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The Failure of the PlayStation 5 and Xbox Series X Release
Introduction
Video game consoles have become a staple product for media consumption in American
culture with 51% of households owning a home gaming console. (Statistica) The industry has
become larger than the film and sports industries combined with an expected $179.9 billion in
revenue in 2020. (MarketWatch) However, unlike film and television which can be seen on any
device with a screen and internet connection, video game consumption is limited by platform
capabilities and exclusive releases. This has been a marketing strategy going all the way back to
the very first home gaming consoles. Pong could only be played on the Magnavox Odyssey, and
if a customer wanted to experience Street Racer, they would have to purchase the Atari 2600
console. In recent years, gaming console market has been narrowed down to three companies
which compete for market share: Nintendo, Sony, and Microsoft. In November 2020, both Sony
and Microsoft released their newest generation of consoles to critical acclaim; however, 5
months after the release of these products, there are still massive shortages and millions of
customers are unable to purchase the new Xbox or PlayStation. From pre-order issues to massive
production and supply chain issues, the release of these new consoles have been some of the
worst of all time. This report will explore the cause of such a disastrous product launch, and how
it compares to similar launches in the past. Additionally, potential supply chain and logistical
solutions to the shortage will be detailed using successful supply chains as an example.
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Background
Nintendo, Sony, Microsoft
Even though the global video game revenue is estimated to be $180 billion for the year
2020, 50% of that revenue comes from mobile gaming. Cell phones are in nearly every person’s
hands across the globe, making the medium much more accessible. The remaining $90 billion of
yearly revenue is split between home consoles and PC gaming. While many companies such as
Google and Amazon have tried to break into the console gaming market, there remains three
manufacturers which dominate market share. Nintendo, one of these companies, produces a
console which is not differentiated by its processing power, but instead by its selection of
exclusive games and the console’s ability to double as a portable device. The newest console
from Nintendo, the Switch, was released in spring 2017 and has led the market since its launch.
The Sony PlayStation series has sold the most total of the consoles since the launch of the
PlayStation 4 in 2013. With critically acclaimed exclusive games, excellent processing power,
and an overall superior marketing strategy, Sony’s product has soundly been more popular than
its Microsoft counterpart. The final manufacturer in the home gaming console market is
Microsoft which produces the Xbox. The Xbox differentiates itself similarly to the PlayStation in
that it creates exclusive games and promises greater processing power; however, due to a long
string of poor performances from exclusive games and confusing marketing campaigns, the
brand is squarely behind that of its competitors.
Demand Patterns
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Unlike many products which have a consistent demand year-round, video game consoles
have an extremely large spike in demand for 2 months of the year, the holidays. Figure 1 below
shows the monthly video games industry sales in the United States. (Statista)
Figure 1
Monthly Video Game Sales
This demand spike creates and enormous amount of pressure on manufacturers and supply
chains in the months leading up to November and December to satisfy demand. Shortages every
year since the early 2000’s has produced news headlines which highlight the difficulty to acquire
video game consoles and where to find them. Both the new Xbox and PlayStation products were
released in November of 2020 to take advantage of the increased demand, but shortages still
occurred. In addition to demand spiking for the holiday season, history has shown that there is an
enormous build-up of demand leading up to a product launch. When the PlayStation 5 console
pre-order went live last year, there were over 1 million orders within 12 hours. The final demand
variable that had a great effect in 2020 was the Covid-19 pandemic. The video game industry
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boomed during the lockdown with many customers unable to experience the real world and
instead turning to a virtual one. All of these factors had a part in the skyrocketing demand for the
new consoles and created an overwhelming number of orders for manufacturers to handle.
Manufacturing Process
The manufacturing process which takes place to produce this technology is one which
requires components from many different companies. While the consoles get shipped from their
respective manufacturing headquarters, assembly currently takes place in China. Components
which are used in the PlayStation 5 and Xbox Series X include: a central processing unit made
by AMD, a graphics chip also from AMD, RAM chips sourced from Samsung and Micron, and a
memory drive made by Western Digital. Similar to the production of a smart phone which
requires often hundreds of suppliers and manufacturers to align in a supply chain, the production
of gaming consoles has a complex and vast supply chain requiring coordination.
What went wrong with PS5 and Xbox?
Sony opened availability of PlayStation 5 pre-orders in September of 2020 and customers
were met with error pages and checkout systems going completely offline. Many customers had
the product removed from their cart while checking out, or simply had to restart the process
multiple times. The date of the pre-order was not clearly conveyed by Sony which led many
retailers to allow customers to purchase consoles earlier than intended and sometimes during the
earlier hours of the morning when many people were sleeping. Many of those who did secure a
pre-order were met with information shortly after that their console would not arrive on the
promised date “due to high demand”. The consoles were later announced to only be available via
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online retailers to prevent the spread of Covid-19 putting even more stress on the retailer
websites and enabling the use of bots to purchase the products. According to a GameStop
director, over 60% of website traffic during the days leading up to the release of the consoles was
robots or scalpers. There was a group of scalpers in the United Kingdom which reportedly had
over 3500 consoles with plans to sell them at a profit. Finally, many unlucky customers opened
their PlayStation 5 box to find bags of cat food or other objects indicating that their product was
stolen in transit.
The Xbox Series X release held similar issues to that of the PlayStation 5. Pre-orders
were completely overwhelmed and within hours almost a million consoles had sold. Microsoft
did not, however, delay promised shipping dates and has seen less of an issue with theft and
product hoarding by scalpers.
The largest issue that both consoles share is that they are nearly unavailable for a
consumer to buy. Online stores and brick and mortar locations have both been sold out of these
products since launch with a space amount restocks. The CFO of Microsoft commented that
supply shortages would continue “as we head into the post-holiday quarter, so Microsoft's Q3,
calendar Q1." (Techradar). Many experts predict that supply will not catch up with demand until
the end of the 2021 calendar year for either console.
Consumers and businesses alike are currently facing a massive shortages and price
increases across a great number of products including video game consoles, cars, and computers.
This phenomenon is caused in large part to the scarcity of semiconductors in the market today.
The problem was initially caused by a temporary shut down on production of these parts due to
the Covid-19 pandemic, however, there has also been a great increase in demand caused by
changing habits and more products needing a central processing unit. Companies like Microsoft
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and Sony are not alone in their struggles against this shortage. Ford and Nissan have slowed
production on their assembly lines to accommodate for the lack of availability of
semiconductors. There does not seem to be an end in sight to these issues. A tech and media
analyst, Neil Campling, commented “There is no sign of supply catching up, or demand
decreasing, while prices are rising across the chain. This will cross over to people in the street.”
(Guardian) With such a widespread problem such as the semiconductor shortage, companies
which have a flexible and efficient supply and logistics plan are having the most success.
What do successful technology supply chains look like?
What could Microsoft and Sony have done to predict such a spike in demand and drop in
component supply? Donald Waters, author of a book titled “Supply Chain Risk Management”,
gives a relevant example when explaining the importance of risk management. Ericsson, a
company which produced cell phones in the early 2000’s, had prided itself on an efficient supply
chain with single sourcing being a key element in this strategy. One day, a thunderstorm started a
small fire in the sole supplier of the company’s radio frequency chips rendering the factory to
only a fraction of its former production rate for almost a year. Ericsson did not have a back-up
supplier at the time and the shortage of parts cause the mobile phone division to lose $1.7 billion.
This example is only a small-scale representation of what has occurred due to the Covid-19
pandemic and the regulations associated with it. Today, not only have the PlayStation 5 and the
Xbox Series X seen shortages in their key components, but also saw a great jump in their
demanded quantity.
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In order to best reduce the risk, Waters goes on to explain that collaboration is the best
course of action. Each member of the supply and logistics chain has a unique position role to
play yet risks to any single member can permeate and expand to create a risk to the entire
production process. While the companies are not immune to the microprocessor shortage,
companies like Apple have not seen nearly as many setbacks as the gaming console
manufacturers. Apple delayed the launch of the iPhone 12 by two months and Samsung is
rumored to be considering a similar approach to the situation. However, when compared to the
estimated 16-month shortage of products of Microsoft and Sony these seem like minor setbacks.
Apple has a famously efficient supply chain which has a goal of cutting inventory,
reducing warehousing space, and to make fostering competition between suppliers. Apple
reached an inventory turnover of 37.2x in September of 2018 meaning that their inventory turned
over every 10 days. (Tradegecko) A high turnover rate is made possible by accurate forecasting
for short term and long-term demand. Apple has been able to accurate predict which
technologies will be in demand 5 years down the road and place an order or find a supplier years
in advance. This is the primary reason that Apple has been able to effectively manufacture their
product through the semiconductor shortage: they placed the order for the parts years ahead of
everyone else, so they stand first in line when suppliers are shipping product. Another important
part of the Apple supply chain efficiency is their limited number of SKUs. A smaller diversity of
product variations makes a smaller array of unique components needed which is an efficiency in
both warehousing and manufacturing.
Both Sony and Microsoft are aligned with Apple in that they have a very limited number
of SKUs to increase manufacturing and warehouse efficiency; however, the demand forecasting
from both companies was very poor. The most recent large console release can be referenced
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when looking for an expected sales value. The PlayStation 4 and Xbox One both released during
the holiday season of 2013 and were reported to have sold 2 million units over an 18 day period
and 2.1 million units over a 14 day period. Since that year, the gaming industry has more than
doubled in total revenue to almost $200 billion. This problem is not unique to 2021 gaming,
articles dating back to 2006 write about the shortages of the then newly released Xbox 360.
Accurate forecasting of component needs and consumer demand should be formulaic for
Microsoft and Sony, as they both have released 5 iterations of consoles experiencing the same
issues each time.
Conclusions
The release of the new home gaming consoles by Microsoft and Sony have created a
negative view of the products before they are even in many customers’ hands. In another 5 to 7
years, it can be expected that Nintendo, Sony, and Microsoft will all release new gaming
hardware. A smooth product launch by any of these companies would need to have accurate
forecasting of demand, a risk adverse supply chain philosophy, and a more effective system for
ordering and pre-ordering products.
Accurate forecasting of demand is one of the most difficult aspects to running an efficient
supply chain. There are many methods to predict consumer demand such as moving average and
exponential smoothing, however, when predicting demand of a product in strict competition with
another similar product these methods tend to be inaccurate. A similar industry which has the
potential for volatile demand is tourism. In a journal about a deep learning approach to demand
forecasting, Yishuo Zhang explains that a myriad of inputs go into an AI software in order for it
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to produce a prediction. These factors can include Google search trends, weather data, social
media mentions and the historical demand during a similar time of year. Factors like these must
be accounted for when releasing any product, especially one which is traditionally of such high
demand.
A risk adverse supply chain is one which avoids disruption to the supply and is able to
maintain a flow of material through difficult circumstances. As mentioned early, both Sony and
Microsoft source their graphics processing units and central processing units from AMD. While
it could be difficult, looking toward other manufacturers such as Intel and Nvidia as secondary
suppliers would allow for a more integrated supply chain for key components to be used in the
product. No company is able to predict such a thing as the Covid-19 pandemic, however, steps
may be taken in manufacturing in the future to ensure that production levels do not have to drop
to zero should workers be in limited supply.
The Covid-19 pandemic has not only changed how society works, but how shopping and
commerce is done. With the recommendation from the CDC to remain at home, that is how most
of the shopping happens today. Many brick and mortar stores had to close due to Covid-19 safety
regulations causing even more customers to head online to shop for products. Some of the most
frustrating online buying experiences for many consumers are purchases of limited products.
Releases of limited sneakers or clothing items are often a topic of outrage for many, as they are
rife with scalpers and robots which can overwhelm the entries of just one consumer. A similar
problem occurred with the release of the Xbox Series X and the PlayStation 5 with thousands of
robots and scalpers instantly buying up products when they are restocked. This is why both Sony
and Microsoft should require retailers which sell their products online to employ a specialized
bot protection software. As quickly as new bots are being developed to behave as a human does,
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there is technology to counteract malicious purchases. (DataDome) The launch of the next
consoles will need to oppose scalpers in force to maintain a stable stock and keep customers
satisfied.
Customers also experienced great disappointment when promised a day of delivery
months in advance and were later told that the promised date would not be kept. Many
technology releases will employ a rolling release date to reduce the pressure to deliver on a
single day. Setting rounds of pre-orders which would deliver the product a few weeks apart
would create a staggered release and reduce the strain on e-commerce sites like Walmart and
Target. This release method would also give a better idea of demand quantity as a greater
number of customers will be able to submit a payment for the product.
The backlash that Microsoft and Sony have received from the release of the Xbox Series
X and PlayStation 5 has been of great detriment to the respective companies; however, most of
the criticism is about the lack of availability of their products and not the products themselves.
This shows the importance of a sound supply chain and logistics strategy. Strategic decisions
made about the manufacturing and logistics of the release for these products are cause for a PR
disaster. Logistics has always had a hand in business as the transfer of goods and services is
equally if not more important than the goods and services themselves. However, due to the
Covid-19 pandemic, business is being done over the internet at a rate never before seen making
the delivery of business an instrumental part in the growth of industry.
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https://www.mordorintelligence.com/industry-reports/global-games-market.
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Guardian News and Media. (2021, March 21). Global shortage in computer chips 'reaches crisis
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