Why Microsoft's Dumb Move Might Actually Be Smart: Part 2

| About: Microsoft Corporation (MSFT)

This article is directly related to my previous article recently published on SA. It was well received by a lot of you and some asked for further clarification about what could be the implication of Microsoft's (NASDAQ:MSFT) strategy regarding casual gamers on Xbox One sales and how it could be critical in the fight against Sony's (NYSE:SNE) PlayStation 4 (PS4).

Xbox One (X1) clearly targets casual gamers.

As you may have noticed, Microsoft focused mainly on non-games entertainment and didn't talk that much about what was possible in terms of pure gaming when it presented the device at E3 2013. Instead we heard a lot about TV, social media and interaction with the machine. From this angle, the X1 appears as a highly integrated multimedia center in which non-games entertainment is seen as a main feature rather than a capability that a consumer might want to use a few times a year, as was the case on the previous generations of consoles, and seems to be the case on PS4.

There are two "dumb moves" here by Microsoft: 1) focusing mainly on casual gamers, emphasizing features of a device rather than gaming capabilities at a presentation -- E3 -- that is mainly watched by hardcore gamers, and 2) X1 isn't sold without Kinect, which induces additional costs and doesn't allow Microsoft to aggressively price its console.

Why is it smart?

None will deny that the massive success of the Nintendo Wii was due to its casual gaming oriented approach. The casual games market is poised to become an $8.64 billion industry by 2014. Public interest is increasing every year and is the best opportunity to make money on the gaming market.
But more than just bringing the console to casual gamers, Microsoft wants to bring it to the entire family, and this has critical implications. In the past, the buyer and the main user of the console was the gamer. In Microsoft's strategy, any member of the family is a potential buyer, not only of the console device itself, but also a potential buyer of content. So one should wait before saying that the PS4 is superior to the X1 just because it outsells the X1 for the moment. The content purchased could be significantly higher on the X1. Indeed, assuming a family composed of a father, a mother, a son and a daughter, you can find at least three different buyers: parents who could be buying multimedia content such as a TV series; the son, who will probably buy some "hardcore" games; and the daughter, who might purchase some casual games. In contrast, a more "hardcore gamer" centered device such as the PS4 would rather generate sales from the hardcore gamer and not really from the other members of the family looking for a more casual or entertainment-based experience.


Kinect is the ultimate bait to catch some casual gamers, and we can fairly say that with 24 million Kinects sold with the last generation of Xbox, the bait is working pretty well. More than a bait, the quality of the device is way superior to Sony's Move, and Kinect is capturing full body movement, as opposed to Nintendo's (OTCPK:NTDOY) Wii U. Indeed, the new generation of Kinect has been improved and it can now capture very tiny movements, including finger movement, and therefore offers the greatest possibilities in terms of game play. Moreover, while PS4 and Wii U users will have to buy additional costly peripherals to play with friends, Kinect will be able to record the movements of 6 different players on its own, without additional peripherals or cost to the user. Overall, I see Microsoft's integration of Kinect as a good move. Additionally, it might affect the pricing less than what you would expect.

Casual gamers don't rush.

I've seen a lot of reports that the PlayStation 4 is outselling the Xbox One by far. This is probably true for the moment. But you should keep in mind that the X1 targets casual gamers, and that these are not the kind of customers that rush to buy a newly announced device as soon as possible. So my feeling here is that what we observe is the initial sales to hardcore gamers. We might only see whether targeting the casual gamers was successful and worth it at the end of this year (casual gamers are more likely to buy at that time due to holiday sales).

Why should you care as an investor.

I've read a lot of very bearish reports about the Xbox One regarding its pricing and its focus on casual gamers. However, I consider it a great opportunity for investors. Microsoft redefined the role of the console within a family, and I believe that it will significantly extend the sales of content and probably of the devices themselves, since people will be more likely to buy an Xbox One which meets both the requirements of casual and hardcore gamers, rather than buying both a PS4 and a Wii U to fulfill these two needs. Although it appears that the PS4 is outselling the Xbox One for now, one factor that might positively impact sales going forward is that Microsoft changed its policy about used games because of the negative feedback it received. Specifically, playing games offline will not require a 24-hour Internet connection, as original proposed, and players will be able to use and share games without limitation. That makes the console more appealing for the hardcore gamers. Moreover, casual gamers might represent a significant faction of X1 buyers, and as previously mentioned, they're not the category of buyers that rush to purchase a newly released gaming device. Instead, I rather expect these consumers to buy the device at the end of year as a holiday gift, for instance.

I think that Microsoft is going to release a lot of hardcore games in the coming months to show gamers that it cares about them. At the same time, it will continue its efforts to appeal to casual gamers. Overall, Microsoft is likely to attract consumers from these two very different worlds, and I believe this will translate into a significant increase in revenues for the X1, compared to a device like the PS4, which is only focused on hardcore gamers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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