ASX investors are perhaps lucky that their choice for Xbox and Playstation exposure is limited to electronics retailer shares such as JB Hi-Fi (ASX: JBH), Harvey Norman (ASX: HVN), Target, owned by Wesfarmers (ASX: WES) and Big W, owned by Woolworths (ASX: WOW).
Experts estimate that overseas companies Microsoft (Nasdaq: MSFT) and Sony (NYSE: SNE) are making less than $40 profit on each console – including retailers' profit margin. But whereas Microsoft and Sony use economies of scale and fees from game developers and their online offerings to create positive earnings later, retailers can begin to profit immediately.
The electronics consoles have been released just before Christmas in what is surely a smart move by the gaming system developers. They (and thus retailers) get the hype and midnight launches to boost their sales activities, along with the not-to-be-underestimated effect of kids begging their parents (many times) if they could pleeease have one for Christmas.
I can remember when the very first Xbox came out 12 years ago; the kid next door had one and I was blown away by it. Mesmerized. It had completely 3-D graphics and a controller that had two joysticks, so for the first time you could control where your character looked with one stick, and make him move with the other. As I told my poor parents many times, it was like magic!
Christmas was coming up soon after I first played the Xbox and I had to have one. In fact, we still have this original Xbox – in full working condition – being used as a DVD player in a spare room.
Once lured in to electronics stores, parents can then be upsold by Christmas sales or interactions with staff as they buy DVDs, headphones, tablets and iTunes gift cards for other family members. Even if the retailer doesn't make much money on the console sale, it can upsell and cross-sell other products and there is the flow-on effect of people spending their Christmas money to buy games for their new consoles early in the New Year to keep kids busy during school holidays.
Foolish takeaway
It's a win all around for electronics retailers this Christmas. Retailers usually do well at Christmas, but the Xbox One and the Playstation 4 should be the basis for an extra-merry Christmas for JB Hi-Fi, Harvey Norman and their ilk.
