VIDEO: Microsoft vs. Sony–Who’s Winning the Video Game Console War?

This week the annual Electronic Entertainment Expo—or “E3” among gamers—kicks off, and all eyes are on Microsoft (MSFT) and Sony (SNE), makers of the Xbox One and PlayStation 4 game consoles, respectively.  The focus this year for Microsoft—which presented first—was on getting back to basics of gaming.

In this latest battle in the “console war,” Sony is off to a commanding lead, due in no small part to some major gaffes made by Microsoft at last year’s event. The latest comparable sales statistics show Sony booking about 7 million PS4 sales compared to 5 million Xbox One sales for Microsoft.

Last year, Microsoft showed an almost unfathomable misunderstanding of its own loyal customer base.  Rather than focus on video games—which might be expected for the introduction of a video game console—Microsoft chose instead to market the Xbox One as an all-purpose entertainment system for your living room, controlling your TV, music and streaming services like Netflix (NFLX) via its Kinect motion and voice sensor.

The execution couldn’t have been worse.  Unlike the PlayStation and popular consumer options like the Roku, Google (GOOG) Chromecast and Apple (AAPL) Apple TV, Microsoft required that users pay a subscription fee to use streaming services such as Netflix (that is, a fee to Microsoft in addition to the normal Netflix subscription fee).   Adding insult to injury, Microsoft also attempted to restrict second-hand game sales and to require an “always on” internet connection.  All of this dampened enthusiasm for what was otherwise a fine product and gave Sony a marketing advantage that Sony management couldn’t have even dreamed of.  Microsoft has since backpedaled and reversed all of these decisions.

Kinect, by the way, also added an additional $100 to the Xbox’s price relative to the PlayStation—which is the single biggest factor in Microsoft’s lagging sales.  The Xbox One initially retailed for $499 vs. $399 for the PS4.  Gaming enthusiasts had a hard time justifying paying an additional $100 for functionality that they didn’t need or want.  And Sony seemed to “get” them when Sony focused it presentation on gaming.

Call it the dying gasp of Steve Ballmer’s Microsoft.  Under new CEO Satya Nadella’s leadership, there would be no repeat of last year’s ham-fisted performance.  Microsoft focused its energy on its popular titles, including new iterations on the Halo and Call of Duty franchises.

I spoke to CNBC’s Adam Bakhtiar and Oriel Morrison about the direction that video gaming would take in the years ahead.  Today, high-end PC gaming accounts for about 20% of the market, and low-end mobile gaming—the sort of games you could play on an iPad or smartphone—account for another 17% of the market, and growing. The remaining 63% of the market remains the domain of video game consoles, at least for now.

Console gaming probably has another good 5-10 years left in its current form.  Beyond that, we’re really left to speculate as to what the future may look like.  Might consoles get lost in the shuffle as games are increasingly available cross-platform and cross device?  Consider the precedent created by online streaming services like Netflix and Hulu, which can be viewed on virtually any computing device or any one of an infinite number of streaming set-top boxes.  In this future, it would be the content creators that reaped substantially all of the profits, not platform vendors.

In any event, this latest battle in the console war promises to be interesting.  Microsoft has ditched Kinect and lowered the price of the Xbox One to compete with the PS4.  Expect Sony to respond with some aggressive marketing moves of its own.  While Microsoft can afford to be an also ran in gaming consoles, Sony cannot.  Sony has seen its consumer electronics businesses wrecked by competition from Samsung and Apple, among others.  Outside of its movie studio—which may well be spun off as a separate business—the PlayStation is Sony’s last realistic chance at market dominance.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

VIDEO: Is the Surface 3 a Game Changer for Microsoft?

Microsoft (MSFT) unveiled its Surface 3 tablet on Tuesday, and I joined CNBC’s Adam Bakhtiar to discuss what it might mean for Microsoft’s prospects.  The good news: It’s a fantastic product that blows the iPad out of the water.  The bad news: Given the slowdown in the growth of the tablet market, I fear it’s too late to make much of a difference.

To start, Microsoft really outdid itself this time in creating a sleek, attractive product.  The new Surface boasts a large 12-inch display and PC-caliber power.  And in fact, Microsoft is billing its new offering less as a “tablet” and more as a “laptop replacement.”   It’s compared as much to an Apple (AAPL) MacBook Air as it is an iPad.

The Surface 3 runs Windows 8.1 Pro, which means that a user can literally do anything on the tablet that they can do on a desktop or laptop computer.  If you buy an optional docking station, you can even give yourself a multi-monitor setup.  And the USB 3 jack allows you to plug in virtually any accessory you can plug into a computer.

The downside?

Cost.  The Surface 3 starts at $799, making it significantly more expensive than the iPad or the assorted Android tablets.  It’s also more expensive than most mid-range laptop computers.  If your purposes for owning a tablet are light web browsing, reading e-books or toying with entertainment apps, then the new Surface is too much computer for you.

One interesting point of differentiation is the size.  Microsoft opted not to “out iPad the iPad” with a smaller screen.  By opting for the larger screen, Microsoft is attempting to create an entirely new product line in the “jumbo tablet.”  That’s a smart move; peeling away Apple loyalists is no easy task.

Unfortunately, Microsoft is coming to market with the Surface 3 at a time when overall tablet growth is slowing.  The tablet market will be lucky if it grows by 12% this year.  Apple sold a lot fewer iPads than the consensus expected last quarter, even while iPhone sales surprised to the upside.  And ironically, PCs—the very products that tablets were supposed to destroy—are staging a mild recovery.  The rate of decline in PC sales slowed to just 1.7% in the first quarter of this year, according to Gartner.  With corporations finally starting to replace their employees’ aging computers after years of cost cutting, we may actually see modest growth by the end of the year.

So, will the new Surface be a game changer for Microsoft?  No, it won’t.  But kudos to Microsoft for coming to market with a worthy competitor.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Join Macro Trend Investor today and start profiting from the powerful megatrends that are cresting across the global economy—and get ahead of the next macro trend to build your wealth for years to come.  Just $1.00 grants you your all-access pass!

Sizemore Talks EBay, the Future of Mobile Payments, and More on CNBC

Watch Charles discuss EBay’s (Nasdaq:$EBAY) earnings, the future of mobile payments, and Apple’s (Nasdaq:$AAPL) transition to an income-focused value stock on CNBC’s Asia Squawk Box.

Can’t view the embedded media player? See Apple Looking a Lot Like Microsoft

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Charles Sizemore and Jeff Reeves Discuss the Microsoft Drubbing

From Jeff Reeves at The Slant:

It was a rough Thursday for PC stocks Microsoft (NASDAQ:MSFT), Intel(NASDAQ:INTC), Hewlett-Packard (NYSE:HPQ) and the like.

That’s because late Wednesday, IDC reported PC sales slid nearly 14% in the first quarter, well below the 7.7% decline that was expected and the worst drop since the firm began tracking the sector in 1994.


To add insult to injury, Microsoft was downgraded Thursday by Goldman Sachs(NYSE:GS), Normura and Hilliard Lyons. All  cited the ugly IDC numbers.

So what’s going on? Can these companies — particularly Microsoft — evolve?

Charles Sizemore thinks so, based on hopes of getting Microsoft Office software on Apple and Android devices.

The tug-of-war between hardware and software always favored keeping Office native to the Microsoft Surface tablet. But that may be changing.

“It’s a bit of a game in that does Microsoft … minimize their plans to grow their tablet business by pushing Office onto their competitors, or do they hold out and see if they can generate margins?”

Charles thinks the rumor mill is strongly favoring a push onto Apple (NASDAQ:AAPL) devices powered by iOS or mobile gadgets running Android from Google(NASDAQ:GOOG).

There’s also hope for the xBox business with innovative in-home entertainment options, Charles says.


Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

At Current Prices, Tobacco is No-Go

Back in December, I recommended that readerswatch their ash when investing in tobacco stocks.  In their hunt for yield in a seemingly yield-less world, investors had bid the price of most tobacco stocks to levels that no longer made sense.

Tobacco is a no-growth business and an industry in terminal decline.  As a case in point, American teenagers are more likely to use illegal drugs that to light up a cigarette.

In the circular logic of the stock market, the lack of growth is part of what has made tobacco stocks such fantastic investments in recent years.  Management doesn’t have to reinvest in the business or to fund an expensive marketing budget.  And there are no white elephant projects or unrealistic management spin.  They understand the economics of their business, and they do the only things that make sense: they pay out gargantuan dividends and aggressively buy back their shares.

But the key here is investor expectations.  Investors had low expectations for the sector and were unwilling to pay up for earnings. Ultimately, the success of any investment depends on the price you pay, and tobacco investors were able to enjoy monster returns precisely because the stocks were cheap.

Well, they’re not anymore.  Not by a long shot.  By Wall Street Journal estimates, the forward P/E on the S&P 500 is 13.5.  Philip Morris International (NYSE:$PM) is significantly more expensive than that, and Altria (NYSE:$MO) and Lorillard (NYSE:$LO) are essentially at the same valuation.



Forward P/E

Dividend Yield

Payout Ratio

1-Yr Div. Gr. Rate

Philip Morris International






























Cisco Systems







This should not be.  Tobacco stocks should not be more expensive than the rest of the market.

Yes, all pay significantly more in dividends than the S&P 500, which pays a pitiful 2.0%.  But look at the payout ratios.  All pay out the majority of their earnings as dividends, whereas the payout ratio of the S&P 500 is less than 30%.

Meanwhile, take a look at the technology stocks at the bottom of the chart.  Intel (Nasdaq:$INTC), Microsoft (Nasdaq:$MSFT) and Cisco Systems (Nasdaq:$CSCO) all trade for 10 times or less expected earnings, and all have modest dividend payouts with plenty of room for growth.  They pay a little less in dividends than tobacco stocks…but not that much less.  And their dividend growth rates are comparable (with the exception of Cisco, whose growth rate is off the charts).

Last month I joked that chipmaker Intel was my favorite “tobacco stock,” arguing that Intel had quite a bit in common with the likes of an Altria and its peers:

As the Big Tobacco has proven for decades, companies in declining industries can make excellent investments under the right conditions.  If you have a dominant market position (think back to Warren Buffett’s “moats”), a conservative balance sheet, and have ample cash flow for share repurchases and dividends, you can do quite well by your investors even in a shrinking market. It’s worked for Big Tobacco investors, and it will work for Intel investors as well.

The same could be said for Microsoft and Cisco.  Tech is the new tobacco.

To be fair, tobacco companies have certain advantages that “tobacco companies” like Intel lack.  A chemically-addicted clientele, for starters, as well as an unrivaled ability to raise prices virtually at will.  Whenever a progressive-minded (or cash-strapped) city decides to hike the taxes on cigarettes, the taxes flow right through to the customer.  Not too many companies have that ability.

But that said, I’m betting that Big Tech is a better investment than Big Tobacco.  Investors are expecting no growth from Big Tech.  So, if actual results prove to be even marginally better than disastrous, investors should enjoy a decade or more of solid gains.

Microsoft and Intel in particular may or may not ever figure out the mobile market.  But that’s ok.  Given that a zero percent probability is currently priced into shares, mobile success can be thought of as an embedded call option that could end up paying off in a big way.  And if that option is never exercised, you’re still getting the existing businesses at “tobacco” prices.

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