Analyst lowers 360 sales projections

UBS ratchets down 2005 estimates by 1 million units but says Microsoft, publishers, and retailers won't feel the pinch.

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In a memo sent to investors this morning, Mike Wallace of UBS Securities recast his estimates of Xbox 360 units that will make it on to retailer shelves this holiday season. Wallace adjusted his estimates southward by almost 50 percent, from a previously stated 2.5 million units to 1.5 million units. Though the drop might seem shocking to some, Wallace says such developments are par for the course. "This is not surprising, nor out of the ordinary," Wallace said. "Hardware launches are always tough and usually come in below initial expectations."

By region, Wallace sees 350,000-400,000 units shipping in North America on its November 22 launch date. Over the course of the remaining five weeks of 2005, he sees the North American market peaking at a total of 800,000-1 million units on store shelves.

In the other markets, Wallace expects around 400,000-500,000 units to be in the retail channel in Europe when the Xbox 360 goes on sale on December 2. In Japan, where the console debuts on December 10, he foresees an initial batch of about 100,000-200,000 units. Wallace predicted no significant postlaunch influx of consoles in either market by year's end.

How will fewer 360s on shelves affect Microsoft and third-party publishers? It won't, says Wallace. In fact, Wallace suggests the lack of 360s this year will inevitably mean a better holiday season for the current-gen systems, including the original Xbox, leading in to a more gradual and positive first quarter for 2006. "Existing platforms should make or break numbers this year," said Wallace.

Also, with fewer 360s to sell, Microsoft will actually report better earnings numbers, according to Wallace. Given the estimated $65-$90 loss per unit, the company will actually reduce its losses for the last calendar quarter by selling less hardware, he said.

Looking toward the January-March quarter next year, Wallace predicted an additional 500,000 units per month for the US market, "meaning that the March quarter will be more meaningful for Xbox 360 sales ... which could actually help the market, [giving] consumers a reason to get into stores post-Christmas."

Overall, Wallace was all but blasé about the adjustment. "Is any of this a big deal? No." He added the market impact from the lower numbers will be "minimal." "MSFT will sell all the units available for the next few months, so a lower number only has a modest impact on software sales in Q4," he said. "500,000 less hardware units in the US with a tie ratio of 2:1 (the normal tie ratio for a new platform) means that about 1 million software units and $60 million in retail sales will not sell through this year."

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