Practical analysis for investment professionals
21 June 2013

Microsoft’s Xbox One Console: A Leap Too Far?

“Only make your audience take one leap of faith per episode. Every audience is prepared to take one leap of faith, but not more.”

–Gene Roddenberry, creator of Star Trek

In a move reminiscent of Netflix trying (and failing) to split their online and by-mail services, Microsoft (MSFT) recently announced a dramatic reversal for its new video game console, the Xbox One. Microsoft’s original plans for the Xbox One required a full-time connection to the internet — even for playing single-player, “offline” games — but a recent announcement posted to the Xbox website describes changes that will do away with the required internet connection and revise some of their previously planned restrictions on re-sold or loaned games.

Why was the fan backlash, which had been ongoing since May, so powerful? It may have come from Microsoft’s attempt to implement a long-term strategy too quickly.

Microsoft’s current console, the Xbox 360, has dominated the US market. In April, the company announced that retail consumers had spent $402 million on Xbox 360 hardware, software, and accessories, and that the Xbox 360 had spent more than two years as the best-selling video game console in the United States.

Still, it’s a difficult time for video game consoles. There’s less time between new console releases, making it difficult to recover development costs. The physical software distribution model is being pressured by online delivery systems. Mobile devices are offering entertainment for “casual” gamers at lower prices. Smart tech companies will have to adapt in order to survive, but they also have to be aware of how much adaptation their audience can handle.

Microsoft’s requirement for constant internet access was a gamble that the current “always connected” consumer base would have been large enough to support console sales. It would have put them in a good position as that group of consumers grows over time.

Other aspects of Microsoft’s console, such as its restrictions on re-sold or loaned games, shifted its business from the traditional “video games are a physical thing that you own” model to a “games are a service that you are paying for” model — but not every consumer is willing to accept this change. The digital restrictions made the “games are physical” segment of their always-connected audience upset. The “games are a service” part of the larger, not-always-connected audience was already upset.

Microsoft could have used this as an opportunity to communicate their vision for the future of console gaming. (In fact, Keith Stuart at the Guardian has an excellent discussion of how Microsoft’s strategy could have worked out well for everyone.) And better communication might have helped, if the video game industry’s culture was less geared toward trash talk and allowed more honest communication about goals and ambitions.

At E3, the US video game event where game developers unveil their biggest announcements, Sony (SNE) and Nintendo (NTDOY) were able to emphasize how their newest consoles didn’t need an internet connection. The audience preferred Sony’s improvised attacks on Microsoft’s policies over Microsoft’s statement that people who don’t like the new console can always buy the old one. And Sony’s own moves towards “games as a service” looked better when compared to Microsoft’s position.

Ultimately, Microsoft’s reversal of plans for the Xbox One may be enough for the console to succeed in the marketplace. The company’s long-term strategy for console gaming may have to wait a little longer.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.


About the Author(s)
Peter M.J. Gross

Peter M.J. Gross is an online content specialist for CFA Institute, where he has managed blogs for the CFA Institute Annual Conference, European Investment Conference, and Middle East Investment Conference. Previously, he worked at Hampton Roads Publishing Company and at MFS Investment Management. Mr. Gross' articles have been published by Enterprising Investor, City A.M., Seeking Alpha, and The Hook. His work has also been highlighted by Real Clear Markets and the World Economic Forum. Mr. Gross holds a BA degree from Connecticut College.

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