Why did Microsoft even make the XBox?

[happywaffle]

I know everyone loves the XBox and all, but I don’t understand why Microsoft decided to go for it. By all accounts they have yet to even turn a profit, despite all their popularity. And who knows how many billions have been blown in the last five years that they would need to make back just to break even on the venture! What’s the logic? Did they think it wouldn’t be like this? Did they expect to sell three times the XBoxes that they did?

It’s easy enough to say “It’s Microsoft, they wanted to dominate the market” but Microsoft is still a business with shareholders, and would have had to have some dollars-and-cents reason to do this.

[Shagnasty]

What you are suggesting ist hat Microsoft run its business by quarterly profit estimates. That is exactly what man businesses do wrong today. Some extremely successful companies like GE run very expensive R&D facilities with no promise of short to medium term profit. It is hard to say Microsoft is thinking here.

One strategic idea they may have is that the X-Box and the PC may merge in other ways or maybe it will become something new entirely. What they were sure of that there was a very popular line of powerful computing devices that were not run on their software. They wanted to get more experience in that area before they were caught by surprise with something. Also, Microsoft wants to keep itself at the very core of operating systems and complementary software. That is why they care so much about coming up with a new killer Internet browser even though they don’t profit from it in a direct way and the best competition is free and will remain that way. I say that they are a huge tank sitting alone on the battlefield of computer software and they want to blast away at anything that creeps towards their position.

[Taran]

This isn’t really a question with a General Answer, but I can offer a little insight:

Microsoft doesn’t do a lot of innovating. Since time immemorial their strategy has been to take something good and make it better. This worked out very well for them in industries with established competitors (Word, Excel, Windows), but even ten years ago they were starting to worry about becoming victims of their own success.

Consider Microsoft Office. The overwhelming majority of business computing setups run it, so it’s a giant cash cow and a pillar of the company. However, they can only go on milking it for so long as they persuade consumers to buy upgrades. Stop and think about that for a second. Every product they introduce is a threat to their future cash flow. The better Office 2k7 is, the harder it will be to sell Office 2k9. The worse Office 2k7 is, the less likely it is that anyone will bother to upgrade from their perfectly adequate Office 2k5. In the office software space, over a long enough time period, Microsoft is totally, irredeemably fucked unless they can come up with a revolutionary innovation. Historically that has not been their strong point, and they are worried.

In that light, consider the console industry. It’s fiercely competitive, so they can play to their strengths and improve rather than innovate. Better still, its primary users are gamers, people famous for their willingness to spend a lot on upgrades and buy all the new toys as they become available. Best of all, gamers pay subscription fees. The other way out of Microsoft’s upgrade dilemma is for them to persuade consumers to buy software subscriptions instead of software lisences. They’ve wanted this for years and years, but every gesture they’ve ever made in that direction has crashed and burned…except for X-Box Live.

So why didn’t the X-Box pay off? No I’ve talked to really knows. My theory is that they were hoping, over several console generations, to capture most or all of the console market even if few users switch over directly. This is what they did with Excel: one minute Lotus 1-2-3 owned the market, then everyone upgraded their hardware and switched to Excel, and they became the new spreadsheet kings overnight. The thing is, they were able to do that because they could make the barrier to entry extremely low: Excel could do everything Lotus could, could read and write Lotus spreadsheets, the works. The cost for a Lotus user to switch to Excel was practically zero, so as long as Excel offered any improvements at all (and it did), they could easily take over. 90% of the time it didn’t matter which you were using, and the other 10% of the time Excel was better. But consoles don’t work that way; if you’re a guy who wants to play the Final Fantasy XII, you have to get a Playstation 2. There’s no way the X-Box can satisfy you. I don’t think they planned for that kind of brand loyalty, and their usual weapons are totally useless against it. But that’s only a guess.

[samclem]

The OP is probably better suited to IMHO.

Moved. samclem

[Palooka]

The Xbox has already turned a profit. I believe the turning point was the record-breaking sales of Halo 2 that finally did it.

[Amp]

From what I understand, even though they lose money on the hardware they more than make up for it in software sales.

[Mahaloth]

@Taran

So why didn’t the X-Box pay off? No I’ve talked to really knows. My theory is that they were hoping, over several console generations, to capture most or all of the console market even if few users switch over directly.

I remember before the first X-box came out, many were wondering what the point was. We knew they’d lose money on every x-box purchase, so most people thought the first X-box is just to set up for the second X-box, which will turn a huge profit.

Now the second X-box is out, and it still isn’t earing them any cash.

And this time, while first, they will not be the strongest system. And, I have a feeling this generation of Nintendo will put up more competition than the Game Cube. Combine PS3(the clear favourite) and the Wii against the 360 and I think X-box is going to have a hard time.

It’s as it should be. Unless you offer something amazing and unique, its’ hard to beat out Sony or Nintendo. They are really already reaching most of the audience that needs to be reached.

My suggestion for X-box 3? Design it for the elderly! Huge buttons and slow moving games! It’s a whole market that’s ignored!

[RickJay]

@Taran

Microsoft is totally, irredeemably fucked unless they can come up with a revolutionary innovation. Historically that has not been their strong point, and they are worried.

After 25 years of being “totally, irredeemably fucked,” exactly how much longer is it going to take before we see evidence of it?

So why didn’t the X-Box pay off? No I’ve talked to really knows. My theory is that they were hoping, over several console generations, to capture most or all of the console market even if few users switch over directly.

This is obviously what they’re trying to do. XBox 360 is, after all, only the second generation of console they’ve put out, and thanks to the PS3’s continued delays, it’s gradually consuming more and more of the market. Microsoft has the capital to fight it out for years and years. They don’t have to win right away.

[garygnu]

Don’t forget the PS3 will be stupid expensive.

[Chronos]

From what I understand, even though they lose money on the hardware they more than make up for it in software sales.

At least, that’s how every other video game company works. I wouldn’t be at all surprised if Microsoft lost money on every Xbox sold. Nintendo and Sony, and Sega and Atari before them, also lost money on every console sold. Could we have a cite that Microsoft is actually losing money on the Xbox? It’s quite possible that the OP just saw a figure for the consoles, and didn’t realize it was incomplete.

[Rigamarole]

Where exactly are these profit figures you’re all discussing?

[Taran]

Rigamarole: Here are some numbers to chew on. Note in particular the negative numbers next to “home entertainment”. Here is Microsoft’s own release.

@RickJay

After 25 years of being “totally, irredeemably fucked,” exactly how much longer is it going to take before we see evidence of it?

Were people really claiming that Microsoft’s near-total monopoly over business software had forced them into competition with themselves 25 years ago? I’m not engaging in random Microsoft-bashing, I’m describing a specific and very real problem that MS has spent years trying to solve. As for when these troubles will make themselves impossible to ignore, I obviously don’t know. My guess is that the major Windows version after Vista will be the last one ever made; security upgrades and gaming will do for this round, and I’m sure that MS will try to release another OS after Vista…but I don’t think it will go over very well. So call it ten years before the problem is obvious to everybody instead of wall street analysts, and five more before MS is forced to re-invent itself.

If something marvellous happens on the hardware side and everyone suddenly needs new versions of everything (if quantum computing comes together, say), then all bets are off. If there’s suddenly a reason for everyone to upgrade their programs, MS is in a great position to take advantage of that.

This is obviously what they’re trying to do. XBox 360 is, after all, only the second generation of console they’ve put out, and thanks to the PS3’s continued delays, it’s gradually consuming more and more of the market. Microsoft has the capital to fight it out for years and years. They don’t have to win right away.

I think you’re right, of course, but it still seems like a hell of a gamble to me. The X-Box made money and I’m sure the 360 will, but video games aren’t like office tools or web browsers; you can’t make a game that does everything Half-Life does, but better. Instead of appreciating the advances, gamers get annoyed by the repetition. But that’s all IMHO.

[ftg]

It’s all about MS’s biggest bogey man: Sony.

MS hates Sony with every fiber of its being. The PS line is a direct threat to the Wintel world. They have now become effectively PCs that are not running MS software. And Sony sells huge numbers of them.

MS is seriously worried that the world will wake up one day and realize that they don’t have to buy Wintel PCs anymore and buy Sony PS’s instead.

Note that the HD-DVD/Blu-ray war is a MS/Sony war (with MS backing HD-DVD just because it is not Sony and Sony not wanting to give in a license MS codecs).

MS is prepared to lose hundred of millions of dollars on Xbox. (And they are definitely losing money.) All to try and hold back Sony.

Silly MS, all they have to do is the same thing they’ve always done with their enemies. Wait until Sony shoots itself in the foot. (Which they have indeed done.)

The really odd thing is that the real war over this is in Asian and developing markets. Sony pretty much can’t lose there and MS can’t win. The US is just a sideshow but the symbolism is too great for either party focus on the real issues.

[CaveMike]

As consumer electronics continue to move from hardware devices to network-enabled software devices, Microsoft sees an opportunity to play to their core-strength, software development, while competing with traditional consumer electronics manufactures that are more hardware-oriented (e.g. Sony). Gaming is a huge market with explosive growth and it is also a great first step to moving into consumer electronics. As Shagnasty said, Microsoft wants to ensure that a substantial number of devices used for gaming (whether they are consoles, handhelds, or PCs) are running MS software. There is also a nice synergy in gaming since a fundamental use of PCs is playing games (more than many PC owners might admit). MS has a vested interest in continuing to make the PC an attractive gaming platform. This also provides a nice side-benefit that games are easy to port between platforms – much easier than from console to console. When the XBox was created and launched, there was already a common vision to expand the functionality of game consoles to media devices; another reason why a gaming console would be a nice gateway to consumer electronics.

Finally, it is a bit too early to judge MS’s success or failure. They jumped in to a highly competitive market where Sony had a huge lead. Round 2 has not even been played out yet (XBox 360, PS3, WII) and MS has done a nice job staying focused. They put their second console out while Sony battles Vista-like problems with the PS3; not to mention that the PS3 sounds like a major pain to develop on. In fact, the XBox/DirectX team seems to be the only major team at MS that is firing on all cylinders. This may be another reason MS entered the market, they may have had the right mix of people that could create and sell the business plan to the execs while other ideas (such as an MP3 player) were not kicked off.

MS often comes late to a market and throws enough dollars at the problem until they get the market. This isn’t any different except that the initial investment and potential payoff are much bigger. But again, that is in character considering MS just pledge a billion dollars to catch up on the internet front.

@Chronos

At least, that’s how every other video game company works. I wouldn’t be at all surprised if Microsoft lost money on every Xbox sold. Nintendo and Sony, and Sega and Atari before them, also lost money on every console sold.

I thought that this was not always the case – in particular with Nintendo’s Game Cube.

[Rysto]

@CaveMike

I thought that this was not always the case – in particular with Nintendo’s Game Cube.

Supposedly, only the GameCube, XBox, Dreamcast and Saturn have been sold at a loss.

[CrankyAsAnOldMan]

I think cavemike covers an important point–do the other systems have the connectivity via Windows Media Connect?. I assume they’d like it to become a seamless part of your media/entertainment setup, and maybe even eventually replace (instead of duplicate) some of the other media devices people own.

[cainxinth]

Last I heard the video game market was projected to grow a jillion dollars in the next ten years. So, I think the question is why didn’t Microsoft make the X-Box sooner?

[Tuckerfan]

@Amp

From what I understand, even though they lose money on the hardware they more than make up for it in software sales.

And the licensing rights. If you write a game for the XBox and want to be able to market it, be prepared to shell out big bucks to make it happen.

[bump]

@Taran

Consider Microsoft Office. The overwhelming majority of business computing setups run it, so it’s a giant cash cow and a pillar of the company. However, they can only go on milking it for so long as they persuade consumers to buy upgrades. Stop and think about that for a second. Every product they introduce is a threat to their future cash flow. The better Office 2k7 is, the harder it will be to sell Office 2k9. The worse Office 2k7 is, the less likely it is that anyone will bother to upgrade from their perfectly adequate Office 2k5. In the office software space, over a long enough time period, Microsoft is totally, irredeemably fucked unless they can come up with a revolutionary innovation. Historically that has not been their strong point, and they are worried.

They’re hardly “totally, irredeemably fucked”. You’re forgetting that OS and applications are not independent of each other. All they have to do is keep coming out with spiffy new OSes that run on the latest hardware (and have drivers for it), and discontinue OS support for older hardware.

By doing this, they keep people moving in the direction of the new OSes. For example, most of the current hardware in say, a Dell, doesn’t even have drivers written for Windows 98. If you want a modern Dell, you pretty well HAVE to run XP or Vista (or possibly Win 2003 Server).

Since they have that particular migration path, all they have to do is write Office 2k7 to ONLY be compatible with Vista, and Office 2k9 to only be compatible with whatever the follow-on is. Sure, it’s kind of ugly, but it’s the way they’ve done things all along.

My guess as to why they got into the console market is that they thought they had enough tech-industry muscle to move in and dominate over Sony and Nintendo, although it hasn’t worked out that way. Most serious console gamers I know usually have a PS2 AND an XBox, because the games aren’t alll available on both.

I think in the long run, it’s not such a bad move for Microsoft- there will end up being some convergence between PCs and consoles, and they’ll be well positioned to take advantage of that.

[iamthewalrus_3]

@bump

Since they have that particular migration path, all they have to do is write Office 2k7 to ONLY be compatible with Vista, and Office 2k9 to only be compatible with whatever the follow-on is. Sure, it’s kind of ugly, but it’s the way they’ve done things all along.

That doesn’t really solve the problem that Microsoft has, unless they break backwards compatibility. Even if I buy a swoopy new computer that will only run Vista, Vista still has to run my old copies of Office 2000, or whatever. So there’s not enough pressure to upgrade to Office 2kx.

Furthermore, the upgrade path of new computer -> new Windows OS is slowing down, because the hardware improvements are slowing down. 5 or 10 years ago, a 2-year-old computer was less than half the speed of a new one. Now it’s more like 80%.

So Microsoft’s traditional revenue streams seem to be slowing down. Hence, Xbox.