When it comes to shipping video game consoles to gamers on time, "I don't think the management of the supply chain is their core competency," R.W. Baird analyst Colin Sebastian told NBC News.
We've all heard the story: the long lines of Apple fans lining up outside the store, breathlessly awaiting that first chance to get their hands on the new iPhone. But when it comes to video game consoles, the throngs of die-hard gamers are all the more feverish simply because the wait has been longer, the anticipation higher.
Despite the fact that the video game industry is now on its eighth generation of console hardware, it still seems like every new release of an Xbox or PlayStation is, on some level, a disaster. Pre-order quotas are quickly maxed out, and impatient gamers turn to eBay or (God forbid) Craigslist to pay an extra premium just to get their gadget of choice in time for the holiday season.
Even the Wii U, which Nintendo itself has admitted isn't selling all that well, faced supply setbacks when it launched last year. And it doesn't look like things are shaping up to be any different for the $499 Xbox One or the $399 PlayStation 4 — both consoles received record-breaking pre-orders, and the gaming press has already started warning of possible shortages after Robert W. Baird analyst Colin Sebastian predicted as much in an interview with GameSpot.
Judging by the excitement for the consoles, the demand is clearly there. So why is meeting it with a proper supply so tricky? Sebastian told NBC News that with all the moving parts that Sony and Microsoft have to coordinate in time for a tight holiday release window, things get, well, "complex."
"There's a lot of gyration in the supply chain," Sebastian said. "It's hard to get everything together at the same time."
What, exactly, is "gyration in the supply chain"?
Michael Pachter, an analyst at Wedbush Securities, explained. "The manufacturers have to plan production for two or three years out, so they tend to plan to make 10 (million) to 12 million consoles annually at the outset, and adjust upward or downward based on demand," Pachter told NBC News in an email. "They probably haven’t commenced manufacture yet, and will probably do so in mid-August — notice we haven’t seen leaked pictures from the assembly line yet. That means around 1 million per month, and it takes time to ship to retail. We’ll probably get 2 – 3 million of each globally at retail by year-end."
"If you think demand will exceed that figure, there will be a shortage," Pachter added. With major retailers like Best Buy, Amazon and GameStop vying for more launch units, "allocations are especially tough, because everyone wants as many as they can get."
Piers Harding-Rolls, head of games at economic research firm IHS Global Insight, agreed, adding that the international dimension of global launch only makes organizing the supply chain all the more difficult.
"All console companies aim to have a smooth launch with as few 'lumps' in the distribution chain as possible," Harding-Rolls wrote in an email to NBC News. "Distribution smoothness depends on a number of factors: amount of total inventory (how quickly factories can build products that don't fall apart), regional allocations (how many sales are expected across major sales territories) and sales channel negotiations (agreements with retail stores)."
When a product launches across multiple regions at the same time, he said, consumer electronics companies "are more likely to get 'lumpy' distribution which will lead to shortages within specific channels because it is a more complex go-to-market process." When a shortage occurs in one region or another, "the speed at which manufacturers can respond to squeezed supply depends on willingness to spend on quicker shipments and availability of additional product."
Jordan Selburn of IHS told NBC News that this kind of bottleneck dramatically hampered Sony's initial launch of the PlayStation 3 in 2006 because the console's Blu-ray was built with blue laser diodes, a "brand-new piece of tech that just ran into a shortage." This time around, however, Selburn says that the technology inside both of the next-gen systems isn't groundbreaking enough to make production as difficult or time-consuming.
"They're not encountering fundamental questions about: can it be built?" Selburn said of Sony and Microsoft. As a result, he thinks any real difference in initial sales will come down to how gamers react to software policies like Microsoft's controversial online requirements — an issue that Selburn estimates gives Sony twice the demand for the PlayStation 4 than what Microsoft now has for the Xbox One.
The 'Apple effect'?
But that doesn't mean there won't still be impatient gamers this holiday season, Melissa Otto, an analyst at TIAA-CREF, told NBC News. While all the sound and fury about having to wait a few extra weeks for a console might frustrate the individual consumer, Otto said that, from a broader perspective, it's actually great marketing.
"I'm not sure it's something they struggle with," Otto said of console manufacturers supplying enough units. "I would argue that it's actually something they create. Whenever a new console cycle begins, these companies have a tendency to limit the supply to gauge the demand and create buzz. And then once the buzz starts and the momentum kicks up, the supply continues to be limited which magnifies the value of the actual product."
It's easy to see what Otto means. Neither Sony nor Microsoft would comment specifically about their current launch plans, but both companies told NBC News that demand for their respective consoles has been strong.
"Consumer reaction to PS4 has been phenomenal," a representative from Sony told NBC News in a statement. "We will try our best to meet all demand needs, but it’s very possible that demand will outstrip supply at launch." A spokesperson for Microsoft, meanwhile, wrote in an e-mailed statement that "we are pleased with the enthusiasm consumers have shown as Xbox One preorders are trending ahead of Xbox 360 during the same time period and have sold out at most major U.S. retailers."
Other analysts agreed with Otto's assessment that Sony and Microsoft might be aiming for what she called "the Apple effect" in their statements about demand outstripping supply. But Sebastian, who still estimates that Microsoft is better equipped to turn out as many as two times more Xbox One units than Sony is prepared to release of the PlayStation 4, said that the long life-cycle of these products has always made their launches a bit more bumbling.
"I don't think the management of the supply chain is their core competency," Sebastian said.
Yannick LeJacq is a contributing writer for NBC News who has also covered technology and games for Kill Screen, The Wall Street Journal and The Atlantic. You can follow him on Twitter at @YannickLeJacq and reach him by email at: Yannick.LeJacq@nbcuni.com.
First published July 27 2013, 4:33 AM