Is Microsoft's Xbox 360 Team Waking Up?

Some have accused me of not really understanding Microsoft's "gateway to the living room" strategy, where they are willing to incur billions upon billions in operating losses over many years in order to establish a beach head for offline and online gaming, music, video and streaming content. I've been pretty brutal in my assessment of the risks of such an approach, calling their strategy "niche" and overly-focused on the hard-core gamer, especially at the price point they've established. And I've also commented that this positioning stands in stark contrast to their messaging of becoming more mainstream. Finally, I've claimed that Microsoft really doesn't understand the mass market, focusing on the technical shortcomings of the massively successful Wii and not on the fact that, bottom line, it provides a fun experience for game players across the spectrum. Something is wrong here, inconsistencies abound. So what gives? Am I being overly critical and missing the boat or is Microsoft's gaming strategy seriously broken? The answer: they are wrong - and they know it. What they do with this knowledge will be fun to watch.

Microsoft Knows Their Strategy is Broken - Finally

And how do I know this? Read these quotes from a recent Bloomberg interview posted on spong.com 06/08/2007:

Microsoft has indicated that it plans to make a stronger play for the casual market in order to expand its demographic.

Speaking with Bloomberg, Peter Moore, head of Microsoft's interactive entertainment business division, said of the wider audience that the Nintendo has reached, “If we don't make that move, make it early and expand our demographic, we will wind up in the same place as with Xbox 1, a solid business with 25 million people. What I need is a solid business with 90 million people."

Microsoft's director of Xbox global platform marketing, Albert Penello, echoed the sentiment. Discussing Microsoft's assertion that it's winning over female gamers with Guitar Hero 2 (you can check out this week's Girl Gamer column to test that assertion), Penello said, “If you don't start building that content and reputation it never comes. I don't want to be pigeonholed as a hard-core machine.”

Microsoft also acknowledged the appeal of a sub-$200 console, with just the faintest whiff of a hint that it might be looking towards a lower price-point for the 360. “We are well aware that the sweet spot of the market is really 199 bucks (£101),'' said David Hufford, a director of Xbox product management.

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Clearly there's no solid commitment to a price cut in Hufford's comments. That said, unless he loves Nintendo far too much and missed PR training day, Microsoft would appear to have a price drop on its mind.

Doh! When you've got your Head of Interactive Entertainment, the Director of Xbox Global Platform Marketing and a Director of Xbox Product Management all publicly saying that they've got to crack the mass market and that lower price points are attractive, does this indicate a seismic strategic shift? I'd say so. It seems like an implicit endorsement of Nintendo's strategy, which has clearly been very successful and taken the wind out of both Xbox 360 and PS3. It almost reminds me of when James Allchin, then head of Microsoft's Vista project, said that he'd buy a Mac if he wasn't working at Microsoft. But what does this mean in terms of building a broader array of mass market T and E games (and, say, placing less emphasis on M games like Halo 3?) and dropping prices in order to effectively compete for the mass market gamer? Only time will tell. But a reading of the tea leaves indicates that Microsoft is waking up - and not a moment too soon.

Bill Still Doesn't Get It - Bad for MSFT

Notwithstanding the statements from the gaming guys in the Microsoft trenches, Bill is still working at cross-purposes, which is neither good for his H&E business nor the morale of his troops. During his jousting on a panel with Steve Jobs, Bill projected a vision of a motion-sensing game with high-tech 3D positioning, video recognition, blah, blah, blah. Oh, but not like the Wii. Readers should be aware the "interviewer" who suggested that Bill's vision is already existant - and it's called the Wii - is none other than technophile-cum-columnist Walt Mossberg himself. From Eurogamer 06/05/2007:

Bill Gates has revealed that his vision for the future of gaming involves a new control system where players swing a bat or racket as they would in real life - but said it won't be the same as the Wii.

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Turning to the subject of how the home PC's role is evolving, Gates said, "As we get natural input, that will cause a change... Software is doing vision and so, you know, imagine a game machine where you just can pick up the bat and swing it or the tennis racket and swing it."

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The interviewers suggested Nintendo has already created such a machine in the form of the Wii - but Gates replied, "No, that’s not it. You can't pick up your tennis racket... And swing it. You can't sit there with your friends and do those natural things.

"That’s a 3D positional device," Gates continued. "This is video recognition. This is a camera seeing what's going on."

Gates has previously been critical of Nintendo's strategy with Wii. Back in January he was quoted as saying, "Look at the resolution you get with a controlled experience like that. Say to yourself, how in terms of using a game for a long period of time, what kind of accuracy and capability do you want?"

You know what the problem is here? People don't want technology; they want a fun and exciting user experience. Technology is merely a means to an end, something that Bill loses sight of on a regular basis. He would be better served by letting his team that are closer to the customers drive vision and for him to stay out of it. Because he just doesn't get it. And every time he opens his mouth he just digs Microsoft a deeper hole out of which to climb.

Learning from Mistakes - Some do it Well While Others...

It's not as if Nintendo has always made the right moves. They've made tons of mistakes, as they did with the GameCube console. That said, they learned from their mistakes, internalized key lessons and built a better machine and a better model, and we are seeing the benefits of this learning in the runaway success of the Wii. This learning process was extremely well-covered by Martin Fackler of the New York Times and carried on CNet 06/08/2007:

Nintendo is known for turning out hits with memorable characters like Donkey Kong and the Super Mario Bros., but it has had a reputation for cold-shouldering game software developers because it preferred to make both its hardware and software internally.

The company, based in Kyoto, Japan, certainly produced innovative designs like the GameCube and the touch-screen on the portable Nintendo DS, but it was perennially outclassed and outsold by the more powerful Sony game machines. Sony's PlayStation 2 outsold the GameCube six to one.

Contrast that with the success of the Wii. The Wii and Sony's technology-packed PlayStation 3 went on sale in the United States in November, a year after Microsoft rolled out its Xbox 360. As of the end of April, Nintendo has sold 2.5 million Wii consoles in the United States, almost double PlayStation 3's sales of 1.3 million and heading in the direction of Xbox 360's 5.4 million sales, according to the NPD Group, a market research firm.

What changed? The secretive company is coming out of its shell. It has made a concerted effort to woo other makers of game software as part of a broader change in strategy to dominate the newest generation of game consoles.

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"I had not seen that attitude from them before," said Namco Bandai's chief operating officer, Shin Unozawa, who was at the meeting. "Nintendo was suddenly reaching out to independent developers."

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Nintendo's new strategy is two-pronged. Making the Wii cheaper and easier to play than its rivals attracts a broader range of new customers, including people who never bought a game machine before. With Wii, Nintendo has avoided one mistake it made with GameCube, which was competing with its wealthier rivals on expensive technology-driven performance. While Wii lacks the speed and graphics of PlayStation 3 and Xbox 360, Wii sets itself apart with novel ideas like its wireless motion-sensor controller that gets game players off the couch and jumping around.

The other thrust of Nintendo's new strategy is to enlist software developers like Namco Bandai to write more games for Wii than they did for previous Nintendo machines. Nintendo's hope is that this will help erase one of Sony's biggest past advantages: the far greater number of game titles available for its machines. The more games a machine has, the industry theory holds, the more gamers want to play it.

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"Nintendo is determined not to repeat past mistakes," said Masashi Morita, a games analyst at Okasan Securities in Tokyo. "It is taking a whole new approach with Wii."

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The Wii's simplicity is also the selling point for software makers. Wada said developers had been slower to write games for PlayStation 3 because of the greater complexity of the console's main processor, the high-speed multicore Cell chip. He said PlayStation 3's production delays had also made Sony slow to provide developers with the basic codes and software needed to write games for the new console.

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Now, game developers and analysts say, Nintendo is showing itself more willing to be a partner and not just a rival.

"Being cool toward other game developers didn't work," said Masayuki Otani, an analyst at Maruwa Securities in Tokyo. "Nintendo has learned that it pays to be friendly."

Turning self-awareness and learning into cash - this is Nintendo's story with the Wii. How Microsoft internalizes its lessons learned and reacts will be absoutely critical for the Xbox 360's mass market success. But one thing is for sure: Bill has to let his product guys drive the bus. Because if he let's his technology-vision-thing drive strategy they are screwed.

Comments

[Roger]

Jack, I think you hit on a very, very important point. Microsoft has a major identity problem. Problem is, they've spent in their H&E division like drunken sailors, where the only positive financial outcome would be if they cracked the mass market and got widespread adoption. Problem is, they've curried favor with that 20-25 million user base that doesn't represent the mass market, it represents the hardcore gaming market. And if they had built their model around this that would be great, and they could make tons of money serving this segment. But this is not how they've spent and this is not what their messaging is, ergo, they are in the midst of a full-blown identity crisis.

Whether simply moving down price and adding more E and T games will do it I don't know; maybe the Wii user experience with the Wiimote is just too powerful for the Xbox 360 to crack at any price point and with any kind of games. And if this is, in fact, the case, then they've got a huge problem. Grossly high cost structure with a console that is not desired by enough users to achieve break-even, much less profitability. This would be a truly ugly scenario for the company.

[Jack]

I find Moore and Gates' comments laughable, and indicative of any company that has just had the rug pulled out from under them by a truly disruptive competitor.

MS made a huge play at securing the most dedicated of the hardcore sect with the Xbox 360, and that's exactly what they got. The 360 was indeed a "sequel" to what we got with the original Xbox, and I think the audience size will eventually reflect that. 20-25 million, if that. They're too ingrained with a specific type of customer to start tossing "casual" games against the wall to see what sticks. No one's going to buy that strategy, literally or figuratively. Just look at casual games that bombed spectacularly on the 360 like Viva Pinata.

The issues have been framed for this generation already; MS should now focus on taking out the PS3 for good, and maximize profits with the 20 million strong user base it will eventually command. To toss casual games onto that pile would be a wasted effort, in my opinion.

[Gandhi]

These statements by Microsoft are nothing new. They are typically a VERY late second-mover to any market they choose to compete in. They wait for the market leaders to establish a market, then hop on the bandwagon declaring they have something fancy under development that they will be bringing to market "soon." Two years later, they trot out a watered-down version of thier original promises that is buggy mess.

Nothing new here about them wanting to now go after Nintendo. Did they not declare that they were going after Sony PS with their XBox 360? Now that the market has spoken otherwise and the Wii is a hit, Microsoft again trosts out some vague promises of pursuing the broader market.

Microsoft is the only company that i know if that consistently gets away with such false promises. If it were not for their $300B cash hoard, they would have been a long-forgotten long time ago.

[Rahul]

I continue to find it surprising that you are one of the few people who appear to understand, from a business point of view, what the current state of the market is. It's all so straightforward and obvious. Yet so few people comprehend it.

[gaidengt]

Simply jumping on the bandwagon of mass-market appeal won't hold as a long term strategy for Microsoft or Sony, for that matter -- Nintendo has gained ground because it went out of its way to do something shocking and created a new market around that experience -- the so called 'blue ocean' strategy. As soon as your focus shifts from creating new markets to exploiting existing ones (i.e. The $250 Xbox 720 with motion sensing controllers) you're back to the shark infested waters you were trying to leave behind.

I guarantee Nintendo's next console will take things in a new direction yet again, perhaps building on some features of the Wii but displaying the sort of creativity and craziness that will *require* people to buy it, just to try it out.

If the previous 20 years of video game evolution was the trunk of a tree, with steady, solid growth in a single direction, the upcoming generations (at least, the ones from Nintendo) will be a flourishing web of branches, with each successive generation developing a new genre of video gaming that has few ties to those that came before it.

At this point in video game development, the 'solid ground', ironically, is the environment that is constantly eroding and erupting into new landscapes. These companies need to stop the mimicry and go out on a limb to succeed.