under siege from the Wii. Paul Graham recently posted that "Microsoft is Dead." Paul might have a taste for the dramatic but you can see where he is coming from. It hasn't been a particularly good twelve months for Ballmer's Boys, and recent news isn't much better. Further, it has come to light that Microsoft, in an effort to embellish its perceived momentum in gaming and its window into family rooms the world over, has been using the oldest and shabbiest of retailer tricks to juice sales figures for the Xbox 360: channel stuffing. No, you say, Microsoft couldn't be doing such a thing. This is a relic of old-line consumer products companies like Philip Morris, or fraudsters like Miniscribe who literally shipped bricks in lieu of disk drives to hit sales targets. Well, the Internet has gotten pretty heated up on this issue, particularly as the inevitable boom-bust results of this tactic are now coming home to roost. Microsoft management is being forced to walk down volume guidance, shining a bright light on the year-end spike in shipments that made the numbers look good - for a while. But that game is over. The jig is up, Softy. So whaddya gonna do now?

Why Stuff the Channel?

Because you are feeling desperate. But why? Xbox is doing pretty well, right? Well, not good enough, and giving ground fast to the Wii. Let's consider what's gone on in gaming consoles over the last two generations. Last go around Sony got the jump on Microsoft and Nintendo with the PS2, beating the original Xbox and Gamecube consoles to market by about a year. The result: Sony kicked some serious butt, selling around 100 million units to 20-25 million units each of the Microsoft and Nintendo offerings. So Microsoft thinks to itself "Ha, I'm going to pull a Sony and get a jump on these bastards for our nextgen console." So it releases Xbox 360 in November/December 2005 versus November 2006 for Sony and Nintendo, a full year jump on the competition. The results to date: 9.7 million Xbox 360; 6.6 million Wii; and 3.1 million PS3. So, the Wii has achieved around 2/3 of Xbox 360s sales volume after only four months, and this after conceding a 12 month head start. From Microsoft's perspective, this can't feel too good or bode well for the future.

Further, both empirical and anecdotal evidence point to increasing interest and resources being devoted to the manufacture of the Wii, with some of those resources coming directly out of those currently associated with the Xbox 360.

From DigiTimes 03/26/2007:

Wistron is likely to gradually discontinue the production of Xbox 360 games consoles for Microsoft in 2008, partly due to declining profits on production of the consoles and partly on market reports stating that Microsoft has added Celestica to the list of its suppliers, according to a March 26th Chinese-language Economic Daily News (EDN) report.

From DigiTimes 03/28/2007:

In order to meet demand for Wii, which presently far outstrips supply, Nintendo intends to find another manufacturer to bolster production of the console, currently being handled solely by Foxconn Precision Compotents (FPC). New manufacturing partners under consideration include Asustek Computer, Compal Electronics, Inventec and Wistron, which are all eager to land a contract with the Japanese firm.

It kind of seems like the story is that as Microsoft is cutting prices for customers and pressuring suppliers to drop their prices as well, that the Xbox 360 isn't the gravy train it was cracked up to be. And that companies like Wistron are excited to shift resources away from Xbox 360 and towards the Wii. So, when things aren't going your way and you have loose accounting practices at your disposal, what do you do? Stuff away!

How to Stuff the Channel

For those uninitiated in this time-honored practice, per Wikipedia:

Channel stuffing is the business practice where a company or a sales force within a company inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling to the world at large. This can be the result of a company attempting to inflate its sales figures. Alternatively, it can be a consequence of a poorly managed sales force attempting to meet short term objectives and quotas in a way that is detrimental to the company in the long term. Many managers will engage in channel stuffing to increase annual/quarterly sales. Even though this would hurt the company because the distributors would have to return any unsold goods back to the company, it would help the manager if his earnings was based on a sales quota.

Occasionally, distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers, and use the phenomenon to their advantage. This is done by holding back on orders until the end of the suppliers' quota period. The suppliers' sales force then panics, and sells a large amount of the product under more favorable terms than they would under ordinary circumstances. At the beginning of the next period, no new orders are placed and barring any action, the cycle then repeats.

Corporations have been known to engage in channel stuffing and hide such activities from their investors. In the United States, the U.S. Securities and Exchange Commission has in some cases litigated against such corporations.

None of the reasons for channel stuffing are particularly noble, glamorous or value accretive, but that hasn't stopped legions from engaging in this unethical practice. There have been some terrific posts on the topic, dating back as far as December, calling out Microsoft on their trumped-up sales figures.

From Blackfriars' Marketing 12/11/2006:

We have a game we play around the office here with Microsoft press releases. The game is, "Find the words that make the headline true." It's not always easy.

Let's start with XBox 360s. Last week, Microsoft said that it expects to sell more than 10 million XBox 360s by the end of 2006. Sounds plausible, right?

Well, sort of. Unfortunately, NPD just released their numbers for November. The outcome was pretty close to Blackfriars forecast last week:

Nintendo Wii: estimate: 600,000+, actual: 476,000
Microsoft XBox 360: Blackfriars estimate: 600,000, actual: 511,000
Sony Playstation 3: estimate: 200,000,  actual: 197,000

Sounds pretty good, right? XBox 360 beat the Nintendo Wii in November with half a million units. They should be fine with the projection, right?

Well, not if you go back to Microsoft's earnings statements and notice that through September 30, Microsoft had only sold 5.9 million units according to its SEC filings. XBox 360 sales in Q3 were averaging 300,000 a month, so let's say October sales were 400,000. Adding on 511,000 for November, that brings us up to 6.8 million. Estimates are that Microsoft will sell about 1.5 to 2 million XBox 360s for Christmas. That leaves the total about a million units short of the 10 million goal.

The secret sentences in the first press release cited above that make the projection possible are the following:

That "sold" number refers to units "sold into retail," which refers to units in transit, units sitting in store inventories and machines sold to consumers.

So how can Microsoft make its stated goal? It's simple: they "stuff" the retail channel by requiring retailers to take XBox 360s over and above those they need by the end of the year.

Now some might argue that retailers won't want to take inventory they don't want this time of year. But Microsoft has a nice trump card to play here. They simply say, "Well, we have a big consumer product launch of Windows Vista and Office 2007 coming up on January 30. Those who don't take XBox 360s might have some trouble getting inventory of those products." And given that those products are pretty much guaranteed to sell in the millions of units for the year at price points of hundreds of dollars, most retailers will just take the XBoxes and call it a day.

Oof, that's brutal, and, of course, true. Carl Howe at Blackfriars' is a rock star. It's forensic analysis like this that makes those with domain experience in the blogosphere so valuable. And then the more recent post, after Microsoft uttered "no mas" and had to come clean.

From Blackfriars' Marketing 01/26/2007:

Microsoft reported earnings this evening, and with it, they announced their actual results for XBox 360 sales over Christmas. The good news: Microsoft shipped 4.4 million XBox 360 units in the fourth calendar quarter of 2006. The bad news: the company only expect to sell another 1.6 million by July 1, lowering its projection of 13 to 15 million down to only about 12 million. These numbers nicely confirm Blackfriars' earlier prediction that Microsoft was shipping excess XBox 360 consoles to retailers to make its 10 million XBox's sold by the end of 2006.

The money quote on XBox 360 sales:

"We are just being cautious about the second half," said Liddell in an interview. "There is a reasonable amount of inventory in the channel."

Second-quarter sales at the entertainment and devices division rose 76 percent to $2.96 billion, but it lost nearly $300 million.

A quick marketing hint for Microsoft: advertising sales targets is just a bad idea. Yes, you get to set expectations so you can exceed them -- but that backfires on you when you don't. And worse, it makes you do things that from a business point of view make little sense, like stuffing the retail channel with products they don't want. Further, doing silly things to make artificial goals just tarnishes Microsoft's brand -- which probably wasn't the original goal.

Well, in the end I guess it all comes out in the wash. The moral of the story: beware of headline numbers and sales projections around year-end, as hype and wishful thinking may get mixed up in a kind of toxic brew (at least to investors).  Let's look at some additional perspective (with some cool and informative charts) on the channel stuffing issue and the relative performance of Xbox 360, Wii and PS3.

From RoughlyDrafted.com 03/27/2007:

Next Gen Consoles: PS3, Wii, Xbox 360

Meanwhile, despite the scorn dumped upon the beleaguered PlayStation 3, Sony has already shipped over two million units in its first couple months.

Sony, like Microsoft, announces units shipped, not actually sold. This allows both companies to advertise sales numbers based on how many units they can force retailers to accept, not on how many units customers actually buy; both have considerable market power to push excess unsold inventory into the channel.

The Wii sold 3.19 million units by the end of 2006, and is on track to catch up to and outsell the Xbox 360 by this fall. Even the PS3 looks set to pass the 360 this year; Microsoft recently dropped its June 2007 sales estimate from 15 million to 12 million.

Microsoft had announced the 15 million goal in November 2006 to distract attention away from the other consoles that were just being released.  It met its earlier goal of 10 million by the end of 2006 by stuffing the channel with unsold inventory.

That move didn’t help to actually sell units; Microsoft’s SEC filings report that at the beginning of October, the company had only sold 5 million 360s.

That means that half of the world's 360s were sitting in retail shelves this holiday season, and a significant amount still are. That has pressed Microsoft to dramatically slow new shipments until the channel clears out excess inventory.

And the hard-core gamers following this stuff are none too pleased, either. Deceptive tactics like this don't play well with the intensely loyal, deeply devoted high-end crowd, and these sentiments were splashed all over the comments in a recent post at Kotaku concerning the release of the Xbox 360 Elite. So, release a high-end model extension with a jacked-up price in the wake of adverse PR around the channel stuffing issue? Great idea - not.

From Kotaku 03/28/2007:

This is a horrible deal. I just can't believe it, MS what are you doing?

I swear this feels like an attempt to stuff the channel some more and make 360 sales look better than they are. I mean, announce it 4 days before the end of the quarter, book sales of 20 units to 25,000 outlets worldwide, that's 500,000 more "sales" this quarter instead of next.

I'm just so shocked from the idea of raising the price on a console, I can't stand it. I know it brings more functionality, but still. When Sony added ethernet to the PS2 (with the Slim), did they raise the price? When the DS Lite came along with better battery life and a new display, did they raise the price?

The only time I can remember the price of a console going up is when original Xbox went from $150 to $175 right before it died. That didn't go well, does MS want to repeat that?

br549 03/28/07 1:07am

I just don't get it.

The Fall-Out

I'm sure Chris Liddell was just thrilled at having to stand up in front of the investor community and do a little tap dance around the Xbox 360 channel-stuffing issue. But, of course, he wouldn't come out and say that, but use some appropriate Alan Greenspan-like euphemisms to convey the point in more oblique terms.

From Reuters 01/25/2007:

LOS ANGELES, Jan 25 (Reuters) - Microsoft Corp. (MSFT.O: Quote, Profile , Research) on Thursday cut its fiscal 2007 forecast for Xbox 360 video game console shipments, citing unsold inventories in stores, and said it is trying to make sure its gaming division turns a profit in the upcoming fiscal year.

Chief Financial Officer Chris Liddell said Microsoft aims to ship a total of 12 million Xbox 360s by the end of its fiscal year on June 30, down from a previous target of 13 million to 15 million.

"We are just being cautious about the second half. It was always going to be a slow half. We've done very well in the first half. There is a reasonable amount of inventory in the channel," Liddell said in an interview with Reuters.

So what is a "reasonable" amount of inventory in the channel, Chris? Does it have anything to do with shipping (not selling, mind you) 4.4 million units in Q4 2006, with a projected 1.6 million units through the first half of 2007? I guess you guys just had to make that magic 10 million number by the end of 2006, didn't you? But what did it really mean? Not much, in retrospect.

Bottom line: strong companies confident in their strategy and performance don't do these things. They don't have to. What kind of a message does this type of behavior send to the investor community and, more importantly, your customers? Weakness. Fear. Short-term thinking. Nothing that represents a positive signal for a better, brighter tomorrow. Might this also raise questions around Microsoft's pushing of Vista, which hasn't exactly been flying off the shelves and has received more than its complement of negative press? There is something seriously, institutionally wrong with Microsoft. This is not the company I knew in the late 1990s. Get back to basics, boys. Because accounting tricks neither fool Mr. Market nor your customers forever.

The author does not hold a position in the securities of these companies.

Comments

[(br549)]

Update:

http://news.com.com/Microsoft+to+extend+Xbox+360+warranty%2C+take+1+billion+hit/2100-1014_3-6195058.html?tag=nefd.lede

'Microsoft also disclosed Thursday that it failed to reach its target of selling 12 million [ed note- revised down from 13M to 15M] Xbox 360s by the end of its fiscal year on June 30. The company sold 11.6 million units, CFO Chris Liddell said during a conference call.'

That means they only sold 1.6M worldwide since the end of 2006 despite the release of a new model (Elite). This should only surprise those who weren't paying attention to the massive stuffing happening.

My own inspection of local stores shows that the channel is finally drained again and sales to retail should return to normal going forward.

[ktchong]

Microsoft Posts Record Third Quarter Profits, Credits Windows Vista

http://news.yahoo.com/s/cmp/20070427/tc_cmp/199201939

By Paul McDougall
InformationWeek Thu Apr 26, 4:00 PM ET

Despite signs that businesses are lukewarm to Microsoft's Windows Vista, the company on Thursday said it achieved record third quarter profits partly on the strength of sales of the new operating system.
ADVERTISEMENT

For the three months ended March 31, Microsoft said net income rose 65% year-over-year to a record $4.93 billion. The profits were driven by $14.4 billion in sales, a 32% increase over the previous year. Earnings per share jumped 72% to 50 cents.

On average, analysts polled by Thomson Financial expected Microsoft to report per-share earnings of 46 cents.

Microsoft's third quarter saw the consumer launch of Windows Vista at the end of January, as well as the release of the Office 2007 productivity suite. The new products helped drive a 67% increase in sales of the company's client side offerings to $5.27 billion.

Sales of server products rose 15% to $2.75 billion, while revenue from online services increased 11% to $623 million -- a modest number that may provoke some concern in Redmond as Microsoft is trying to match Google's blockbuster growth in Internet-related business.

Looking ahead, Microsoft said it expects to post fourth quarter revenue in the range of $13.1 billion to $13.4 billion and earnings per share of 37 cents to 39 cents. For the full fiscal year 2008, the company is forecasting revenue of between $56.5 billion and $57.5 billion and earnings per share of $1.68 to $1.72.

Microsoft's overall third quarter sales figures include $1.67 billion in deferred revenue from a Windows Vista upgrade program that the company offered prior to Vista's launch.

Despite the strong numbers, signs are emerging that businesses may be slow to embrace Windows Vista over the long term due to concerns about application compatibility and hardware requirements. Thirty percent of businesses surveyed by InformationWeek said they have no plans to upgrade to the new operating system.

[Evan T.]

Please let us know when you write your next article about Sony doing the same thing... way to stir up some old, questionable, news.

[Agel]

Says the Apple fanboy....

F*&^ you, Xbox 360 Rules.

[Richard A.]

Great stuff. But a few things you missed. MSFT said they would channel stuff back before Xmas in order to catch any wondering PS3-less/Wii-less persons. Problem was the plan backfired and nobody wanted a PS3 and everyone wanted a Wii.

Also the channel stuffing is to get rid of all current version of the 360 as quickly as possible, as a newer 360(not the elite) with 60nm chips should be out by this year. The smaller chips allow MSFT to reduce the cost of making them, and/or allow the system to be sold for less.

[Marcos]

This actually does have an effect on gamers, whether they're willing to look past their partisanship or not.

Game developers make decisions based on how many games they think they can sell on a given platform. If a platform is not selling, they will shift to other platforms or not give that platform exclusives. Thus, Sony losing exclusives to MS. It's game developers hedging their bets.

Back to the financial POV, this will have an effect for investors in game developer companies. They will want to be asking "Is the strategy over-commited to a losing system?", "If the platform maker is deceiving us about sales of the platform, how will that affect a game developer's bottom line?", and other appropriate questions.

MS and Sony both are big companies that are not going to just go away. But I am becoming more and more convinced that their day is past and that they don't matter anymore. And this goes back to the cultural and strategic issues Rodger is talking about. A healthy and innovative company doesn't play games with accounting.

I'm a huge Apple fan, with an interest in that company's success (although I've been enjoying some profit taking lately)*. And I've been very concerned about fall out from the options problems. If it comes out that Apple is also channel stuffing, I'd be even more concerned.

*The rest of my retirement account is in gold and silver, buried in my backyard.

[Who will protect the children from themselves?]

Tim D: Good point. I see that it is quite germaine to Roger's discussion. No, seriously, please return to gaming because context is not your strong suit. Playing the voice of reason works if what you state is relevant. Try to be relevant or go back to whatever crap gaming blog linked to Roger's site.

Good use of commas, though. Perhaps there's fight left in you yet. Oh, how you have turned the tides and become the voice of reason! Good on ya, Tim!

Patrick: Honestly, assertions are not the same as fact. You may, oh so mightily, not want your precious game console to suffer the indignity of being left lonely on a warehouse shelf but reality will always intervene. Please, keep using what you believe to be logic and insert that for cold fact. What an odd world to have so much emotion invested in a plastic and silicon box.

And to be clear, Patrick, Roger is being nice to you. In order to have a conversation, the parties must have a common understanding of fact and opinion. Moreso, they must agree that what is being discussed is not only relevant, but factual. That is, not substitute opinion and assertion for evidence or fact. What have you presented, other than your weak belief in what retailers do, as evidence that you are correct? As soon as you realize that a veneer of pseudo-logic and anectdotes don't suffice in a discussion of markets and finances, you will be one-tenth of the way to becoming a self-actualized individual. I hold no hope that this will occur; I think the risk is too great. Call me Shirley but I'd guess balancing a budget is not your strong suit. Numbers are your enemy, right? I mean, you haven't quoted any whereas Roger has. Why the fear?

Really, it's telling that a few have been driven to such distraction over a near-commodity item. Oh, if only the Patricks and Tims of the world could unite in harmony. We'd live in a world of broken game AI, reveling in the bliss of Superman 64.

Oh, joy!

PS Patrick: If you don't see how ridiculous the claim, "Again, stores that sell the bulk of Xbox 360 do not carry those other products," is, you need to step outside. Your local Toys-R-Us is not retail America. And mention the Gamestop empire, and I'll point you to their filings. Better yet, let's ignore MS's launch partner; I think they're pretty big and their name is similar to Best Buy. Wait, it is Best Buy. Again, I'll force you to learn how facts may be found; even on the Internet. Hint: someone already posted the answer = EDGAR.

[Tim D]

...? My point, which you've either obviously missed or purposefully ignored, was, as a person who just wants gaming systems to play video games, how does any of this matter? The point is, none of this matters to anyone who's not out to take MS down. The MS fanboys would make excuses for them, or dispute the facts presented; Anti-MS Fanboys would praise this article as the reason MS should be removed from the world. My point was, most of us gamers (the people in the middle) don't care and simply want great gaming systems to play games on.

[Roger]

Uh, Patrick, the words you are citing are from Blackfriars' Marketing, not me. The Vista linkage is not at all the thrust of my post. I thought it was an interesting point raised by Blackfriars' and that it warranted being shared, but the words are not mine.

[Patrick Nguyen]

"But Microsoft has a nice trump card to play here. They simply say, "Well, we have a big consumer product launch of Windows Vista and Office 2007 coming up on January 30. Those who don't take XBox 360s might have some trouble getting inventory of those products." And given that those products are pretty much guaranteed to sell in the millions of units for the year at price points of hundreds of dollars, most retailers will just take the XBoxes and call it a day."

You completely linked Vista and Office 2007 to the sale of the Xbox. The proof is in your own words.

I'll agree that stores will take on additional inventory for the holidays. That's simply natural because that is where the vast majority of sales are. I won't agree that they're taking on inventory simply to please Microsoft.

Again, stores that sell the bulk of Xbox 360 do not carry those other products. And stores follow the market. If people are buying all Wii's, then stores will shift their attention there. There's not much allegiance. If the Xbox 360 was a losing proposition, you would see the bulk of retailers devoting less and less attention. And we don't see that happening.

[K_G]

The concept that retailers would just tolerate huge numbers of a $300+ product (360's cores and premiums) with microscopic margins to be shoved down their throats just to have the opportunity to sell Vista (albeit with better margins than video game hardware but not by much) is astoundingly weak. Honestly, how much do you think Wal-Mart, Target, EB/Gamestop earn selling MS OS software? Probably something like .00000001% of their total revenues. Do you think that Best Buy is going to take on a couple months worth of 360s just to make sure they have some Vista disks on hand (not that turned out to be much of a problem) on launch day? Now if you had some proof that MS was bulk dumping 360 Premiums on Best Buy for $175 each, you might have something. But for retailers to take on gigantic inventory loads just to get access to Vista packages, no way....I doubt MS could get a xbox 360 end cap fee reduced for favors involving Vista....and it is not like MS wasn't under pressure to make sure Vista was widely available on day one.

[Dave]

I get the point - channel stuffing is bad for investment forecasts and blah blah blah...
Your bias against the big M is pretty obvious, you've dedicated that huge post to nailing MS to the wall for channel stuffing but manage to slip in a little quip acknowledging that Sony does the same thing -"Sony, like Microsoft, announces units shipped, not actually sold. This allows both companies to advertise sales numbers based on how many units they can force retailers to accept, not on how many units customers actually buy; both have considerable market power to push excess unsold inventory into the channel." - shouldn't Sony warrant the same attention?
Microsoft gets hammered everyday for being number one when that is the whole point to business. Are they shrewd - yes. Do they bully the little guy - yes. Are they the most innovative company - not really. Do they make their investors money --YES. Lots of it.
The channel stuffing gripe is goofy, it's called a console war for a reason. The winner will be the one that has units on the shelves with competitive bells and whistles(lets see what the Wii is doing in a year) and a robust library. It seems to me that one man's channel stuffing is another mans market saturation. I know several people who bought 360s simply because they were available - and that counts for something. The units will sell(all 3 of them), gaming is bigger than ever. Seriously, cut MS some slack for once.
Now I'm just ranting like a fanboy.
Proceed to destroy this "syntactically challenged" post - I must go now to worship at the house of Gates.

[Who will protect the children from themselves?]

So is it too late to invoke Godwin's Law, Wurwag? Have the fanboys finally conceded defeat at the alter of immutable financial fact and flung themselves to the depths of zealotry hell?

Surely, this article concerns Windows; solely Windows. No, in no way is the thrust of the blog entry the Xbox 360 (ie, a division of MS's Entertainment Group).

Just as surely as there is a vast and widespread campaign against MS and Windows perpetrated by financial analysts. They seem to be winning; what with MS's ~95% share in the OS market. Fight the good fight! We have already absconded with ~5% of MS's market share. Victory is at hand.

What any of this has to do with Roger's blog entry, I'm not sure.

Tim D, maybe you can throw in more non-sequiturs ('cause games and channel stuffing seem synonymous), more lame attempts at pedantry, and a greater number of ellipses. Ellipses: a sure sign a great and thoughtful mind is at work. A less fallow mind at work, Tim D, couldn't have produced less. Good job posting on the "Intertubes." I'm sure your elementary school is proud! "Look, Timmy can type! Oh, joy!"

And spelling fairy, a more apt eponym I don't think I will read today (you were being ironic, right? 'cause I surely am being sarcastic). Lest you be too embarrased, "spelt" is a past tense and participle of spell. Yup, crazy I know, but our British friends tend to be that way. Don't be too put out, though; grammar and spelling are so easily confused by confused individuals. More so, when foot is held tightly within mouth. Perhaps, Tim D would lend you an ellipsis and you could claim indifference.

Let's reiterate: MS stuffed the retail channel to make the "number;" a number that was produced artificially as a marketing tool. MS didn't want to eat crow. Nope, instead they made retailers. Either you predict demand correctly or you don't. Really, no more sinister than that. Unless, that is, you fear that your purchase is somehow affected by sedentary product sitting on a warehouse shelf. Well, that, and if you are a Stock Investor (yup, caps.)

By all means, cry away. But leave the Serious Internet Business to the more sober-minded. As the wise and esteemed Mr. Garrison stated, "I just don't trust anything that bleeds for five days and doesn't die."

Please, fanboys and girls, stop slobbering here; keep your ravings for your daycare playmates.

[spelling fairy]

Uh, I think the past tense of the word "spell" is "spelled", not "spelt".

Since we're correcting spelling and all...at least try to get your own right!

[Tim D]

BTW, "(ITS SPELT THEIR, NOT THERE)" is incorrect. It should be: (IT'S SPELT THEIR, NOT THERE)

Since we're correcting spelling and all...

[Tim D]

But...I just wanna play games...

[Some English Guy]

Nice article mate, unlike these kids that have 360's replying with ludicrous spelling mistakes and tears at your analysis, I can see what you're trying to say. I own a 360, but I also study international finance at university here in the UK, and it is not unprecedented for companies to pull tricks like this. I don't see why anyone is surprised that MS is trying to pull a fast one, they have every reason to. With the Wii selling like hot cakes, and it’s nearest technological rival (PS3) just released they'll do everything they can to ensure they seem like the best one.
Personally I would have thought that auditors would pick up on shady practices like this as it is deceiving investors.
P.S. Some of you fanboys should really spend less time gaming and more time learning how to spell.
(ITS SPELT THEIR, NOT THERE)

[Roger]

Hi, it's me, the author of the piece. Some of the comments are going a little off the reservation. Here is a comment I put up on Kotaku:
***************
I'm the blogger Information Arbitrage that wrote the article cited by Kotaku. Just a few points of clarification for those who don't know me, my background or my blog:

1. I don't own single stocks. Ever. So I have no vested interest in either writing positively or negatively about a company or its products.
2. I am a not a gamer and do not own a gaming console (though I've played with a few), therefore the label "fanboy" isn't really appropriate when referring to me.
3. I spent nearly two decades on Wall Street in M&A, Derivatives and trading, so know a lot about numbers and corporate strategy but have learned about gaming via online and offline research as well as the blogosphere.
4. I don't get paid for blogging - it is a passion and an honor to be able to share ideas and be part of the online dialogue.

I only write this to answer questions of my motivation and perspective. Which console is "better?" I have no idea. What I care about is corporate strategy and its impact on its product development, sales, and, therefore, stock price. So I am NOT saying the Xbox 360 sucks. I have lots of friends that have it and love it. What I am saying is that Microsoft has been using aggressive accounting practices to make its headline numbers look better than they are. And this pisses me off. And if look at this in the context of its larger strategic missteps, it all kind of signals that the company has deep, deep cultural and strategic issue. THAT is my point.

I hope Kotaku readers find this helpful. Thanks for reading my post.
***************
I also hope some of the commenters on this blog find it helpful as well.

[Wurwag]

This is typical propaganda article. The same shit hits the fan everytime MS has published new windows. People whine everywhere just because it is so cool to hate MS or Windows. After year or 2 everyone uses this new windows without any problems.

Same methods were used already by Hitler. Sadly, in his time it worked.

Just my 2 cents.

[Derek]

I wish that we could have people that would look more at the direction that the gaming industry is taking and discussing what those possibilities mean. For those of you who work in the sales industry of course managers are going to try and sell more that’s why they have THERE JOBS its absolutely ridicules to be condescending of this fact. We live in a capitalistic society where demand is met by supply to suggest that retailers are going to take a product that they cant sell because Microsoft has some evil magic is both ridicules and inaccurate.

Furthermore what bothers me as a gamer is the precedence that the Wii sets. It lets console developers think that all they have to do is release a sup-par gaming system with an interesting gimmick and attach Asian cool to it. One word insulting.

Now to be completely random I am not completely happy with my Xbox experience as I am now on my 2nd Xbox (the last one bit the dust 2 days ago.)

[TDB]

to sum up your little report short and sweet what a load of crap.

[usufructuary]

Patrick and Keith: Never heard of Sunbeam, have either of you? Look up Al Dunlop. Or don't and continue to appear ignorant concerning "channel stuffing."

Voghan: It goes without saying that you have not read what you've written. Point to an example of a retail market where a manufacturer has dumped product into the channel in order to increase future sales of a "superior" product. I know of not a single instance. You are correct: if consumers know a revision of a product is coming, they will tend to hold off purchasing said product (preferring the latest revision). Exactly what are retailers supposed to do with this product, in excess of what they already have in stock? Make forts? Model the Sphinx and other Seven Wonders in the limitless space afforded by their distribution centers?

Please, though, assert away. Having empirical evidence as opposed to anectodal serves well on the Internet. Better yet, ignore an analysis by someone who has frequently stated he has no dog in the race. Really, it doesn't require a Series 7 or MBA to understand Roger's analysis. He has, thoughtfully, written in a way that is accessible. Maybe if he were more obtuse, less of the syntactically challenged commentary would be present?

Last time I checked, what Roger has based his analysis on was publically available on Edgar (along with commentary by services firms). If you don't know what that is, please go on commenting about this and that videogame, or the graphical prowess of this or that piece of hardware. Or better yet, replace MS with M$ in a piece of financial discussion. I'm sure MSFT's investors don't mind the $; though, as Roger articulates, they might not be particularly happy with the arc that $ seems presently to be taking.

PS CCClub: Fascinating jab. Were your feeling's hurt by Roger's analysis? Care to take a stab or is posting to a "blog" above you? Doh!

PPS slugg: Your "academic world" is apparently a closed-circuit television program on local access. Why do we need store managers? Playing that game, what would they know that the retailer's logistics and purchasing department wouldn't know better? Take a deep breath. Type E-D-G-A-R into Google or whatever is your preferred search engine (or alternatively, go directly to the SEC's website). You will find MS's filings. Read them. They contain the mana form heaven you so seek. Prepare yourself, though; your attempt at re-definition will run aground in the harsh world of strict financial and accounting terminology. And, you'll re-read the numbers that Roger has presented to you. Enjoy at your leisure! If the rigor of your proof against Roger's post is evidence of your academic talent, you have the time.

[FrankieSab]

Vista is a dissapointment and XBOX is under siege... This article is not serious, a real joke...

[Rob]

Didn't PS3 target 6 million console sold by the end of march? I guess there doomed too. =/

[slugg]

From the academic world I come from, a "proof", or any paper that tries to prove something, is held to the highest standard of sources and fact-checking. This article shows no evidence of either. It is speculation. As a poster above mentioned, where are the quoted sources or even "anonymous" store managers, etc., backing these claims up? Channel-stuffing refers to the INTENTIONAL pushing of product that probably won't sell-- I believe that Microsoft, if anything, shipped more consoles than demand might have dictated (in retrospect)because they were unsure of demand, thought that the lack of PS3's and Wii's would lead consumers to buy a 360 "instead" as a Christmas gift, etc. And claims that they (MS) held Vista over retailers heads is ludicrous. I heard the same rumor about Sony shipping more PS3's to stores that sold more stand-alone blu-ray players and/or PSP's, and that was pure fiction, as well. It's funny that some people will attack Microsoft just for being on top, with no evidence or rational reasoning to support it.