Microsoft Is Getting Pounded in Gaming Console Fight

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As a company that grew to dominance by selling software, Microsoft (MSFT) has never been much of a presence in the hardware market. Remember the Zune MP3 player or the Kin family of smartphones? Yeah, probably not.

The one consistent exception was its popular gaming console, the Xbox. The current iteration of the venerable machine is being thumped by a longtime rival, however. In the long boxing match between console makers, Microsoft is down at the moment. Should we count it out?

The 4 Is the Best of 3

These days, the console market is essentially a triopoly composed of Microsoft's Xbox line, Sony's (SNE) PlayStation family and -- still part of the game somewhat -- Nintendo's (NTDOY) Wii.

The clear favorite in terms of popularity is Sony's current-generation model, the PlayStation 4. According to industry tracker, so far it's racked up global sales of around 16 million units, with Microsoft's Xbox One and Nintendo's Wii U lagging well behind at 9 million and 8 million, respectively.

Put another way, the PS4's total is nearly that of the Xbox One and Wii U combined.

That's quite a shift in position from the previous generation of consoles, in which Sony's PlayStation 3 (currently at 84.1 million units sold) and Microsoft's Xbox 360 (83.9 million) were neck and neck, but a good distance behind the front-running Wii (101.2 million).

Grabbing the Gamers

At least some of the success of the PlayStation 4 has to do with Sony's strategy for the console. In contrast to the 3 -- initially marketed as an all-around, integrated entertainment device -- the current machine is targeted at gamers.

In addition to the now-expected built-ins for other media (it has a slot for Blu-rays/DVDs, for example), it emphasizes premium graphics and sound in its game. The ambition is clearly to provide the richest, most immersive playing experience possible.

That's in contrast to the Xbox One, a device Microsoft conceived as a versatile living-room utility. It has a port that allows users to connect a cable or satellite box directly to the unit, allowing for easy control through Kinect, the motion-sensing input device available as an option at extra cost.

By the same means, users can access on-demand video services like Netflix (NFLX) and Hulu Plus; all TV/game/VOD options are presented on the machine's OneGuide directory.

But if the long lead in PlayStation 4's sales is any indication, in this market a one-stop entertainment shop has much less appeal than a device that can deliver a high level of playability.

Nintendo, for its part, seems to have chosen the gamer-first path taken by the PlayStation 4. Perhaps a bit too enthusiastically, though, as (unlike its Sony and Microsoft rivals) the Wii U can't play DVDs or Blu-rays and is therefore less useful as a non-gaming device. Additionally, reviews have criticized the machine's lack of third-party games when compared to the PlayStation 4 or Xbox One.

Cut and Sell

Microsoft has the financial and organizational muscle to fight back, however, and lately it's been trying hard to land a blow or two.

In advance of this year's Black Friday shopping frenzy, the company launched a limited-time deal. It cut the price of the Xbox One by $50, adding in a choice of popular games as a "bundle" with or without Kinect. Those offerings include the hot titles "Assassin's Creed: Unity" and Activision Blizzard's (ATVI) "Call of Duty: Advanced Warfare."

$50 is a fairly deep cut; the standard (i.e., without Kinect) model's suggested retail price is $399, the same as that for the PlayStation 4.

The promotion was nicely spread among the nation's top online and offline retailers, including (AMZN), Best Buy (BBY), and Target (TGT).

The sales push seems to have worked. According to a poll conducted by retail research concern InfoScout among roughly 2,000 consumers who bought a gaming item on Black Friday, 53 percent of console buyers took home an Xbox One. This handily beat the PlayStation 4's 31 percent, and was far ahead of the Wii U's 6 percent.

Sprinting Sony

Still, Microsoft has a long road to run for Xbox One sales to catch up with those of PlayStation 4. The fact that it's barely in front of the latest machine from Nintendo -- at this point pretty much considered a has-been in the console wars -- is not particularly encouraging at this stage.

The Black Friday results are certainly cause for optimism, but they put Microsoft in the uncomfortable position of having to compete on price. A great part of the PlayStation 4's success is its positioning as a premium gaming device; in this market, being the discount option is not a good long-term strategy.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Activision Blizzard, and Netflix. The Motley Fool recommends Microsoft. Try any of our Foolish newsletter services free for 30 days. Is your portfolio ready for the new year? Check out our free report on one great stock to buy for 2015 and beyond.
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