The Xbox factor

Nov 22nd 2005
From The Economist Global Agenda

Microsoft’s release of its Xbox 360 video-games console begins a new phase in the battle to remove Sony’s PlayStation from the top spot. If it succeeds, the software giant may be tempted to make more incursions into the competitive market for home-entertainment hardware. Rivals beware

VIDEO gamers who are keen on action games set in wartime will be familiar with the tactic of launching an offensive at dead of night. The technique was not lost on Microsoft this week, as it opened the latest front in the war of the video consoles. At a minute past midnight on Tuesday November 22nd, the technology giant unleashed the Xbox 360, the latest version of its console, in shops around North America, where battle-hardened gamers had queued for hours for a place on the frontline. The new Xbox will go on sale in Europe and Japan in coming weeks.

Despite Microsoft’s impregnable strength as a producer of software, its foray into hardware brings it up against two other considerable powers, both from Japan: Sony and Nintendo. The last round of engagements in the consoles war produced a clear winner in Sony, which has sold 96m PlayStation 2 boxes around the world since its launch in 2000. By contrast, Microsoft’s Xbox, launched in 2001, has sold 22m units, while Nintendo’s GameCube trails with sales of 19m.

Microsoft is hoping that by stealing a march on its competitors, it can make up ground on Sony and leave Nintendo floundering in its wake. In the Xbox 360’s first three months on the market, the American firm wants to sell up to 3m units worldwide. But Sony and Nintendo are marshalling their forces for a counterattack: the PlayStation 3 is set for launch in the spring of 2006 and Nintendo’s new Revolution console will follow sometime later in the year. Microsoft will be hoping that its early move proves decisive. After all, speedy launches have shifted the balance of power in this business before: Nintendo once ruled supreme, but Sony usurped it by getting the PlayStation 2 on to the shelves before its rivals’ competing new offerings.

The dominance of PlayStation 2 was not just the result of its early arrival on the market. The console also supported games made for the original PlayStation, it could be used as a DVD player, and Sony’s good relationship with publishers ensured a steady supply of top-selling games. Furthermore, Sony aimed its product not only at the teenagers that were Nintendo’s core market but, by producing more sophisticated (and, indeed, more violent) games, at older and wealthier players too.

The last Xbox was a powerful piece of kit that appealed mainly to hard-core gamers, but it has lost Microsoft a considerable sum of money. This time, the firm is trying to tap a broader market through clever marketing, such as the unveiling of the Xbox 360 on MTV, and a deliberate push to capture market share in Japan. The Xbox has made almost no impression in its two rivals’ home country—its share of the consoles market there is less than 1%. Microsoft hopes to rectify this by producing a wider range of Japanese titles.

The Xbox 360 has been launched with what is generally regarded as an impressive selection of new games. Keeping up this momentum is vital to its success. Microsoft hopes the new console, which retails at around $300 for the most basic version, will at least break even. That would not be as bad as it sounds. Video-games consoles are traditionally sold at a loss. Profits tend to come from the sales of games and peripherals, and these are potentially vast. In America in 2004, revenue from game sales amounted to some $20 billion, exceeding cinema box-office receipts.

Microsoft’s main aim is to get close to or even overhaul Sony. The Japanese firm is pinning its hopes on the processing power and storage capacity of its new console, which will include a revolutionary processing unit based on the new Cell chip, developed with IBM and Toshiba. But this approach is such a radical change from the operation of the old console that games developers will be forced to start from scratch, using a new style of computer programming to produce games for the PlayStation 3. Any resulting hitches with the new technology or the supply of games could place Sony at a disadvantage. Furthermore, when it comes to online gaming, the PlayStation is deemed to be some way behind the Xbox. That shortcoming matters, because playing games over the internet is becoming more popular as broadband access spreads.

However, Sony has bigger plans for the console and the Cell chip. By including a Blu-ray optical drive in the PlayStation 3, it hopes to promote its own standard for the next generation of DVDs, and the console as a device for playing them. Sony is currently locked in a battle with Toshiba, which, despite helping to develop the Cell chip, is pushing an alternative DVD standard. Sony also hopes to use the Cell chip in high-definition televisions, music players and a range of household electronics. The PlayStation 3 will be the first device equipped with the new chip, and its performance will thus be closely watched. So for Sony, maintaining a lead in video gaming is key to the group’s overall health.

Microsoft’s push into video gaming is small beer compared with its dominance of the global software industry. But the company is still hungry for success, and many think it could grab enough market share to draw level with Sony, if not overtake it. And the Xbox is merely Microsoft’s first stab at manufacturing hardware that runs its own software and online services. A happy outcome would convince the software giant that it should invest more of its billions in the increasingly alluring market for electronic home-entertainment devices (an iPod-bashing music player may come next). Expect battles on a number of fronts in the years ahead.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.