Microsoft Xbox One Decisions Should Delight Investors
After yesterday's opening E3 keynotes, the tech blogging community was in an uproar and almost unanimously declared Sony (SNE) and its next generation console PS4 the big winner over Microsoft's (MSFT) Xbox One. Microsoft has made decisions to benefit not just themselves but their most important partners, developers, as well. This will in turn create a strong narrative Microsoft can use to weave moving forward.
Moving forward, the next-generation console wars will be decided by ecosystems. Microsoft's Xbox has unquestionably the stronger ecosystem. The Xbox LIVE brand is stronger than ever and Microsoft has shown the ability to improve the value-added services associated with their Xbox LIVE Gold subscription service. The Xbox LIVE Gold subscription service is one of Microsoft's newest billion dollar businesses. I have never seen so many positive comments from hardcore gamers about the value an Xbox LIVE Gold membership holds. This sentiment will serve Microsoft well and keep customer loyalty and satisfaction high. As Apple (AAPL) has shown us in the mobile space, when you have strong customer loyalty and satisfaction you can keep your pricing at a premium and drive better profit margins. Sony's competing Playstation Plus premium service fails to generate the broad appeal that Xbox LIVE does as Sony focuses primarily on games and approaches the social aspect of gaming as an afterthought.
The used games business is big business. For years, companies like GameStop have made their living on profiting from gamers trading in their games to free up cash for future gaming purchases. Developers never see a penny of that new transaction when a used game is sold at GameStop. What Microsoft has put into place is a system where developers can now profit even when their title is resold. This is huge as it creates secondary revenue for developers. There has been no shortage of gaming studios shutting down over the past couple of years. This should go a long way of keeping developers happy and loyal to Microsoft's Xbox brand.
Microsoft's decision to market the Xbox One as a media center for the living room is the best position possible. Having the Kinect bundled with the console will add ease of use and convenience that gives users dashes of delight that we are accustomed to seeing Apple add. Walking into your living room and launching your TV with your voice is something that will soon seem commonplace and essential. This is one of those features where you won't know the value until you've experienced it first-hand. The media services that will be a part of the Xbox One's launch will be substantially more than Sony's PS4 and will be simpler to utilize. This simpler and ease of use focus should sound familiar. Apple has used this approach to their products for the past decade to produce record profit and revenue while becoming the destination for priority releases from developers. Sony's gaming-only focus makes them a target for other gaming consoles as they seek to enter the living room battle.
The Xbox One will feature deep integration with other Windows products that will be in hundreds of millions of homes over the course of the next year. Being able to control your TV and Xbox from your smartphone, tablet or PC will be a boon to the Xbox One. This ecosystem tie-in will be a boon for the Xbox One and Microsoft is focusing hundreds of millions of dollars to weave this narrative this fall. One big push to the narrative this fall is Microsoft's special partnership with ESPN. Exclusive content and experiences only available on the Xbox One will drive consumers to desire the Xbox One.
Microsoft's opening $499US price tag will be justified by the valuable Xbox LIVE services, exclusive content available only on the console that appeals to a broad segment of TV viewers and Sony's neglect of a growing segment of console purchasers - women - will drive record profits and brand loyalty ensuring Microsoft stays on top for the foreseeable future.
Warnings: There is a chance Microsoft fails to provide a compelling narrative and scare hardcore gamers and indie developers away from the platform. The indie developer story is much more important. Microsoft needs to open the Xbox One up and make it easy for indie developers to create titles. This will give Microsoft a strong ecosystem to hold off Apple if they decide to open up Apple TV to third-party developers.