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April 14th, 2007, 16:04 Posted By: wraggster
Source: The blog of Roger Ehrenberg, president and COO of investment analyst service Monitor110, as picked up by Newsweek, Wired, and others.
What we heard: The Ehrenberg blog post roundly condemns Microsoft for "channel stuffing," a shady process by which company's can meet their stated shipment goals by sending unwanted inventory into the retail channel just before the end of a fiscal period. The company gets to say it met its targets, but it can come back to bite it later as those goods are returned to the manufacturer or retailers reduce future orders until they've worked their way through their existing backlog of merchandise.
Ehrenberg bases his accusation of channel stuffing primarily on postings from another financial blog, the Apple-focused Blackfriars' Marketing. The first post was made last December, and questions Microsoft's ability to hit its publicly stated target of selling 10 million Xbox 360s by the end of 2006.
The Blackfriars writer notes that Microsoft counts systems sent to retail as not just shipped but actually sold. It then crunches some numbers (and apparently confuses worldwide figures with the NPD Group's US-only numbers at one point) and concludes that Microsoft could have hit its goal for the year, but only by stuffing the retail channel. He follows that up by implying that Microsoft threatened to withhold copies of its Vista operating system--released in January--from retailers who didn't play along and choke down excess Xbox 360 inventory.
The second Blackfriars post is from late January, right after Microsoft downgraded its sales projections for the Xbox 360 from 13-15 million systems by the end of June to 12 million. The Blackfriars writer views the downgraded guidance as confirmation that the publisher was indeed channel stuffing at the end of 2006.
"Strong companies confident in their strategy and performance don't do these things," Ehrenberg wrote. "They don't have to. What kind of a message does this type of behavior send to the investor community and, more importantly, your customers? Weakness. Fear. Short-term thinking. Nothing that represents a positive signal for a better, brighter tomorrow."
While Ehrenberg paints a pretty bleak picture, a handful of analysts GameSpot contacted about the story disagreed.
"Microsoft sold-in 10.4 million 360's by December 31," noted Pacific Crest Securities' Evan Wilson. "It seems very unlikely that Microsoft stuffed the channel to beat their 10 million forecast."
Wedbush Morgan Securities' Michael Pachter was similarly skeptical. "It's possible that Microsoft has shipped a few hundred thousand consoles more than retailers want, but not possible that it shipped millions," Pachter told GameSpot, adding, "Microsoft would never stuff the channel to make numbers look better. I really don't buy this at all."
Lazard Capital Markets' Colin Sebastian called it "old news," but not what he would characterize as channel stuffing. "Microsoft's guidance for Xbox shipments during the first half of 2007 disappointed some investors, but the reality is they already had enough units in the channel to fulfill much of the demand," he said.
Nollenberger Capital Partners' Todd Greenwald said Ehrenberg's issue with Microsoft was legitimate, but also old news.
"Sure Microsoft probably over-shipped the channel," Greenwald said," but we knew that three months ago… To me, and most of Wall Street, it was pretty clear what Microsoft had done. And Sony's done the same thing. Nintendo's the only one who isn't doing it, but that's not to say they won't do it again in the future."
Greenwald also pointed out that it's different for a hardware vendor to stuff the channel than a software publisher because systems have a much longer shelf-life and will eventually sell. On the other hand, Greenwald said if software doesn't move in the first month, excess inventory will quickly suffer price cuts and returns.
When contacted by GameSpot, Ehrenberg himself confirmed that his blog was intended to take what was considered old news in the gaming world to a wider investment audience that might not have heard it before.
The official story: Microsoft did not "stuff the channel" with Xbox 360s to meet our sales numbers. Retailers had built a healthy inventory position last quarter to support sales during the holiday, and also for this quarter to accommodate holiday gift card redemptions.--A Microsoft representative.
Bogus or not bogus?: Bogus that this is a big deal. Companies play semantics with "units shipped" and "units sold" all the time, we essentially knew about this months ago, and one man's channel stuffing might be another man's slower-than-expected holiday sales season.
via gamespot
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