Xbox 360 cannibalizing XBox more than Sony game sales

[Comparison of video games sales in dollars before and after XBox 360 introduction; original analysis and data available at the Seattle Post Intelligencer.]

Todd Bishop over at the Seattle Post Intelligencer has a fascinating analysis of the Xbox 360 and the game market, nine months later, based upon third-party games sales data. One of his observations is particularly interesting:

You can literally see the user base shifting from the original Xbox to the Xbox 360, with the two Microsoft consoles basically splitting the sales volume that was associated with the original Xbox in the previous year. This appears to support the conventional wisdom that much of the Xbox 360's initial market would come from existing Xbox users who upgrade to the new console. The question here is how many new gamers and PS2 users the Xbox 360 will be able to attract in the long run.

Now, we can't read too much into this analysis, since it excludes sales of games from the console manufacturers (although Todd is looking for the data to fix that). But looking at the spreadsheet, one point becomes fairly clear: XBox 360 games sales growth is mostly coming at the expense of XBox game sales, not from Playstation game sales. In fact, over the past nine months, XBox game revenue from both XBox 360 and XBox sales from third parties has only increased $113 million. That's a pretty small revenue increase, given that Microsoft's XBox division lost more than $1.5 billion during that same nine months. And by the way, Microsoft views this effort as being so successful, that it has tapped the XBox leaders for its Zune entry into digital music as well.

I think these results may illustrate a marketing myth. The myth is that a company with deep pockets can buy its way into a market and later dominate it through market share. The problem is that even deep pockets eventually become empty, and then the business has to actually make profits. But a business built on subsidization rarely has the marketing or the management culture to actually turn a profit, resulting in losses until the shareholders pull the plug.

As Sony launches its Playstation 3, Microsoft will head down this path by responding with XBox price cuts to "hold onto its market share gains." But the real test of those market share gains will be whether they actually create profits for the company. Based upon the this initial data, those gains may actually be losses.

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