Disposable Income of Xbox 360 - Research Paper Example

?Economic Indicator Analysis Section One The product being analysed is the Xbox 360 that is being produced and marketed by Microsoft Corporation. TheXbox 360 is the successor to the original Xbox video game console and hails from the seventh generation of video game consoles. A major feature is Xbox Live that allows players to compete with each other online, to download various arcade games, to download new game demos, to view trailers, to watch television shows as well as music and movies through Windows Media Centre capabilities. Moreover, region specific media access to third party media is also offered through streaming services such as ESPN and Netflix. Currently a slimmer version of the Xbox 360 is being shipped which sports a number of features. These include Wi-Fi (802.11 b/g/n), TOSLINK S/PDIF optical audio out port, five USB 2.0 ports and a specialised AUX port. (Takahashi, 2010) All previous models of the Xbox series have been discarded since. The console ships with a standard 250 GB hard drive and a cheaper stock keeping unit ships with 4GB internal storage space. Special editions of the Xbox 360 ship with 320 GB hard drives. Microsoft holds that the Xbox 360 platform is only through half of its projected life that is deemed to continue up to 2015. (Robinson, 2009) In terms of performance and capability, IGN named the Xbox 360 as the sixth best video game console of all times out of a total of 25 gaming consoles. (IGN, 2011) The processor is a triple core Xenon designed by IBM. Each core can process two threads simultaneously and so in total it can process six threads. (Microsoft, 2008) The Xbox 360 handles graphics through the ATI Xenos GPUS that sports 10 MB worth of eDRAM and has a main memory pool of 512 MB. The controllers for the Xbox 360 are shipped in both wired and wireless models. A host of technical failures were associated with the Xbox 360 since its release but these have been dealt with by Microsoft by extending warranty periods to three years and by modifying hardware to accommodate thermal instability. Microsoft is a leading software and IT business company with roots stretching as far back as the late seventies. The company was founded by Bill Gates and Paul Allen on 4th April 1975. With the introduction of the company’s DOS (Disk Operating System) that was extensively utilised by IBM, the company saw unprecedented growth. The development of the Windows framework allowed the company to expand its reach to newer consumers around the globe. The mid nineties saw Microsoft under fire for monopolistic business practices and was subsequently prosecuted under anti-trust laws. Moreover, Microsoft expanded into the word processing domain with its Microsoft Office software suite that sports little competition. Recent years have seen Microsoft diversifying its portfolio by delving into newer markets such as video games, consumer electronics, digital services, cellular phone operating systems and VoIP communications. As of 2011, the company hosts revenue of some $69.96 billion while its operating income stands at $24.1 billion as of 2010. The video gaming industry is far more open than the video games console industry as it allows successful start-ups. Developmental costs for software are lower than those for hardware and this allows the video games market to be more open to competition. However, the video games console market requires multi faceted research aimed at developing and sourcing hardware that can be utilised to outstrip the performance of the competition’s consoles. Consequently, there are few companies in the market that are manufacturing and marketing video gaming consoles. Notably the market is occupied by Nintendo’s Gamecube and Wii, Sony’s Playstation series and Microsoft’s Xbox series. Both Nintendo and Sony develop customised hardware for their gaming console platforms including processing, storage and GPUs (Graphics Processing Units) along with networking and other supporting features. In contrast, Microsoft tends to source its hardware from various sources to put together gaming consoles. The processers, GPUs, network and auxiliary features are all sourced from different vendors. In either case that is using customised or sourced hardware it is imperative that the developer test the device extensively in order to avoid claims later. This forces development times to be large (typically spanning around 5 years) and warrants strict financial commitments which smaller companies cannot deal with. Consequently, the video game console market is a closed market with an oligopoly based structure. An oligopoly based market relies on a few sellers to control the entire market. The video game console market follows a dominant firm model for oligopoly based markets. Nintendo’s Wii is effectively the market dominator with around 44.9% as its market share. However, in response to Nintendo’s Wii the competition has not lowered its prices which provide a sign that the market is not likely to slide into a monopoly any time soon. (Samuelson & Marks, 2003) The current market for video game consoles is shared by the Nintendo Wii, Sony Playstation 2, Sony Playstation 3, Microsoft Xbox and Microsoft Xbox 360. In terms of competition between these gaming consoles, the markets witnessed large growth for the Nintendo Wii since its inception due to its low cost and ease of creating new games. The rapid creation of new games allows gaming consoles to attract more customers who are willing to expand their gaming horizons. The sales of the Nintendo Wii were followed by the Microsoft Xbox 360 but a significant difference in sales existed between both. The Xbox 360’s sales were between one thirds and two thirds of the sales of Nintendo Wii in an entire year. (Shiloy, 2009) See Appendix “A” for details. Console Sales (millions) Market Share (%) Nintendo Wii 87.6 44.9 Xbox 360 55.4 28.4 Sony Playstation 3 52 26.7 Table sourced from HI confirms previous findings that the current businesses in the video games console market are behaving in the form of an oligopoly as the HHI is between that of an open market and that of a monopolised market. Section Two The indicator being chosen to analyse this situation is disposable income as it clearly reflects the spending power of people after taxation. This allows a reasonable estimate to be developed for a major part of the population as per their consumption patterns. A higher personal disposable income would signify that people would be more predisposed to buy high value added items and vice versa. Furthermore changes in the personal disposable income also represent a significant shift in the way people spend especially on products that they acquire for pleasure and entertainment. An expanding personal disposable income indicates more people ready to buy certain products and vice versa. Given that the Xbox 360 is an entertainment product and not a basic necessity so a strong personal disposable income would represent good chances for it to sell and vice versa. Moreover, this indicator is updated frequently by the federal government which provides it with a measure of reliability and trend ability. Disposable income is simply a measure of a person’s personal income minus the taxes that the person has to pay. This amount is effectively what a person has available to spend on durable and non durable products and services. National accounts define disposable personal income as the difference of the personal income and the personal current taxes. (Linden, 1988) If the consumption outlays are subtracted from personal disposable income then the remaining amount is known as personal savings. This could also be restated in a different form. Personal savings and personal consumption expenses combined form a person’s disposable income. What is clearly discernable here is that the personal disposable income provides room for consumption based expenses. Buying a video gaming console or anything else is eventually a function of consumption expenditure. This consumption expenditure is ultimately tied to the disposable income available to a person for spending. The higher the personal disposable income, the greater a person’s chances of buying a particular product are. As stated previously, personal disposable income encompasses consumption expenditures and higher the consumption expenditure, the greater the chance that a person will buy a product with a specific value. The Xbox 360 is priced from $250 to $700. This represents significant consumption expenditure and if the general public has a personal disposable income capable of bearing such expense only then could such products be bought. It is highly unlikely that people in the third world would begin consuming Xbox 360 with personal disposable incomes that are often less than the price of the Xbox 360. Moreover changes in the personal disposable income would represent significant chances that the general public would purchase such products. The data used to analyse this indicator has been sourced from the Bureau of Economic Analysis (BEA) which is a sub section of the U.S. Department of Commerce. The BEA is responsible for compiling various kinds of economic indicators at various frequencies to measure economic activity over short and long periods. The particular report used to source this data is the “Personal Income and its Disposition” report compiled by NIPA (National Institute of Pension Administrators) and is available on the BEA website.1 This report is updated with a frequency of three months (one quarter) and the current report had data compiled up to June 2011 (second quarter 2011). Section Three Section Four Disposable income has been measured through periodic reporting with a frequency of one month. The levels of disposable income have been retrieved for a period of fifty four months. The starting level was January 2007 while the last level was from June 2011. The retrieved data was manipulated to make it more understandable. First the disposable income levels for each year were sketched together on one graph in an effort to create a measure of spread through visual analysis only. This graph clearly shows that disposable income levels in 2007 were the lowest in the available data. Moreover, the disposable income levels rose constantly in 2007 signifying positive economic activity. For the fiscal year 2008 the disposable income levels witnessed a lot of volatility. The first quarter of 2008 saw disposable incomes levels growing comparable to those in 2007. However, the disposable income levels rose significantly at the end of the second quarter of 2008 but soon lost their levels and the rest of the year witnessed gradual declines which sharpened near the end of the fourth quarter. 2009 saw disposable income levels dropping steadily till the end of the first quarter after which they rose in the second quarter and then continued with no growth until the start of the last quarter. The last quarter saw some growth which reset levels to those experienced at the start of the year. In stark contrast, 2010 saw disposable income levels that soared constantly with nearly the same rate of growth as that in 2007 but with a greater base level. The first two quarters of 2011 are available which show steady increase at the same growth rates as those in 2010 and 2007. The second graph is a measure of income levels spread over the total of fifty four months put together chronologically. Again the noticeable thing is the growth experienced within the first sixteen months followed by a volatile rise that plunged to nearly the same levels experienced after the first twelve months. The subsequent two quarters show some more volatility although it is not comparable to the volatility experienced just before it. This volatile region is followed by a plunge again to nearly the same levels experienced at the end of the first twelve months. However after this point in time the disposable income levels have witnessed gradual growth that seems to be slowing down after the first forty eight months. The third graph shows percentage change percentage change over a period of one month for the original data specified. The behaviour is comparable to what has been listed before. There is localised volatility in percent change levels from month to month except for two major variations in percent change witnessed in 2008 and 2009. Following these the income levels have varied from month to month as before except for the region following the fiftieth month where the percentage change is nearly the same after which it decreases and remains steady for the last two months. The last graph is percent change between consecutive years for disposable income. 2008 can be seen to house positive change that tops some 5.76% followed by negative change in 2009 with a decrease of 2.14%. In contrast 2010 displays a growth of 3.62% while 2011 shows a growth of 3.06% for the first two quarters. Section Five If the last two quarters are looked at independently, it is apparent that disposable income levels are witnessing some kind of slow down indicating little to no growth. The disposable income levels for the last six months as well as the accompanying percentage change are depicted in Appendix “C”. The percentage change also clearly demarcates that change has become near constant in the first four months and has decreased to constant levels for the last two months. This indicates market stagnation and slowed growth for disposable income levels. If the market is forecasted for the next six months using simple forecasting tools in Excel, it is apparent that disposable income levels are set to drop by around $1,000. Though this estimate may be too large based on the activity of the last fifty four months but it may as well serve as an indication of expected drops in disposable income levels. Please see Appendix “D” for projected disposable income and percentage change levels for the next six months. The disposable income levels projection also signifies that the levels will recover although very gradually which basically shows stagnation. If the percentage levels are looked at, it is apparent that percentage change remains positive for the last six months but shows little deviation. The first four months are seen to display a percentage change level of 0.3% while the last two months show a percentage level of 0.29% only. The difference in percentage growth between the projected levels is very little which confirms suspicions of market stagnation that will cause disposable income levels to stagnate as well. The business cycle represents the state of the economy and the markets over a sizable period and delineates market behaviour and fluctuations. Fluctuations occur due to changes in production as well as economic activity and typically span several months or years. For a long term growth trend the economy tends to shift with time from rapid economic growth (or booms) and relative stagnation to declines (or busts). Mot business cycles are measured through the changes in the real GDP (Gross Domestic Product). Although these variations are termed as cycles but changes in economic activity do not follow any kinds of mechanical or otherwise predictable periodic patterns. (O'Sullivan & Sheffrin, 2003) Within economic circles the fluctuations are better understood are expansion and recession. An expansion period is considered between a trough and a successive peak. On the other hand, recession is considered to be the period between a peak and a successive trough. The NBER (National Bureau of Economic Research) contends that a recession is a significant decline in economic activities that span well over a few months and are visibly felt through changes in the real GDP, employment, real income and industrial production levels. (NBER, 2011) A period of expansion is defined similarly as well. The GDP of a nation depicts changes in the income levels of its residents. An expanding economy displays a soaring GDP while a receding economy displays a declining GDP. In turn the income of people is connected to the GDP and any changes in the GDP affect the income levels of people accordingly. As income levels change so does the disposable income level which is basically the real income minus the personal taxes paid by a person. Therefore in terms of the larger picture any changes in the GDP are directly reflected in the disposable income of people. (Perez, 2002) Given the fact that the disposable income is directly tied to the GDP and that the GDP is a direct reflection of the state of the economy, it is apparent that the disposable income is a coincident indicator of the economy. This means that any changes in the economy are immediately reflected in changes in the disposable income. If the economic situation is improving, then the disposable income would increase in tandem and vice versa. (Smith, 2009) The disposable income is a clear measure of people’s spending power. Based on variations in disposable income, the Federal Reserve policy will be directly impacted as well. In case that disposable income is announced with clear significant growth from previous months, there will be two clear effects. People’s purchasing power will increase and consequently consumer expenditures will go up. People will find more money in their pockets to spend on things other than mortgages, utility bills and the like. The second effect will be that businesses will be stimulated to see greater chances that their products will be bought. This will encourage businesses to borrow more from banks in order to boost activities. Greater borrowing will mean that the Federal Reserve will be faced with greater demand for money than before which will cause the Federal Reserve to increase interest rates in an attempt to curb borrowing by businesses and people alike. In contrast, in case that a lower disposable income level than before is announced, there will be similarly matched effects only in the opposite directions. Consumers will have to dig deeper in their pockets in order to spend on consumer goods freely. This will discourage businesses from spending any more on their activities than current levels. In fact businesses would decrease spending on their activities as a result of decreases in disposable income levels. This in turn would discourage borrowing from banks and the interest rates would be lowered by the Federal Reserve in order to encourage borrowing by businesses and people. Another possibility is the stagnation of disposable income levels that would force business spending to remain constrained as well. In turn the borrowing from the Federal Reserve would be constant over time and so would the interest rates be constant over time. In such a case the economy would need a stimulant to spur things to move in the right direction. In my opinion the disposable income level would suffer in the next two quarters. Even if the disposable income levels do not suffer significantly, there are large chances that they would stagnate. This would cause the Federal Reserve to either hold the interest rates steady or to decrease them. However, this would not spur massive spending by consumers in the immediate run as the excess borrowed capital would take some time before it would show up actively in the economy. Consequently consumer spending in the shorter run would remain near current levels if a large drop does not come. Gradual decreases may be witnessed though. This does not bid well for the Xbox 360 that would be forced to live with current sales figures with possible dips in sales as well. The demand for the Xbox 360 would decrease and stagnate within the next six months. Bibliography IGN, 2011. Xbox 360 is number 6. [Online] Available at: HYPERLINK "http://www.ign.com/top-25-consoles/6.html" http://www.ign.com/top-25-consoles/6.html [Accessed 17 August 2011]. Linden, F., 1988. A Marketer's Guide to Discretionary Income. Numerical/Quantitative Data. Conference Board, Inc., New York, NY, Consumer Research Center.; Bureau of the Census (DOC), Suitland, MD. Microsoft, 2008. Xbox 360 Technical Specifications. [Online] Available at: HYPERLINK "http://web.archive.org/web/20080822024003/http://www.xbox.com/en-AU/support/xbox360/manuals/xbox360specs.htm" http://web.archive.org/web/20080822024003/http://www.xbox.com/en-AU/support/xbox360/manuals/xbox360specs.htm [Accessed 18 August 2011]. NBER, 2011. US Business Cycle Expansions and Contractions. [Online] Available at: HYPERLINK "http://www.nber.org/cycles.html" http://www.nber.org/cycles.html [Accessed 18 August 2011]. O'Sullivan, A. & Sheffrin, S.M., 2003. Economics: Principles in action. New Jersey: Pearson Prentice Hall. Perez, C., 2002. Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. London: Edward Elgar Publishing Limited. Robinson, M., 2009. E3 2009: 360 to Stick Around Until 2015. [Online] Available at: HYPERLINK "http://uk.xbox360.ign.com/articles/991/991485p1.html" http://uk.xbox360.ign.com/articles/991/991485p1.html [Accessed 17 August 2011]. Shiloy, A., 2009. Video Game Console Market Continues Its Formidable Growth in the U.S. – NPD Group. [Online] Available at: HYPERLINK "http://www.xbitlabs.com/news/multimedia/display/20090212170954_Video_Game_Console_Market_Continues_to_Grow_in_the_U_S__NPD_Group.html" http://www.xbitlabs.com/news/multimedia/display/20090212170954_Video_Game_Console_Market_Continues_to_Grow_in_the_U_S__NPD_Group.html [Accessed 18 August 2011]. Samuelson, W. & Marks, S., 2003. Managerial Economics. New York: Wiley. Smith, C.E., 2009. Economic Indicators in Today's World. California: Wankel. Takahashi, D., 2010. Microsoft to Launch Smaller XBOX 360 Game Console. [Online] Available at: HYPERLINK "http://venturebeat.com/2010/06/14/microsoft-to-launch-smaller-xbox-360-game-console/" http://venturebeat.com/2010/06/14/microsoft-to-launch-smaller-xbox-360-game-console/ [Accessed 18 August 2011]. Appendix A Appendix B Appendix C Appendix D Read More