Wednesday, May 18, 2005

“Game On: Microsoft and the Next Generation Console War”

Microsoft announced the release of its successor to the Xbox game console (dubbed “Xbox 360”) with no small amount of fanfare, in a 30 minute-long infomercial on MTV on May 12. The Xbox 360, to be available in time for the 2005 holiday season, represents Microsoft’s next hope for market share in the highly competitive video game industry.
Sony has sold nearly 87 million PlayStation 2 units worldwide and 35.4 million in the U.S., while the Xbox lags behind with 20 million worldwide and 13.2 million in the U.S. Sales numbers for the Nintendo GameCube are largely unknown, with estimates ranging from 16 to 20 million consoles sold worldwide, and 9.5 million domestically. Part of the reason for Sony’s dominance is the long lead that the PlayStation 2 enjoyed over the Xbox – Sony released its system in October 2000 in the U.S., while Microsoft began selling its own system in November 2001. Game consoles traditionally go through a five to six-year cycle before the next generation, and the gaming industry is ripe for a change.
The new system will be formatted for high-definition televisions, with multi-channel surround sound and a DVD player to utilize more advanced home theater systems. It also includes a 20 gigabyte hard drive, wireless capabilities to network with any Windows PC, and an Ethernet port to connect to a high-speed Internet connection. The Xbox 360 is not just a gaming system – it intends to be the centerpiece of a fully integrated entertainment center. Accompanying the system is complimentary access to Xbox Live, an online service to provide downloadable previews and custom content for games. With a paid subscription, a user can access online multiplayer games to compete against similarly connected players.
Microsoft clearly hopes to gain first-mover advantage with this release – although Sony and Nintendo say their next generation consoles will be ready later this year, analysts do not anticipate a release until early 2006. Sales for new consoles are largely driven by the availability of high-profile game titles, and the Xbox 360 release party included clips of upcoming games to show the graphics capabilities of the new system. Microsoft is also giving a great deal of attention to the Xbox Live service, a revenue stream with great potential.
Some analysts rave about the technical aspects of the new system, citing the “honest to goodness…almost as good as video” graphics but others question Microsoft’s timing, cautioning that the market may not yet be ready for a next generation and that the Xbox 360 is only an incremental improvement. As kids play their state-of-the art video games, Microsoft is betting on parents being able to visualize a game system as the house’s digital center. Consumers may be difficult to convince. “This is more an Xbox 1.5 than an Xbox 2,” said PJ McNeely of American Technology Research.
One unknown factor is the cost of the console. Console manufacturers followed Nintendo’s model and have historically sold the game systems at a loss or at cost in order to drive sales, while making money from the licensing fees for the games. Microsoft has been no different, with its Home and Entertainment Division announcing an operating loss of $164 million for the first quarter of 2005 and losses on the Xbox running to about $1.2 billion per year since 2001. The traditional price point of a new console is $299, but estimates for the Xbox 360 vary between $299 and $399, with Microsoft refusing comment on the price point. The company also settled another pressing question on May 16 when it announced that the new system would be backward-compatible with games for the original Xbox.
Then there’s the matter of the current 800-pound gorilla of the video game consoles, Sony. With a launch window of spring 2006, the promise of a new Sony system may be enough to hold back initial sales of the Xbox 360 – after all, Sony has a much larger customer base, all of whom may be willing to wait three or four months for a new system that will still work with their existing games. The failure of the 128-bit Sega Dreamcast system, released in 1999 to initial success and discontinued in 2001, is partly attributed to a similar phenomenon – Sony announced its PlayStation 2 in April 1999, to be released in 2000. Millions of gamers, instead of purchasing the first mover of the 128-bit consoles, decided to wait for the release of the PlayStation 2 and waited to upgrade. Sony’s recent unveiling of the PlayStation 3 was much more muted than Microsoft’s splashy event, with executives focusing on the technical specifications and games and dodging the questions about cost or actual release date.
Nintendo is another unknown factor, with its console, code-named “Revolution”, to be released in early 2006. Unlike Sony and Microsoft, Nintendo is focusing solely on a system for games but has not released any other information.
While the initial hype and earlier launch of the Xbox 360 may help Microsoft gain some market share, the company cannot erase Sony’s lead and much greater share in one generation. Microsoft is doing all it can – generating widespread attention (even beating Sony to its unveiling), beefing up its system, and signing the important game developers for the highest-profile franchises. Unlike Sega, it has the deep pockets to compete with Sony. Ultimately, however, it will be extremely difficult to convince Sony’s much larger customer base to switch systems with a new PlayStation imminent. All Microsoft can expect is to gain some customers with its earlier launch date, and earn a few percentage points of the video game system pie.

Josh EmersonStephanie JoseDiana Sheehan


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