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This column was originally published on RealMoney on Feb. 9 at 8:34 a.m. EST. It's being republished as a bonus for readers.

On Wednesday, I wrote about


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troubles on several fronts, beginning with the Xbox 360.

If the Xbox 360 were to fail, the unraveling would look exactly like what we're seeing: hot demand but thin production volumes in North America and Europe; a dismal, instant flop in Japan; resurgence in new portable game consoles sucking some oxygen out of the software market;



new megamachine most likely still on track to launch by June.

Chances are, when the Xbox 360 starts showing signs of real weakness -- by the fourth quarter of 2006 -- Microsoft will do something spectacularly desperate, possibly launching a portable game console of its own.

The Home and Entertainment unit brought in only 13% of Microsoft's total revenue in the latest quarter, so it's hardly a make-or-break unit for the company. But if it turns into a persistent source of losses, Microsoft's long-term outlook will be that much dimmer.

And despite half a decade of hype, the Mobile and Embedded Devices division generated barely $100 million in revenue in the latest quarter. The situation is compounded by the persistent weakness of Windows as a mobile-phone operating system; 2006 seems like the year Symbian finally will knock out Windows as a serious contender in the smartphone market.

The console market is facing a major realignment because of the successful entry of Sony PSP into the portable console race. The Nintendo DS and the Sony PSP have been the smash hits of the past 16 months. Both are topping 12 million units in sales, which is moderately surprising -- the portable console market has never seen two rival products thriving at these volume levels.

This puts considerable pressure on tabletop consoles.

Industry analysts tend to regard portable devices as a quirky sideshow with little relevance to the "real" console market. But it seems that the portable boom is already cannibalizing the tabletop market on the software side, and the situation may become even more pronounced if consumers become confused about the long-term outcome of the Xbox 360-PlayStation 3 race.

Recent warnings from


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Electronic Arts


imply that sales of expensive Xbox and PlayStation 2 games are faltering. The hot sales of the Sony PSP and Nintendo DS may well be undermining the software market for older tabletop consoles just as consumers begin to focus on the upcoming Xbox 360 vs. PS3 battle.

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Sony's PSP isn't doing too well on the game software front, but its movie and TV content sales have surprised the industry. At the same time, sales of Nintendo DS games have been surging. A string of million-unit hits from Japan is arriving in Western markets and showing surprising traction.

Animal Crossing


Mario Kart





-- titles that were regarded as too juvenile and cute to connect with the mass market -- are doing better than expected in America.

Part of the equation here is price:


at $30 and the DS console for less than $130 make them plausible impulse purchases. Part of the buzz around

Mario Kart


Animal Crossing

comes from Wi-Fi features.

Diversification Failures

It's a grim environment for Microsoft, which is also reeling from a series of new setbacks in the mobile-phone market.



Q, the flagship model of the new version of mobile Windows, seems to be plagued by a series of new delays. The


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launch of the Q is possibly slipping to the second quarter of 2006, and the European debut is suddenly hazy.




just announced a stunning new Symbian model, expanding its smartphone lineup notably. The new Sony Ericsson M-600 happens to be a direct rival to the Q and trumps it in weight, W-CDMA connectivity and display quality. Because the M-600 ships in the second quarter of 2006, it is now poised to beat the Q to European and Asian markets.

The lack of 3G support in the Q and the new influx of rival 3G-enabled Symbian enterprise phones will mean that many GSM/W-CDMA operators are likely to yank the Q from their main spring promotions. Once again, a Microsoft smartphone is basically facing a delay into semi-obsolescence. Symbian is poised to expand its 10-to-1 volume advantage over Windows to something more like 20-to-1 by the end of 2006 -- a lethal threat to the long-term viability of Windows in the phone market.

Microsoft's attempt to break free from the tabletop is now faltering on three fronts: against Sony/Nintendo in gaming, Apple in music, and the Symbian alliance in mobile telephony. Microsoft has failed to nail a succession of key changes in consumer electronics: The emergence of an 80 million- to 100 million-unit smartphone market; the emergence of a 60 million- to 80 million-unit portable music player and associated distribution market; and the emergence of a 30 million- to 50 million-unit portable video-game console market. And these are unit numbers that are likely for just 2006.

This matters, because Microsoft obviously


try to engage all of these new markets; it just mismanaged its entry or failed to find the right hardware partners in each case. One failure is perfectly natural, two is understandable and three is a trend. This old dog ain't too nimble with new tricks.

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Tero Kuittinen is a senior product specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. At the time of publication, Kuittinen had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback;

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