Analysis: The Xbox 360 Shortage

Production for the Xbox operation is centered at two factory sites in southern China.  There are approximately 1700 parts to the 360, furnished by about 250 suppliers.  The finished machines start out from Hong Kong, but all the U.S. Xbox 360’s go through a central distribution point in Memphis, Tennessee.  The custom-made processor, by IBM, can only be acquired from two different factories.  It’s estimated that each $399 Xbox 360 costs $526 in material alone.

Analyst Rick Sherlund of Goldman Sachs estimates production capacity for the 360 to currently be about 600,000 to 800,000, which would be approximately 2 millions units shipped by end of 1st quarter 2006.  Microsoft concedes only production hold-ups over a 10-day period in the fall, due to testing glitches at one of the facilities.  They also acknowledge the opening of a third production facility in China, which they claim will help alleviate shortages. 

The other wild card in demand was the unprecedented simultaneous worldwide launch.  The Dreamcast launched a full year early in Japan, and the Gamecube, PS2, and original Xbox staggered their releases as well.   The Xbox 360 U.S. launch was unique, and also complicated though, because of the distribution concentration in Best Buy and Gamestop / EB Games.  With barely enough U.S. supply to cover presales, the prerelease push by these two dominant retailing forces meant other retailers were left standing without, for the most part.  There were unconfirmed reports from some retailers that even their pre-orders have not been satisfied from Microsoft thus far.  These facts, plus accusations from consumers of overaggressive bundling (3+ games, plus additional accessories, and a $399 price tag turning into $600+), may cause a backlash against the Xbox 360 or cause consumers to choose to wait for the launch of the PS3 later this year.

Don’t get me wrong I am not bashing the Xbox 360, I love the machine, but I am just trying to explain the shortage and give you, the reader, all the facts of the case on both sides of the fence.