Myth-Busting the Xbox 360 Shortage

Ah, the holiday season, when you can’t open a newspaper or magazine without reading about the hot new item that has people lined up around the block. This year, it’s Microsoft and its Xbox 360 making headlines—but there’s more to this story than usual.

As if Microsoft isn’t already enough of a lightning rod, the company is now under fire for allegedly misjudging demand, failing in the supply chain, or possibly even intentionally creating a shortage for the new video game system. Although Microsoft remains tightlipped on the matter, a more thorough review of recent history, paired with the realities of the high-tech manufacturing supply and demand chain, expose some slightly less sinister possibilities.

New product launch realities:
When building a sales forecast, one of the most rudimentary tools available to a manufacturer is past sales performance. In this case, the launch of a new gaming platform is certainly not unprecedented.

The 2001 introduction of the original Xbox saw 1.1 million boxes shipped within North America in the first three weeks, rising to 1.4 million in the next three weeks. Rival Sony received tons of bad press back in 2000 when it could only manufacture 500,000 PlayStation 2 units before it ran into component supply problems.

By comparison, this year’s launch of Xbox 360 saw between 300,000 and 400,000 units shipped just after the November 22 launch, and roughly 300,000 more as of December 20. Another 400,000 units have gone to Europe and Japan, which tallies up to about 1.1 million boxes in just more than four weeks.

Considering the greater complexity of the new-generation consoles, the production rate seems well in line with previous launches, and looks downright spectacular compared to PS2.

Reason No. 1 for the shortages:
The most likely reason North America is seeing a heightened shortage this year is twofold. First, unlike previous game console launches, there is no other competing product launching in unison to help distribute demand. The original Xbox faced the Nintendo GameCube launch within three days of its own.

Microsoft’s shipment of 400,000 units abroad this time around clearly shows that it has put a priority on seeding the European and Japanese markets ahead of Sony’s PlayStation 3 launch next year. In Japan, where Sony has typically done well, demand for the Xbox 360 has been slower than anticipated, perhaps the greatest flaw in demand planning on Microsoft’s part.

Reason No. 2:
The second half of the equation unfolds on the supply chain side of the business. Many have criticized Microsoft for failing to meet demand immediately upon the November 22 launch. However, these game consoles are not as simple to manufacture as a Cabbage Patch Kid or Hula-Hoop.

The only way Microsoft could fully meet demand on the launch date would be to manufacture millions of units months in advance and warehouse them. If we are to believe reports that the units are currently being sold at a loss, this would mean building up $1.2B in inventory prior to launch.

In light of that, it seems that the company’s goal of shipping three million units in a 90-day period is less of a poor reaction to demand, but more a solution to the limitations of complex production. One could cite basic economic principles to argue that the supply and demand curve warrants a higher price tag, but over time the boxes will become more efficient to produce. Like the razor blade strategy, the long-term revenue is all in the cartridges.

Myth busted:
The bottom line is that the higher complexity of game console manufacturing and the poor economics behind stockpiling pre-release inventory means that we will probably always see this type of phenomenon with hot, high-tech gadgets. It has happened with every previous major launch of game platforms, as well as with virtually every iPod release. So, until somebody figures out how to speed up the rate of manufacturing, don’t be surprised if you hear this same story again the next time around.