Microsoft's Gaming Strategy: Strong Presence, Not Revenue

In an April 14 Forbes article (republished on Seeking Alpha on April 18), analyst Roger Ehrenberg criticized Microsoft (MSTF) for its X-box 360 strategy, citing that the platform has dismal popularity in Japan, and that it is a money loser.

“I have concluded that gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective,” he writes. And he concludes by asking, basically whether Microsoft should get out of the gaming business: “At what point, regardless of its virtually endless financial resources, does it say ‘enough is enough’?”

Mr. Ehrenberg misunderstands the motivations of the various companies. I suggest they are as follows:

Nintendo (NTDOY): They just need to sell fun games and make a profit.

Sony (SNE): Promote the Blu-ray HDTV format by getting the players into as many homes as possible early on and by releasing Blu-ray format content through its studio business.

Microsoft: Cover every niche that may develop into an important “gatekeeper” function to make sure that Microsoft sells the software to go with it. Do not allow a potential rival to have any field to itself.

Microsoft’s strategy does not require it to make money on gaming. What it wants is to maintain a strong presence. If gaming consoles really do become the control center of the home, Microsoft will pour some more money into smashing the competition with free bundled software functions and giveaways. Possibly also some knockoff technologies copied from their competitors…

Ehrenberg misses the point of MS's gaming business. The areas where Microsoft is currently attacking strongly are security, with OneLive Security, and supply chain management, with Dynamics. It will compete strongly with firms like Symantec (SYMC) and SAP (nibbling at SAP's niche from the small-business end). But in gaming and portable music (the Zune) it will bide its time and be content to keep its Sasquatch-sized foot in the door.

Disclosure: none

Comments

[Tom B:]

Frankly, you are both right.

2007 Apr 24 08:40 AM