XBox 360: Bill Still Doesn't Get It

Some have accused me of not really understanding Microsoft's (MSFT) "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 beachhead 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 Nintendo (NTDOY.PK) 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 whenJames 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 that the "interviewer" who suggested that Bill's vision already exists - 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

[David Lentz:]

Bill Gates has learned his entire repertoire of business strategy from Parker Brothers -- their Monopoly game, where the winning strategy is to acquire all the properties (market share) by any means, and where notions of cash management of sound fiscal policies or product competition play no role. This shows in how Microsoft approaches business in the Real World, in their preference to keep huge cash hoards with no apparent plan of how to use it.

If it were not for the luck of seizing the nascent PC software industry -- one of the most rapidly expanding business segments in history, and the one having the lowest operating cost -- Microsoft would be lost in the dust bin of history by this point.

It's entirely possible that this wasn't luck, but insightful strategy on Bill's part, but the continued use of the same attack model in every other line of business that Microsoft has attempted to dominate tends to make one believe that Microsoft is a one-trick pony. It's a very good trick, but it takes more than one trick in the toolkit to be broadly successful in business.

2007 Jun 11 09:19 AM

[Tom B:]

Once people realize that Windows and Office are are soulless and awful as all their attempts at products, MSFT will be burning that cash pile REALLY fast.

2007 Jun 11 09:40 AM

[vbarzey:]

Roger, I've got to say that you have a point in that Microsoft does not get it when it comes to the videogame industry. However, you don't get it either because the reasons you listed is just off if you yourself have an understanding of the industry. From reading your article, you sound like a typical MS hater which I'm sure you're not. I am no MS fan either but I enjoy the industry and will give credit where credit is due. You should try that approach because as much as you say MS doesn't get it, well we can say Sony doesn't get it either. Didn't hear you say that.

Let me first address your first silly point about "calling their strategy "niche" and overly-focused on the hard-core gamer." Let's go back to Sony's PS2 which dominated this market like no other for the last decade. Do you think the PS2 was trying to go after the same gamers as Nintendo with that machine or hardcoregamers? The PS2, I remind you was not aimed at the younger gamers at launched. As a matter of fact, neither did the PS1. So how did Sony get to dominate the market as Nintendo was in the cold for 2 generations? Luck or Nintendo mistakes?

The market changed from being about simple kiddie games like Mario and Sonic. Those gamers grew up so Sony went after the more mature gamers that wanted the Final Fantasy and Metal Gear. You know, the ones you are now calling the niche hardcoregamers. These are the gamers that made this industry expand so it is imperative you get these gamers. They are the ones constantly buying software all year long not just during the holidays. Never mind that there are 10 million 360 owers and about 3 million PS3 owners worldwide that are "niche hardcoregamers" compared to 8 million Wii owners in which a number of them own a PS3 or an 360.

I give Nintendo tons of credit in realizing an opportunity and making it work brilliantly. Most of it was out of necessity that the Wii was created. They really couldn't compete with Sony or Microsoft. The Wii biggest success is due to brilliant marketing and attacking the very complaints most non-gamers have about videogames. No excercise or movements and its too difficult. The Wii has now expanded the market to include non-gamers or as is commonly called the casual gamer with simplicity and perceived excercise.

It's not like Microsoft did not know about the casual gamer. They decided to go after the market leader first. Which in business that's the right decision. Give MS credit, they are currently leading (though Nintendo is on pace to pass them) and have taken away Sony's strength. They launched early and got most of the 3rd party on board especially the real successful exclusives Sony used to dominate. The PS3 is struggling for a variety of reasons. The major reason is due to the 360 which begs the question why buy a PS3. XBOX LIVE is dominating the online gaming a huge market that even Nintendo is waaaay behind and really never will catch up.

So where did MS went wrong? XBOX LIVE Arcade. This is where MS was to be creating simple games that appeal to the casual gamer. You know, games that don't require a lot of horsepower. Most of those Wii games could fit on the 20GB hard drive. This is were I think the vision camera which worked well with Texas Hold Em should have given the Wii a run for its money. However, this is dependant (unlike the Wii) on 3rd party support which had little interest in creating those type of games.

Most if not all of the successful games on the Wii are made by Nintendo. The few 3rd party developers aren't doing well on that system. Seems to me like a niche market if I've seen one. The question that has not been answered is if the casual gamer will be bigger than the hardcore gamer. Or better yet, which one will generate the most money in terms of software sales. Third party games determine the platform of choice. Whoever has the most wins. Nintendo the last few generation have had horrid third party support.

The problem now is that they have lost the casual gamer. Microsoft is trying to do a balancing act and I personally think that could be a huge mistake. Sony has shown little attempt at going after the casual gamer. Just look at it's upcoming game list through 2008. Nintendo is doing little for the hardcoregamer. Just look at their games. Microsoft wants to be everything to everybody. The Elite was an attempt to draw the tech savy gadget gamers who are considering a PS3. Now they want to appeal to the casual gamers on the Wii side. Microsoft biggest problem goes far beyond the games industry....The jack of all trades master of just one.

Sony is a sleeping giant waiting to wake to capture the market. If MS thinks Sony is going away, they have sadly mistaken. The Wii is selling consoles but I'm not so sure that the 3rd party developers are going to jump the bandwagon....yet. I personally believe the Wii is doing well also due to the failure of the other consoles getting enough great games out that appeal to most of the gamers. That will change once GTA and Halo is launched in the fall. Casual gamers are great but they aren't the ones keeping the 3rd party developers in business....its that niche group you referred to.

2007 Jun 13 12:24 AM