Are Publishers Really Selling More on PS3 Than Xbox 360? No.

Last week, one of the biggest video-game publishers, Electronic Arts, reported quarterly results. In its reports, the company always gives a breakdown of revenue by gaming platform. Several enthusiast outlets, such as MCV, reported that EA’s revenue from PlayStation 3 games was bigger than that from Xbox 360 games. This would be unusual since the Xbox 360 installed base is substantially bigger than the PS3 installed base. In fact, Xbox 360 game sales continue to outpace those for PS3. Here’s why.

(Full disclosure: I work for Microsoft’s Xbox division and have no formal training in accounting or financial analysis. What follows is my understanding of the situation based on my 12 years as a business, technology and economics reporter for Reuters, and on recent informal conversations with financial analysts who cover the video game industry. This is also my personal opinion and does not reflect the view of my employer.)

Publishers report two sets of numbers in their quarterly reports: GAAP and non-GAAP. GAAP stands for Generally Accepted Accounting Principles, the set of rules that U.S. companies must follow when reporting financial information. The intent is to give investors and regulators a set of consistent, objective data that is comparable across companies and industries. But due to the circumstances of each industry, GAAP numbers often obscure, rather than illuminate, what is happening with an underlying business.

First, let’s look at EA’s GAAP revenue numbers for each platform (A side point: these are revenue or sales figures, not profits. Some reports have confused the two terms. Profit is what is left after a business deducts operational, marketing, administrative and other costs from its sales).

Wii: $161 million
PS3: $121 million
Xbox 360: $73 million

Sure enough, it looks like PS3 games are outselling Xbox 360 games. But here’s the twist. Because so many games now include a substantial online component that is maintained for several years, GAAP rules require a portion of revenue from the initial sale be booked over the life of the online service. So, in a purely hypothetical example, let’s say a $60 game is deemed to have half of its value come from online play. The company will then book $30 over a period of, say, two years, or $3.75 per quarter.

Game companies aren’t the only ones who do this. Apple does it with the iPhone because it delivers ongoing updates and services to the device. So of the $200 you pay for an iPhone, Apple records $25 of that each quarter for two years.

The thing is, this all happens purely on paper. In reality, EA gets that entire $60 all at once, and your $200 for an iPhone goes straight into Apple’s cash pile. Analysts pretty much ignore these GAAP numbers because they want to know what total unit sales were and what total revenue was. Indeed, here’s a line from The LA Times’ coverage: “Most Wall Street analysts say they pay attention to EA’s non-GAAP accounting as a measure of its financial performance.”

So let’s revisit EA’s numbers and look at the non-GAAP statement, which takes out the effects of the deferred online revenue.

Wii:  $184 million
PS3: $99 million
Xbox 360: $136 million

So non-GAAP, the number Wall Street actually cares about, shows Xbox 360 sales still leading PS3 sales. I’m guessing, speculating really, that given that Xbox 360 has the more robust and active online network, that EA is forced to record a larger chunk of deferred revenue, revenue that will be recorded over the next couple quarters.

Interestingly, Activision’s numbers are somewhat different. Here are the GAAP numbers:

Wii: $118 million
PS3: $152 million
Xbox 360: $231 million

And the non-GAAP, excluding the effect of deferred revenue:

Wii: $74 million
PS3: $105 million
Xbox 360: $140 million

Again, purely speculating here, I wonder if the GAAP is so much higher because Guitar Hero sales have been so high for a couple years, and now we are seeing a huge surge in deferred revenue from those past sales.

Anyone have any insights here?

The week in review

Wow. What a busy week. I’m going to just do sort of a link dump here, with additional comment exclusive to you Command-K subscribers. Premium stuff, and worth every penny you pay for it. This should also mark the resumption of regular blogging, now that I have a couple days to breathe and collect my thoughts.

There is this little companythat makes these cute little digital music players. And computers. And something called the iPhone. Everyone was wondering how they had held up amid the worsening economy. Pretty well, as it turns out.

Oh, and in the meantime, they boughta microchip design firm. That sort of threw everyone for a loop. The initial reaction was along the lines of “WTF does Apple want with a semi design shop?” Some of the speculation was that P.A. Semi’s low-power microprocessors could be modified for the iPhone or iPod. As it happens, I was briefed by these guys more than two years ago in my former life as semiconductor beat reporter. Ironically, their chips are based on IBM’s Power architecture, which Apple dumped from the Macs a while back in favor of Intel’s x86 chips. P.A. Semi’s products are aimed at hi-po computing: servers and supercomputers and the like. Not too likely that those will end up in an iPhone any time soon. But apparently, Apple does employ a number of chip designers who work with partners to tweak features to meet certain capabilities Apple’s product engineers have in mind. Still, it’s a curious play since if they wanted a bunch of chip designers, why not just hire them from the job market. Why pay a couple million per headcount to buy a whole company?

As if Apple wasn’t enough to handle, there’s a little game coming out next week that might just be, oh, only the biggest single entertainment property of the year. The Halo 3 launch last year opened the eyes of many reporters and editors to how big A-list video-game properties can be. Not only is Grand Theft Auto IV big business, it’s a game that has as much cultural relevance as The Matrix or Harry Potter.

My main preview story of the game is posted below, but before I get to that, I want to highlight two other pieces.

First is my Gameworld column on Sony’s Gran Turismo 5 Prologue. It’s a gorgeously realistic driving title, but only a fraction of what is promised when the full game comes out next year. Racing fans will love it, but I’m sure many consumers will see the $40 price tag as too high. 

What really interested me about my interview with Taku Imasaki, the U.S. producer on the game, was the vision that the title would become a platform for all things automotive: a driving game at the core, but augmented with videos of races and information about cars. 

Sony plans to add more features and pipe a steady stream of video content into “Prologue” in hopes that gamers’ interest will be redlining by the time the full game is released.

“Our goal is to become another medium for car companies, like magazines and TVs. We’re the perfect game for that and ideally we could become the MySpace or Facebook for auto enthusiasts,” Imasaki said.

Along with Rock Band and possibly Guitar Hero, it’s an example of how these connected consoles with gobs of processing power and storage are enabling games to become destinations/portals/aggregators for certain topics. Rock Band and GH do it for music, GT5 is doing it for cars. I’m sure there are other areas where it makes sense. Sports comes to mind. Take Madden football as an example. They already have a scrolling sports news ticker in Madden, why not buff that up to include highlights of the week’s games, interviews with athletes, and tutorials that show you how to use the video game to enhance your appreciation of the actual sport (I would love, for example, some breakdown of defensive schemes, which I only dimly understand).

The second piece I’ll highlight is an analysis of GTA4. Everybody knows this game is going to sell a buttload. The only question is it going to be serious buttload or just a regular buttload? Estimates from several Wall Street analysts range from 9 million to 12.5 million units by the end of this year, with most looking at about 10 million units. At that scale, analyzing the game’s sales is a little like speculating on how many angels can dance on the head of a pin. Let’s just call it “a lot” and leave it at that.

What I found more interesting was the question of what effect the game will have on console sales, and which console stands to benefit more, the Xbox 360 or the PlayStation 3? My expectation was that most people would say the Xbox 360. After all, Microsoft having locked in the exclusive downloadable content for later this year, combined with the superior implementation of online capabilities in Xbox Live, makes a pretty compelling argument for the machine.

It turns out that most people, from Wall Street analysts to industry observers who know far more about this stuff than me, figure the PS3 will get the biggest hardware sales boost. It basically boils down to two reasons: the hardcore gamers who dig GTA4probably already have an Xbox; those who aren’t hardcore gamers but love the GTA series probably got into it on the PlayStation 2, and are likely to stay loyal to Sony.

If you’ve made it this far, bless you. Hopefully it’s been worth it. I’ll leave you with my preview of Grand Theft Auto IV. Hit the link or go below the fold for the whole thing. It was a fun story to research and write.

By Scott Hillis

SAN FRANCISCO, April 25 (Reuters) – Beatings, carjackings, drive-by shootings, drunk driving and hookers. For video game fans, it can only mean one thing: “Grand Theft Auto 4″ is here, arrving with all the subtlety of a shotgun blast.

The latest chapter in the wildly popular and controversial criminal action franchise from Take-Two Interactive Software Inc is poised to be the biggest entertainment product of the year, with expected first-week sales of up to $400 million — dwarfing Hollywood’s biggest box-office openings.

The handiwork of Take-Two’s Rockstar game studio headed by British brothers Sam and Dan Houser, “Grand Theft Auto 4,” which will be launched next Tuesday, promises to crank up the thuggish drama that made previous installments the equivalent of “The Godfather” for Generation PlayStation.

“We also felt over the last few years there hadn’t been a great standout gangster movie. Maybe we could do something ourselves that would live alongside that stuff,” Rockstar’s Dan Houser told Variety magazine in a recent interview.

Back

Today was the first day back at work after a long, sunny week of Spring Break. In other words, it was not a happy day.

It does mean that regular blogging should resume over the next couple days as I get back in the routine. Funny how when my day is filled with work, I somehow find time to blog, but when I have all this time off, writing never seems to get done.

It was a good vacation. Forests were hiked, beaches were walked, new bands were discovered, and beach parties were had.

Not five minutes ago, I finished Uncharted: Drake’s Fortune, and all I can say is, wow. It’s the first PS3 game I’ve played all the way through, and it was amazing. Think Indiana Jones meets Tomb Raider meets Far Cry. Uncharted is simply an eloquent refutation of the idea that video games can’t compete with movies for story-telling, or that game writing isn’t important. 

I’ll probably write more later about Uncharted as it was, for me anyway, a pretty ground-breaking experience. Most importantly, it was just a hell of a lot of fun and captivated me for about four nights running (much to the chagrin of Tala and the delight of Harlan).