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X-Box sales losing Momentum

LOS ANGELES (Reuters) Microsoft's Xbox video game console may fall short of sales expectations, two Wall Street analysts said Tuesday, citing slowing output by the firm that makes the console for the software giant.

But a near-term slowdown would not derail Microsoft's attempt to take on Sony's PlayStation 2 and Nintendo's GameCube in the fast-growing video game industry, said other analysts who cover Microsoft.

The note of caution came from two analysts who follow Flextronics International, a contract electronics manufacturer who makes the black-and-green Xbox in a deal analysts have said could be worth $1 billion a year.

"Xbox momentum is slowing from an easy start," Banc of America Securities analyst Paul Fox wrote in a note to clients Tuesday.

Output of the Xbox by Flextronics had slowed recently because it appeared that sales of the $299 machine were weaker than expected, said another analyst, Chris Whitmore of Deutsche Banc Alex. Brown.

The Xbox debuted in the United States last November, in Japan in February and in Europe in March. Flextronics makes it for all three regions in factories in Mexico and Hungary.

Microsoft loses money on each Xbox, a tactic that keeps prices down and helps sell more consoles. Profits come on sales of high-margin games, though analysts expect it will take years before Microsoft makes any money on the Xbox.

Industry entering slow season

But production has slowed and Microsoft's target of shipping 4.5 million to 6 million units worldwide by June 30, the end of the software giant's fiscal year, appeared to be in jeopardy, the analysts said.

The slowdown also hurts Flextronics, which Whitmore said books revenue only as the machines leave the production floor.

The new reports come on the heels of a regular global video game survey by Goldman Sachs last week that said U.S. retailers showed a "surprisingly clear" preference for Sony's PlayStation 2 over the Xbox.

A Microsoft spokesman declined to discuss specific numbers, citing the company's earnings report due next week, but said sales are expected to track "usual business cycles" and that the company is happy with sales so far.

"This time of year is historically a slower time for console and game sales, so we're watching the market carefully and taking slight measures to best manage supply," said James Bernard, a spokesman for Xbox.

While Microsoft has claimed strong sales for the Xbox in the United States, at least in its initial holiday season, the company has admitted it is not meeting expectations in Japan, a market where it was expected to have difficulty.

"Japan is going well on the software side and probably is a little behind where we want to be on the hardware side," Xbox director Robbie Bach told Reuters last week.

Microsoft seen sticking by Xbox

Microsoft analysts were unconcerned with the new reports, saying the U.S. market still appeared strong and that this year's holiday season would be far more important.

"Frankly I don't think investors are that concerned," said Prudential analyst John McPeake. "Most of the concern is around the Japanese market, and that was always going to be the toughest market. As the games come out it will get more traction."

Moreover, Microsoft is known for its tenacity when entering new markets, and its cash hoard of $38 billion gives it the staying power to ride out any rough spots.

"Even if sales don't meet expectations, I think as long as they are close and as long as they have a reasonable installed base one year after the Xbox has launched, it has a chance of being a successful product," said Matt Rosoff, an analyst with Directions on Microsoft, a consultancy that specializes in the company and its products.

"They are not going to abandon the Xbox after one year or two years, or maybe even five years," Rosoff said.

from the USAToday.com


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