If you're in the entertainment or electronics industries, you've got to love video games. Despite the recession, the gaming market continues to grow, and its total dollar value already rivals Hollywood box-office returns.
Console gaming has long been dominated by the Big Three: Nintendo, Sony and Sega. But a software market this lucrative wasn't likely to escape Microsoft's notice for long. Sure enough, this holiday season, Redmond has cast its hat into the ring with the introduction of the Xbox.
The new console is an ambitious venture. Backed by a $500 million marketing campaign, the project is so expensive that some analysts project it won't break even until 2004. By that time, Microsoft will have spent an estimated $2 billion producing and promoting the device.
Internally, the Xbox is a familiar design. Beneath its cool black plastics you'll find a 733-MHz Pentium III CPU, an Nvidia graphics processor, Ethernet networking and an 8-GB hard drive. The games themselves ship on DVD-ROM. In essence, it's an off-the-shelf PC, albeit one tuned for performance gaming.
The Big Boss
But even given this tried-and-true approach, if Microsoft wants to become a player in the home-electronics market, it will first have to go up against the big boys: It still has Sony to contend with.
The world leader in consumer-electronics devices, Sony dominates video gaming with a whopping 65 percent market share for its PlayStation and PlayStation 2 consoles. Its closest competitor, Nintendo, remains but a distant second, and the runners-up have fallen by the wayside.
Take the case of Sega, for example. Sega once tried to challenge Sony's supremacy with its Dreamcast console, released in 1998, yet even this seasoned gaming-industry veteran couldn't topple the PlayStation's success. Despite its status as the third-ranked gaming platform, the Dreamcast never enjoyed more than single-digit market share.
Such poor performance can be deadly in the console market, where the hardware itself is often sold at less than its manufacturing cost. That means the vendor actually loses money — sometimes hundreds of dollars — for every console it sells, gambling that it will recoup the losses in licensing fees from game developers. (Microsoft will lose an estimated $125 on each Xbox.)
Low Dreamcast sales resulted in a cash shortage for Sega, leaving it unable to continue to subsidize its console hardware. Faced with certain bankruptcy, in early 2001 Sega decided to get out of the hardware business entirely. What Dreamcast boxes remain on retailers' shelves today are being blown out for the holiday season for a paltry $50 a pop.
Better Mousetraps
Though its record of success may be comparable, unlike Microsoft, Sony doesn't try to dominate its markets by pushing platforms. Sony VAIO laptops run the same Windows as any other portables, only they come equipped with exotic features like DVD burners, i.Link ports (Sony's branded version of FireWire) and tiny Webcams. Its Palm OS-based handhelds ship bundled with Sony's Memory Stick storage device and MP3 playing capabilities.
They're all just great gadgets, and that's the key. Sony markets products, not paradigms.
Its game systems are no different. Where Windows programmers essentially have free reign, PlayStation developers are kept on short leashes, their activities carefully vetted by Sony. And forget about PC convergence; Sony has already bought or litigated two desktop PlayStation emulators out of the market. The Japanese giant isn't interested in creating the Windows of consumer electronics. Its plan is simply to offer a great gaming system.
Nintendo has taken a similar approach with its own latest console, the GameCube. While the internals of the Xbox aren't radically different from those of your desktop workstation, the GameCube's hardware is almost completely proprietary. The message to the consumer is clear: What you get from Nintendo, you can't get anywhere else.
But if Microsoft is willing to gamble $2 billion building a console around the Windows PC model, it's because it hardly has a choice. The PC is its bread and butter. It's banking that a strong market for games on the Xbox will in turn bring new games software to Windows PCs. In a converged universe, Microsoft reasons, what's good for one part is good for the whole. An influx of games for Windows would be a welcome boost to the current sagging PC-software market.
Hearts and Minds
Unfortunately, this kind of symbiotic relationship between the Xbox and Windows PCs just doesn't seem likely. The current market for PC games is a mere $1.3 billion, compared to the more than $7 billion revenues of the console-gaming industry. The trend is for PC games like Quake, WarCraft and others to move to where the money is — to consoles — and not the other way around. Chances are, the Xbox will only speed that trend.
For all Microsoft's hubris about the superiority of its Windows platform, it just doesn't seem to get the message. It isn't system software that sells gaming consoles. It's games.
It's here that Nintendo has long held a distinct advantage, with some of the most immediately recognizable gaming properties around. Nintendo-only titles include the popular Resident Evil series, as well as all the games of Shigeru Miyamoto, creator of Super Mario Bros. and The Legend of Zelda.
Faced with this kind of competition, the Xbox's toughest battle is still ahead: convincing major game developers to sign on to produce games to match Nintendo's. The DirectX programming APIs the Xbox inherits from Windows come with a large installed base of programmers. But many top console-game developers, like Square, EA Sports and 3DO, have already aligned themselves behind one of the other consoles.
The cost of ramping up production for a new platform is too high to be swayed by unsubstantiated convergence hype. These developers want proof that any new console will attract the attention of the notoriously finicky gaming market. Seemingly minor points — like the Xbox's unwieldy controllers — could hamper the platform's popularity and, hence, game sales.
And the Winner Is ... Sega?
At least one gaming-industry veteran has stepped up to the plate to produce games for the Xbox, however: Sega. Bowed but unbroken, since scrapping the Dreamcast console Sega has instead focused on developing gaming software. It's continued to develop networked multiplayer games for the remaining hardware platforms, continuing several years of research into online gaming.
It's also licensing its existing gaming properties. Sega is not only producing sports games for the Xbox, but it will soon release a new version of Sonic the Hedgehog for Nintendo's GameCube console as well. While it may have failed at creating its own gaming platform to compete with the PlayStation, Sega now seems well positioned to continue life as a gaming-software vendor.
It's a lesson Microsoft itself could learn. After all, Redmond's most profitable product line isn't Windows, it's Office — which, you must remember, runs not just on Wintel PCs but on two flavors of the Mac OS as well. Microsoft, like most successful software companies, has attracted the most customers with marketing applications, not platforms.
It would do well to remember that before leaping into another ill-advised venture like the Xbox. To be sure, somebody is liable to profit from the new gaming console. But until it starts paying more attention to its customer base, it probably won't be Microsoft.
