PlayStation 2 May Have Won Last Generation’s Sales Battle, but it Lost the Console War

Every fanboy loves the smell of fresh sales numbers in the morning. They are the main weapon the video game hardware manufactures use to belittle their competition in press releases every month.  And I will be the first to admit that I sit with eager anticipation on the Thursday that NPD sales numbers are released for the previous month. When they finally come out I can hardly type up my post fast enough, before I dash off to update the Gamer Investments NPD graphs. It’s all very exciting, because as everyone knows whoever sells the most units will ultimately be declared the winner of that generation’s console war.

Last time around Nintendo’s Gamecube came in dead last, selling 21.74 million systems worldwide. Microsoft, the new recruit in the war, managed to sell over 22 million Xbox systems, putting it in second place. But nobody was able to come even close to touching the sales numbers that Sony put up. Over 120 million PlayStation 2 systems made their way into homes around the globe. As I understand it, part of what helped Sony achieve those amazing sales numbers was that in some smaller countries a PS2 slim was handed out along with the birth certificate to first time parents. Sony was easily the winner of last generation’s console war. Or were they?

You see, even as sexy as sales numbers are they are not a very good indication of who achieved victory in the war. A brief look at a couple of console wars of the past proves that point. The Atari 2600 was crowned the victor of the worlds first console war when they achieved far greater market penetration than the overpowered, and overpriced Intellivision. Of course that victory was short lived because in 1983 everybody ran out of money when the public stopped buying games and the entire industry crashed. More recently, Sega jump started the last generation of console wars by releasing the Dreamcast well ahead of the competition. Sega was the market leader right up until they too ran out of money, and pulled a “France like” retreat from the field of battle.

If all you cared about was sales numbers and you always put your money on the market leader as an Investor you might find yourself with a worthless nest egg. Worse yet, as a gamer you could find yourself with another Dreamcast on your hands. The real winners of the console war are the companies who manage to make enough money to stay in business and shockingly enough that might not always be who you think is in the lead.

As it stands right now we are in just a few short fiscal years into the current console war. Because this generation has the same players as the last (minus Sega who never really competed in the first place) I thought it would be interesting to take a quick look back at the last cycle, and then get caught up to speed on how things are playing out on today’s battlefield.

A few quick note before we jump in the trenches, and for those who want to skip ahead the next three paragraphs contain all my disclaimers. To make these comparisons I tried to level the starting line as even as possible before I stacked up the dollar bills to see who had the biggest pile. The first thing to overcome was the fact that Microsoft uses a different fiscal year than Sony and Nintendo. To work around this I consider the first year of the “war” to have started during the fiscal year the PS2 was released. This gives Sony a small edge because they had two full fiscal years of earnings before the GameCube and Xbox came out. In the current generation Microsoft gets the edge because they had one fiscal year head start on Sony and Nintendo. The comparison ends on March 31, 2008. This date was chosen because it is the latest date that any one of the three companies has released earnings for. The problem here is that because of the difference in Microsoft’s fiscal year it leaves them with one unreported quarter, although after seeing the results I don’t think the missing quarter, no matter how fantastic it is, will change outcome.

Another area in which things get a little hairy is that Microsoft reports in dollars, while Nintendo and Sony (both being based in Japan) report their earnings in yen. To solve this I went to and looked up the historical conversion rates from yen to dollars for the end date of each fiscal year. I then converted all earnings to dollars using the historical rate for each period.

Lastly, to make the comparison as fair as possible I only included the most current reported operating income from the company’s division that handles home console sales. Sony’s Game Division, Microsoft’s Home and Entertainment (later named Entertainment and Devices Division), and Nintendo’s operating income (excluding investment income). The problem here is that these divisions all include sources of income other than that from the sale of home consoles. Sony Game Division has revenue from it’s PSP. Nintendo’s operating income includes the Gameboy and DS. And Microsoft’s Entertainment and Devices Division includes PC games and the Zune among other things. Even with these extra incomes included I still believe that a comparison between the three companies at this level is appropriate. For those that care, detailed operating income numbers and links to the sources used are available at the end of this article.

The graph below depicts the operating income of Sony, Nintendo, and Microsoft for the fiscal years during the previous generation of console wars. The first year takes place when the PlayStation 2 was released (March of 2000). Since Sony’s fiscal year ends on March 31, 2000 this gave them a full two years of earnings, or losses, before Nintendo and Microsoft entered into the picture. Microsoft is missing from year seven because that marks the release of the Xbox 360 and the beginning of the current console war.

The next graph shows the accumulative operating income for the three companies during the same time period.

Shocked? I know I was when I first saw it. The declared winner of the console war only managed to finish in second place in terms of operating income. Meanwhile, Nintendo (who many annalists thought might pull out of the console war after their “official” third place finish) was laughing all the way to the bank to cash their giant $4.5 billion dollar check! And lets not forget Microsoft. The great honor of besting Nintendo at their own game and finishing second place cost Bill Gates $4.2 billion dollars. Sort of makes you wonder who was really thinking about pulling out of the race.

Now that we are up to speed on the last generation, lets take a look at how the current console war is shaping up. Sales wise, Sony’s PlayStation 3 is at the bottom with 12.85 million units sold. Microsoft is once again in the middle of the pack, despite having a year head start, with 19 million systems sold. Nintendo has done the unthinkable and recaptured the top spot by selling 24.45 million Wiis. But by now you know that sales numbers only tell half the story. So lets see how everyone’s operating income has help up over the last three fiscal years.

Microsoft got the year head start this time, but it only proved to be a year of huge losses. Good news is that it looks like things might be turning around for MSFT stockholders. Year number 9 has been good so far with an operating income of $611 million dollars, and there is still one more quarter left to go in their fiscal year. Sony has been struggling with some huge losses for the two fiscal years they have been fighting the war. Meanwhile I hear Nintendo has just finished paving their driveway in solid gold after pulling in more operating income in these last two years than they did the entire generation before.

The graph below shows the accumulated operating income totals so far for the current console war.

Now I have not contacted my Nintendo PR rep. to check on this, but I think it’s safe to say that the big N is not pulling out of the war anytime soon.

Just to throw some additional numbers around I thought it would be interesting to combine the two generations and see how the chips fall. Total console sales numbers would put Sony in the lead with 132.85 million systems sold (120 PS2 + 12.85 PS3). Nintendo comes up in second with 46.19 million systems sold (21.74 GC + 24.45 Wii). Microsoft falls to the bottom of the heap with 41 million systems sold (22 Xbox + 19 Xbox360). But who cares about sales numbers anymore? Lets see some more operating income graphs!

Microsoft launched the original Xbox in November 2001, and since that date they have an accumulated operating loss of almost $6.8 billion dollars. Sony got about $3 billion dollars in operating income by selling over 120 million PS2s. However the last two years of selling the PS3 wiped out those gains and gave them an overall operating loss of $146 million dollars. And that brings us to Nintendo. The last seven fiscal years have been pretty good to the Big N, who pulled in an operating income of almost $11.4 billion dollars.

I understand that there are many gamers who are perfectly happy just playing their games on whatever system they have. They couldn’t care less who makes the most money and who wins the console war, but they should. At some point all three of these companies have to answer to their stockholders. If all they have to show for years of investment is a big negative number there is always the chance that the stockholders will say enough is enough.

The monthly battle for hardware sales numbers is only a small skirmish in a much larger console war. The real winners are the companies that make enough money to continue the fight. From this Investors vantage point two of the three companies in the war have learned a hard lesson over the last 9 years. If you try to play with Mario’s fireball, you’re gonna get burned.


Full disclosure:

The author owns shares of Nintendo (NTDOY.PK), and Microsoft (MSFT). Update to include Sony (SNE)

And now lots of fun calculations and supplemental data!

Yen to Dollar conversion rates provided by

Annual Reports, and Earnings Statements from the following links

Sony Investor Relations Page

Nintendo Investor Relations Page

Microsoft Investor Relations Page

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