http://www.informationarbitrage.com/2007/04/microsoft_phili.html
Microsoft, Channel Stuffing and Desperation: Old Tricks for a New Era Microsoft is in trouble, and this ain't no joke. Vista is a disappointment. Search is weak. Xbox is under siege from the Wii. Paul Graham recently posted that "Microsoft is Dead." Paul might have a taste for the dramatic but you can see where he is coming from. It hasn't been a particularly good twelve months for Ballmer's Boys, and recent news isn't much better. Further, it has come to light that Microsoft, in an effort to embellish its perceived momentum in gaming and its window into family rooms the world over, has been using the oldest and shabbiest of retailer tricks to juice sales figures for the Xbox 360: channel stuffing. No, you say, Microsoft couldn't be doing such a thing. This is a relic of old-line consumer products companies like Philip Morris, or fraudsters like Miniscribe who literally shipped bricks in lieu of disk drives to hit sales targets. Well, the Internet has gotten pretty heated up on this issue, particularly as the inevitable boom-bust results of this tactic are now coming home to roost. Microsoft management is being forced to walk down volume guidance, shining a bright light on the year-end spike in shipments that made the numbers look good - for a while. But that game is over. The jig is up, Softy. So whaddya gonna do now?
Why Stuff the Channel?
Because you are feeling desperate. But why? Xbox is doing pretty well, right? Well, not good enough, and giving ground fast to the Wii. Let's consider what's gone on in gaming consoles over the last two generations. Last go around Sony got the jump on Microsoft and Nintendo with the PS2, beating the original Xbox and Gamecube consoles to market by about a year. The result: Sony kicked some serious butt, selling around 100 million units to 20-25 million units each of the Microsoft and Nintendo offerings. So Microsoft thinks to itself "Ha, I'm going to pull a Sony and get a jump on these bastards for our nextgen console." So it releases Xbox 360 in November/December 2005 versus November 2006 for Sony and Nintendo, a full year jump on the competition. The results to date: 9.7 million Xbox 360; 6.6 million Wii; and 3.1 million PS3. So, the Wii has achieved around 2/3 of Xbox 360s sales volume after only four months, and this after conceding a 12 month head start. From Microsoft's perspective, this can't feel too good or bode well for the future.
Further, both empirical and anecdotal evidence point to increasing interest and resources being devoted to the manufacture of the Wii, with some of those resources coming directly out of those currently associated with the Xbox 360.
From DigiTimes03/26/2007:
Wistron is likely to gradually discontinue the production of Xbox 360 games consoles for Microsoft in 2008, partly due to declining profits on production of the consoles and partly on market reports stating that Microsoft has added Celestica to the list of its suppliers, according to a March 26th Chinese-language Economic Daily News (EDN) report.
From DigiTimes03/28/2007:
In order to meet demand for Wii, which presently far outstrips supply, Nintendo intends to find another manufacturer to bolster production of the console, currently being handled solely by Foxconn Precision Compotents (FPC). New manufacturing partners under consideration include Asustek Computer, Compal Electronics, Inventec and Wistron, which are all eager to land a contract with the Japanese firm.
It kind of seems like the story is that as Microsoft is cutting prices for customers and pressuring suppliers to drop their prices as well, that the Xbox 360 isn't the gravy train it was cracked up to be. And that companies like Wistron are excited to shift resources away from Xbox 360 and towards the Wii. So, when things aren't going your way and you have loose accounting practices at your disposal, what do you do? Stuff away!
How to Stuff the Channel
For those uninitiated in this time-honored practice, per Wikipedia:
Channel stuffing is the business practice where a company or a sales force within a company inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling to the world at large. This can be the result of a company attempting to inflate its sales figures. Alternatively, it can be a consequence of a poorly managed sales force attempting to meet short term objectives and quotas in a way that is detrimental to the company in the long term. Many managers will engage in channel stuffing to increase annual/quarterly sales. Even though this would hurt the company because the distributors would have to return any unsold goods back to the company, it would help the manager if his earnings was based on a sales quota.
Occasionally, distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers, and use the phenomenon to their advantage. This is done by holding back on orders until the end of the suppliers' quota period. The suppliers' sales force then panics, and sells a large amount of the product under more favorable terms than they would under ordinary circumstances. At the beginning of the next period, no new orders are placed and barring any action, the cycle then repeats.
Corporations have been known to engage in channel stuffing and hide such activities from their investors. In the United States, the U.S. Securities and Exchange Commission has in some cases litigated against such corporations.
SEE THE LINK FOR MORE ON THIS ARTICLE. I DON'T KNOW WHY GAMESPOT ISN'T REPORTING THIS.
Log in to comment