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Game console makers grapple with chip shortages as demand outstrips supply


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Game console makers grapple with chip shortages as demand outstrips supply

The global chip shortage continued to weigh on video game console makers in the second quarter, as Nintendo Co. Ltd., Sony Group Corp. and Microsoft Corp. all struggled to keep up with demand.

Microsoft's Xbox Series X and Sony's PlayStation 5 consoles rarely stayed in stock at retailers for more than a few hours, with every new batch of shipments flying off shelves across the globe. While Nintendo has fared better so far this year at maintaining stock of its aging Switch device, the chip shortage still impacted the company's production goals, specifically for the handheld-only Lite model.

Even though overall video game console shipments grew 7.4% year over year to 9.7 million units, according to a new report by Kagan, a media research group within S&P Global Market Intelligence, it has not been enough to keep up with demand. While console makers are working to produce more units, supply-side constraints heading into the crucial holiday sales period — when demand for gaming products typically peaks — could put a ceiling on retail sales.

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Nintendo Switch shipments decline

Nintendo led shipments among the major console makers in the second quarter with about 4.5 million Switch consoles. However, this marked a decline of 21.7% year over year, ending eight consecutive quarters of year-over-year growth.

The original Switch model, which launched in March 2017, saw sales increase 8% to 3.31 million units in the quarter. But sales of the portable-only Switch Lite model more than halved to 1.14 million units.

Kagan analyst Neil Barbour said Nintendo's slump was the result of a particularly tough comparison with the year-ago quarter, which saw Animal Crossing: New Horizons become a surprise hit during the pandemic, setting off a surge in Switch sales. Animal Crossing sold 10 million units in the prior-year quarter and accounted for as much as 40% of Nintendo's total first-party software sales in 2020.

"Animal Crossing demand was mostly slaked by the second quarter of 2021, and Nintendo could not create comparable gravity with successive software releases," Barbour said.

Nintendo plans to launch a new version of the Switch on Oct. 8. The OLED model will cost $349.99 and feature a larger, higher-quality screen, increased storage and enhanced audio.

Daniel Ahmad, a senior analyst at gaming research firm Niko Partners, believes Nintendo intends to position the OLED model to sustain overall demand for the console while reinforcing the company's pitch that the Switch is a premium console worthy of its price point.

"We expect Nintendo to shift priority to the OLED over the original Switch model, phasing out the latter over time," Ahmad said. "This will position the OLED model as the primary model and boost average selling prices at the same time."

U.S. seaborne data from Panjiva found that imports of items associated with Nintendo fell 15.3% year over year in the second quarter. July data showed a decline of 36.7%, which could be related to the production and launch of the OLED model.

"Just like the new Xbox and PS5 were initially in short supply, demand for the new Switch is likely to far exceed the units they will be able to make," said Eric Oak, a senior supply chain research analyst at Panjiva.

Nintendo declined to comment on how many units of the new OLED model the company is planning to ship at launch.

Sony secures chips for PS5s

Shipments of Sony's PlayStation consoles increased 47.4% year over year in the second quarter. These included 500,000 PS4 consoles and 2.3 million PS5s. Total sales of the newer PS5 surpassed 10 million units in July, making it the fastest-selling console in Sony's history.

Still, the larger number of shipments was not sufficient to satisfy demand for the PS5, which continues to sell out in record times. Sony has taken steps to address a chip shortage for its new consoles, and CFO Hiroki Totoki said during a recent earnings webcast that Sony has secured enough chips to hit its goal of selling 14.8 million PS5s in its fiscal year ending March 31, 2022.

"Regarding the supply of the semiconductors, we're not concerned," Totoki said.

Even if Sony reaches its shipment goals, however, Niko Partners' Ahmad said there still may not be enough PS5 consoles to meet demand, which is outpacing that of the PS4.

"We found that the PS4 actually shipped 10 million units in less time than the PS5 did, but the PS5 has been selling through much faster and reached 10 million sold through a month before the PS4 did," Ahmad said. "In other words, the PS4 had stock on shelves at this point in its lifecycle, whereas PS5s are flying off the shelves as soon as they are in stock."

Sony did not respond to a request for comment on whether its PS5 shipment goals align with demand for the console.

"From a supply chain perspective, manufacturers like Sony and Nintendo, who are asking for custom chip designs, are likely planning far enough ahead that they should be able to ship units," said Panjiva's Oak. "What they are likely losing is the availability to burst production with contract manufacturers."

Microsoft expediting Xbox production

Unlike its competitors, Microsoft does not disclose console shipment numbers. However, CEO Satya Nadella said during the company's July earnings call that the Xbox Series S and X are the company's fastest-selling consoles ever, "with more consoles sold live to date than any previous generation."

According to estimates from Kagan based on Microsoft's reported gaming business unit revenue, Microsoft shipped about 2.4 million consoles in the second quarter, up 69.3% year over year.

Meanwhile, data from Panjiva found that the Xbox led in terms of growth among the major console brands, with imports associated with the gaming device increasing 242.4% year over year in the second quarter and by 96.5% year over year in July. While this indicates that Microsoft was able to ship a larger batch of consoles than the competition, the company confirmed that demand for the Xbox Series X and S continued to exceed supply in the quarter.

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"With the global chip shortage across several industries, we're working as fast as possible with our manufacturing and retail partners to expedite production and shipping to keep up with unprecedented demand for our new Xbox consoles," a company spokesperson told S&P Global Market Intelligence.

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.