Technology Pundits: Why Microsoft Should Not Be in Console Gaming Feb 19, 2010 – By Rob Enderle
A couple of weeks ago Harry McCracken and I were sharing some analysis on
Microsoft’s financial performance which showcased (http://www.businessinsider.com) (you’ll note that
out of around $8.5B of operating income Windows accounts for over $5.5B) that
the Microsoft was largely living off of Office, Windows, and their enterprise
businesses. Their entertainment business appeared to be more of a drag on the
company than a benefit and I suggested they should have likely never entered
the gaming market.
John Obeto over at Absolutely Windows clearly disagreed and thought we should
debate this. He was first to post and you can read what he wrote here:
http://absolutelywindows.com
John’s Argument
John breaks down his argument into several parts. First he argues that to
expand Microsoft had to find new venues to expand and was restricted by
anti-trust limitations as to what those venues would be. Second he argues
that it needed to be a consumer product because they have more visibility and
Apple has showcased they can be more profitable than the other likely
choices. Third he argues that game consoles are the best choice because
Microsoft has had trouble in set top box solutions that simply focus on
content access. Fourth he argues that the Xbox and Xbox 360 were a great idea
just badly executed. Fifth he argued that because Microsoft gets the same for
Windows whether it is gaming or for email there is little point in putting a
lot of resources into PC gaming and console gaming should be more lucrative.
He concludes by conceding that Microsoft should have supported PC gaming
better but that the Xbox caused Sony to collapse and Sony was becoming a real
threat. The close is assumed that therefore Microsoft had no choice but to
enter the space and should remain in it.
Rebuttal
Since I started with the financials I’ll stick with them. Windows
accounts for about 2/3rdsrd of Microsoft’s operating profit the
contribution from Xbox is not material and has historically been negative, at
times significantly so. Xbox consumes significant corporate resources and
those same resources do not seem to be matched on the Windows side. Gaming
pushes performance, performance pushes PC refresh, and PC refresh sells
Windows. If they were to increase the contribution from Xbox by 100% the
result would still fall largely in the margins of the Microsoft major
platforms, if they were to increase Windows by 10% it would increase
Microsoft’s bottom line by around 6% and likely blow out the quarter.
I concede that Sony was a risk but they didn’t fail because of Xbox
they failed because they slammed Blu-Ray into their system which caused them
to not only lose hundreds of dollars initially on every system sold (BOM cost
was estimated at around $1,000 while price was in the mid $600 initially) but
the price was higher than most wanted to pay. Wii came in both profitable and
less than half the price which pretty much put them under. The motivation
behind the disastrous Blu-Ray decision wasn’t Microsoft’s Xbox
but the desire to beat HD-DVD which they did at an extreme cost.
If Microsoft had a PC platform that had the Xbox capabilities they likely
could license it to OEMs who would position it against game consoles without
Microsoft incurring the hardware risk or cost. Dell has indicated they would
be interested in such an endeavor.
In short it is generally more lucrative and easier to enhance a business and
model you do know rather than one you don’t and the financial results
seem to prove this out for while Microsoft is one of the leaders in the
console gaming space that leadership has not translated as well into profit
as the same effort on Windows might have. Granted Vista would have been a
problem regardless.
By going into a hardware business they put the PC OEMs on guard, effectively
reduced the emphasis on PC churn and this contributed to interest by these
OEMs in Linux, Android and the ChromeOS. The economic cost of the Xbox may
never be fully known but it appears to be significant.
Conclusion:
Vendors should never go into competition with their partners and the Xbox in
the end is like a simplified PC. While it is well done the economic cost in
terms of Windows focus and OEM dissatisfaction is more significant therefore
it appears that Microsoft would likely be better off, defined by more
profitable and with a higher market valuation, had they not entered the
console market and instead focused this same effort on Windows gaming.
Technology Pundits: Why Microsoft Should Not Be in Console Gaming
