Insights_

09/09/2020   Piers Harding-Rolls
Microsoft strengthens its console market competitive positioning with Xbox Series S move

Microsoft has confirmed a cheaper, less powerful next-gen console which it will launch in November alongside the Xbox Series X. Xbox Series S will be priced at $299/£249 and have many of the next-gen attributes of the already announced Xbox Series X, such as a custom SSD and support for real time ray tracing but will overall be much less powerful and only capable of natively running games at quad HD upscaled to 4K. It will also be digital only with no Blu-ray drive. Eventually, if Microsoft upgrades its xCloud cloud gaming servers, Xbox Series S may have access to improved native resolutions through streaming and Xbox Game Pass Ultimate, but we do not expect this until at least 2022.  

There is no doubt that Microsoft is better positioned to compete with Sony at the upcoming launch of the latest consoles compared to the Xbox One and PS4 generation. The company is more laser focused on the console gamer, will launch Xbox Series X and Xbox Series S at tiered price points to reach different types of console gamer, is expected to launch Xbox Series X at a similar price point to PS5, has invested a lot in its first-party studio capability and has been successful in building Xbox Game Pass into the biggest games content subscription service globally at more than 10 million users.

Aside from a comparison of console content exclusives, the following are Microsoft’s key competitive strengths versus Sony:

Xbox Game Pass which includes day-and-date new releases from Microsoft studios and to which the company has committed to release a new first-party game every quarter. The inclusion of new releases is distinct from Sony’s own PlayStation Now subscription service and a key competitive differentiator. Xbox Game Pass has become increasingly important to Microsoft’s competitive positioning and will play an expanded role next-gen including alongside a shift into cloud gaming through Game Pass Ultimate. Sony does not currently have an adequate competitive response to Xbox Game Pass. The digital-only nature of Xbox Series S means it is a strong fit for services like Xbox Game Pass.

Xbox All Access is coming to more markets to smooth adoption of Xbox Series S/X during a time of economic turmoil. While many retailers offer options to buy high ticket electronics on credit paid off commonly over 6-18 months, Microsoft’s Xbox All Access program charges 0% interest, includes a bundling of console and Xbox Game Pass Ultimate and extends to 24 months making the payments reasonable. It also offers an upgrade path to Xbox Series S/X for existing Xbox All Access customers that bought into the program for the Xbox One.

A multi-tiered next-gen console strategy from Microsoft will add strength to its competitive positioning. With its existing products in the market – Xbox One S, Xbox One X, and Xbox One All Digital Edition – paired together with cross-generational play for most if not all content, Microsoft already has an active multi-tiered product strategy, so this approach is not a departure.

However, releasing two quite different products at the start of a generation is a significant change. It results in a more complex selling and marketing proposition, alongside all the subscription services and All Access offers, but an expected improvement in market share is a reasonable price to pay. The Xbox Series S at $299 sits below the pricing of the existing Xbox One X, so we expect this product to be removed from the line-up and Series S will offer more value to the consumer while also reducing Microsoft’s manufacturing cost base. There is still a role for a sub $199 Xbox One S product which will play most upcoming games anyway and will give Microsoft maximum flexibility when addressing a wide audience of potential console gamers. This does however leave Microsoft with less flexibility to inject sales momentum mid-cycle, but as the console market is all about intial momentum and keeping it, it is the right choice to load all its competitive capability at the front end of the cycle.

What will Xbox Series S’ impact be? 

In terms of the outlook for next-gen Xbox sales, the key assumptions are as follows:

  • Some sales of Xbox Series X will drop to the cheaper Xbox Series S
  • A portion of Xbox One sales will transfer to Xbox Series S and result in a more rapid transition to next-gen (and pull forward some sales from later in the cycle)
  • Some more Xbox One S/X users will be convinced to upgrade at this lower price point compared to the Xbox Series X (expected at $499)

This impact results in a changed global next-gen sell-through forecast that looks like this: 

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