Game console volumes are lower at launch from where they were back in 2013 when the Xbox One and Playstation 4 were first released. Estimates from Ampere suggest that Microsoft sold 3.3m Xbox One Series X, whereas Sony sold 4.2M PS5 units in 2020 or Q4’20. Though on the surface, volumes sounded equivalent to the PS4 launch, it was noted that the Series X and PS5 were launched or made available in more markets.
The holiday launch was thwarted by a broadly reported chip shortage for more advanced chips. Foxconn recently reported a 10% annual reduction in total unit production, and the shortage will likely continue until Q2’22. TSMC has remained mostly silent about the situation, but revenue for the world’s largest foundry (where Xbox Series X and PS5 chips are made) are expected to grow to $12.9B in Q1’21 versus $10.3B Q1’20 representing 25.2% y/y revenue growth for the world’s largest fab contract manufacturer (representing 54% market share in 2020).
TSMC plays a huge factor in when supply for consoles become available
TSMC still has the largest capacity for 7nm, but will soon ramp-up 4nm in Q4’21 (running ahead of schedule), whereas 5nm production has started to ramp from 2H’20 which means the most cutting-edge products are already riding on TSMC’s production. It seems from various reports that AMD is TSMC’s largest customer for 7nm, as Apple already transitioned to 5nm with iPhone 12, which directly translates to game console availability. Apple is TSMC’s largest customer so it prioritizes A-series chips for its flagship iPhone’s, but upon Apple migrating to its A14 chip and 5nm, a sizeable amount of capacity was made available for 7nm chip designs.
However, even with AMD moving up the pecking order, it seems that TSMC’s production growth isn’t keeping pace with demand. TSMC expects output to reach 140K wsm (wafer supply month) by the end of 2020. This figure could increase over time, with reports suggesting that AMD doubled its 7nm orders from TSMC, and also allocating 75%-80% of 7nm chip production to PS5 and Xbox Series X.
In the immediate near-term, the shortage for game consoles likely persists with doubling of capacity implying that AMD will increase output. AMD could produce enough chips for appx. 40M-50M game console units by the end of 2021, as the initial production run got AMD to 7.8M units total (MSFT and SNE) for the holiday quarter. Implies that even when Sony ordered 10M units in 2020 that production constraints limited AMD to just 50% of the 10M unit order.
Why does this matter for gamers?
Aside from the occasional supply refresh via various online channels, gamers may have to buy a console from third-party retailers on online auction websites like eBay, where gamers can purchase a Series X for $900-$1050 or Playstation 5 from $1,050-$1,100. Basically, there’s so much demand in relation to supply that aside from luck, or a willingness to pay a 2x premium, there’s no way for consumers to get their hands on game consoles.
The supply situation likely gets better by 2H’21, and in an optimistic scenario AMD is able to produce enough chips for 40M-50M next-gen game consoles. This might be enough to slow the pace of price gouging on PS5 and Xbox Series X, but don’t expect this shortage to go away as quickly as the toilet paper mania.
What about game publishers?
The roadmaps of various game publishers could be affected by the size of the next-gen console installed base. It was noted by EA that they were delaying the BF6 release for a number of reasons, but plan on releasing Battlefield 6 this winter 2021, i.e. the company’s Q4.
This is the part of the game console cycle that’s make or break, as the chip shortage translates to a smaller installed base of gamers than originally forecasted. So, game publishers who originally forecasted stronger software revenue from the launch of new blockbuster titles could be affected as well.
However, the impact on Sony and Microsoft won’t be as consequential, though it would play more favorably for both companies to bring supply/demand balance to more reasonable levels. We think consumers would be thankful, but it could also save some of the major game publishers from explaining a more difficult selling environment to shareholders down the road.
Disclosure: Cho Research was not compensated to publish “Xbox Series X and PS5 Slower Sales Driven by Chip Shortage” Though Cho Research does use the research dollars it
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