That was the news – Week 11, 2008: Following disastrous NPD results, does Microsoft have the balls for a third hardware round?

Following NPD data for February on Thursday, and a slew of "brave" journalists pointing to "worry" in the Microsoft camp, Wedbush Morgan's Michael Pachter spelt it out: if Xbox 360 isn't in serious trouble now, it very soon will be. The analyst said that by year-end the machine will be outpaced by PS3 in Europe to the tune of 20-40 percent, and that the Sony machine will "kill" 360 in Japan. In the fourth quarter, said Pachter, PS3 will start to pull ahead in the US, an unstoppable rise in sales fuelled by Blu-ray inclusion, a potential price cut, and an increase in HD screen take-up.

It's a nightmare situation for Microsoft, however hard it spins it. Pachter's saying that by the end of 2008 Xbox 360 will be dominant nowhere, the machine being outsold massively by Wii in all major territories and looking forward to a grim near-future of being steamrollered in the "core" market by a maturing PS3. Essentially, it's "lost" and the big question now is not who's going to "win" this console generation: far more pressing is the issue of whether or not Microsoft will release a successor to Xbox 360 at all.

February's NPD data showed that at 254,600 units, Xbox 360 was the fifth bestselling console in America last month, and that PS3 – with 280,800 sales - outsold it on home turf for the second month in a row.

Microsoft moved to deaden the blow before the figures were published, saying poor sales were down to "supply constraints" which would be fixed by April, GTA IV's launch month.

On the release of the stats, Microsoft issued a cagey statement, saying that a "winning platform" is about "more than console sales", and focused on overall spend on hardware and software as opposed to hardware itself. $332 million was spent on the Xbox 360 in February, it said, capturing 39 percent of the "generation’s ecosystem", while $235 million was spent on PS3 and $283 million was spent on Wii.

SCEA was less reserved. In a statement titled, "PS3 Sales Eclipse Xbox 360 for Second Straight Month; Year-Over-Year Sales More Than Doubled," CEO Jack Tretton said, “Consumers are recognizing the tremendous value of PS3 and we believe that Blu-ray becoming the high-def format of choice was the tipping point for many consumers. With monster titles like Gran Turismo 5 Prologue and Grand Theft Auto IV launching in April and Metal Gear Solid 4 in June, we’re demonstrating this is the year for PS3.”

And if this is the year for PS3, it's looking increasingly likely that it's also the year we see 360 truly humbled and the potential of the entire Xbox project starting to face some serious home truths.

Crisis Core

Xbox 360 now has a global installed base of 18 million, or thereabouts, and it would appear its growth rate is slowing. The machine sold 10.4 million units in a little over a year at launch, and has now taken a further 14 months to add under just over 7 million more. PS3 is estimated to be at around the 11 million mark globally and 3.8 million in the US, although Sony hasn't confirmed a figure as yet. Assuming PS3 sales start to accelerate dramatically in the back half of 2008 for the aforementioned reasons, and that 360's growth slows as a result, 2008 is looking to be the year where the worm most definitely turned.

It's time to face facts. The Xbox consoles have never been accepted in Japan and have only ever really resonated with the UK in Europe. Yes, the machines have performed well in the US, but only up to a point: Xbox 360 has failed to stave off competition from Nintendo – of that there is absolutely no doubt – and if predictions are borne out Sony will outgun it with PS3 in all territories moving into 2009. Microsoft's gaming division is only just in profit after seven years of Xbox being a retail reality. The question for the Redmond giant, quite obviously, is "now what?"

The quick fix

There's price cutting. Pachter predicts that Xbox 360's European price drop will boost sales by up to 20 percent. Analysts are already urging a similar move in the US as PS3 starts to gather a real head of steam. We may well see this happen, but price drops are a short-term fix, as our friends at Sega are only too aware. As Nintendo put it after the European cut was announced, "[Microsoft is] going for a different market with the price cuts… and once you start slashing the price of something, there is really only one way to go”.

Then there's allying yourself with key titles. Microsoft has jumped through some very expensive hoops increase perception that Xbox 360 is the format on which to play GTA IV, and there's no doubt the Rockstar game will be a system seller, and may well define this generation in many respects. But what else does Microsoft have for year-end? There's Gears 2, Banjo 3, Halo Wars and Fable 2, but is it enough over a PS3 price-cut, a cheap HD disc player, Resistance 2, LittleBigPlanet, Killzone 2, MGS4 and the might ("might" being the operative word) of FFXIII on a global level? Computer says no.

And finally, assuming price-cutting and third-party-game-felatio only work for so long, there's the ultimate in games trade showboating: you admit your cycle's over and you release another console.

Xbox's end-game?

If Microsoft is to do what everyone is just assuming it will do, it will announce a successor to Xbox 360 next year and launch it in 2010. This machine will technically supersede 360 in every respect – effectively killing it as 360 did to the original Xbox – and launch globally into the middle of PlayStation 3's cycle. The cost and logistics will, yet again, be incredible. Microsoft, it is assumed, will enter an entirely new phase of operations with the Xbox brand: it will, again, start from scratch with a new machine, expect this time it'll be facing a Sony with over 120 million PS2s in the market, exploding sales on a cut-price PS3 and a now-embedded handheld with PSP. To say the least, given the previous global performance of Xbox and Xbox 360, that's a daunting prospect. If it failed to "win" before, what will be the difference this time round?

It's balls on the block time. Microsoft said it was in the games business for the long haul when it released Xbox at the turn of the Century, famously saying it was in for a 20-year fight. Xbox 360 has peaked and will now decline against its rivals and we must soon see what Microsoft intends to do: it must now either stick to its guns and push ahead with a new hardware launch or admit defeat. Is Microsoft ready to commit more billions on a fight it will almost certainly never win? If 2008 is the year of PS3, with 2009 be the year of 720?

Only Microsoft can answer the question. We'll know soon enough.