Microsoft takes risk with Xbox
BILLIONS INVESTED IN EFFORT TO SNATCH CUSTOMERS FROM SONY
By Dean Takahashi
Mercury News
As Microsoft prepares to launch its Xbox 360 video game console, the company is doubling down on its bets that video games will become an ever larger part of consumers' lives and that it can move beyond hard-core gamers to claim a big share of Sony's mainstream customers.
On Nov. 22, after four years of planning and billions of dollars at risk, the Xbox 360 goes on sale in North America, the first leg of its worldwide debut. Industry veterans predict that demand from the most avid game enthusiasts alone will be enough to make the console a top seller this holiday season. But they don't know how Microsoft will succeed with the broader group of consumers, dubbed casual gamers, who may prefer the Sony PlayStation 3 or the Nintendo Revolution coming next year.
"The wild card is whether consumers are really going to come out in the holidays for the Xbox 360 or just wait for Sony next year," said David Cole, analyst for market researcher DFC Intelligence in San Diego.
The Xbox 360 will have graphics that are better than anything on store shelves today, with more lifelike games designed to be viewed on high-definition TVs. It will be a digital entertainment and communications system that consumers can customize. But buying it isn't an easy decision for gamers, since the high-end version comes at a steep $399 and each game costs as much as $60.
Microsoft has created two versions of the new console, one with a hard drive that costs $399 and another without that costs $299.
From Chairman Bill Gates in Redmond to Nick Baker, the Microsoft hardware engineer in Mountain View who was a key chip architect for the new box, Microsoft's Xbox team started placing their bets on the Xbox 360, Microsoft's second version of the Xbox console, as early as four years ago.
But the broader effort to take a big chunk of the video game industry, now $28 billion in sales, started six years ago as a reaction to contain Sony's growth.
In the first round, Microsoft came in a distant second. Sony sold about 90 million PlayStation 2s, while Microsoft sold 22 million Xboxes and Nintendo sold about 20 million GameCubes. Nintendo has remained profitable, but Microsoft's cumulative losses in the video game business have topped an estimated $4 billion.
Broader vision
Microsoft is hoping to gain on Sony and make money this time by finding new ways to generate income beyond selling games. It hopes to generate sales from online tournaments, advertising and other online services that would boost Microsoft's long-term quest to control all online entertainment transactions in the home -- as consumers connect to the Internet via the game machine.
The stakes have only grown with the Xbox 360. Like a kid putting another quarter in an arcade machine, Gates anteed up billions for another round of battle. And engineers like Baker gambled that switching the Xbox 360's microprocessor to an IBM chip rather than an Intel one would deliver the processing smarts needed for more complex and intelligent artificial characters.
Microsoft's partners in the Xbox 360 venture -- such as game developers -- have also put themselves on the line. With games running $10 million to $15 million each to develop, a bad bet or two can steer a developer into bankruptcy.
Robbie Bach, chief Xbox officer, noted that this time many of Microsoft's big decisions were made lower down the ranks of the Xbox team, which topped out at more than 700 on hardware and 1,000 in game development.
One example was the choice of the microprocessor. Baker and fellow Microsoft hardware engineer Jeff Andrews, wagered that the best way to top the old Xbox was to create a chip that had multiple cores, or processing engines, on a single chip. This would make computer opponents in games far smarter, and it's why they chose IBM over Intel chips, which were in the first Xbox.
Microsoft also made a significant bet by signing up more contract manufacturers, hiring three of them to assemble boxes in China instead of just one. The bet is that outsourced manufacturing will be more efficient than Sony's use of its own factories. The move is enabling Microsoft to launch in North America, Japan and Europe in the same holiday season.
Another gamble Microsoft took was timing. Bach believes that Microsoft can gain ground by launching the Xbox 360 well ahead of next-generation machines from Sony and Nintendo. The risk of launching early: The new Xbox won't come with a blockbuster game based on Microsoft's hit franchise, "Halo," anytime soon. Without that, gamers may not perceive the machine to be much better than what they've already got.
But the Xbox team figured that making the games run on high-definition TVs would set them apart. David Reid, director of Xbox 360 platform marketing, says the lack of "Halo" at the launch gives many of the other brand new titles a chance to rise to superstardom. About 15 to 20 titles will be ready by year's end, which is significantly more than either Sony or Nintendo have fielded in past launches.
Greg Thomas, head of Take-Two Interactive's Visual Concepts sports game studio in Novato, thinks the Xbox 360 lives up to its promise of enabling more lifelike games. He assigned a couple of developers the task of making uniforms for basketball players that would look baggy and flow like real cloth. It took them months to perfect the simulation for their basketball game for the Xbox 360.
Subtle differences
"It's not one big thing people will notice," Thomas says. "It's a lot of subtle things that complete the picture."
Whether consumers appreciate the subtleties will determine how well the consoles sell.
To broaden its appeal to more gamers, Microsoft is stepping up its investments in games. Microsoft Game Studios stole one of Nintendo's best game development companies when it acquired Rare for $375 million in 2002. Rare has made two of the three Microsoft titles that will be ready when the Xbox 360 launches.
For the Xbox 360, Shane Kim, general manager of Microsoft Game Studios, has opted for just a few titles with bigger budgets. One of those games, "Perfect Dark Zero," an espionage shooting game, is topping the lists of most requested games for all types of game hardware.
Since Microsoft wanted to broaden the console's appeal to non-gamers, the company designed it to fit with other living room decor and electronics, said Brett Lovelady, head of the San Francisco design firm, Astro, hired to work on the Xbox 360. The result is a smaller box that looks like a concave, cream-colored briefcase. It is intended to look like an appliance that doesn't intimidate the non-gamers in the family, said Lovelady.
J Allard, corporate vice president in charge of the Xbox platform, hired a trained sculptor, Jonathan Hayes, to lead the industrial design for the Xbox.
Allard also gambled that an online marketing and distribution strategy -- including virtual game tournaments, advertising and downloadable games -- would generate new sources of revenue that would help offset losses related to selling hardware for less than production costs.
"We decided we had to emphasize the combination of hardware, software and services," said Allard.
Still, big questions persist. Gamers are likely to be upset that many of their games for the current Xbox won't run on the new machine, thanks to the switch from Intel to IBM chips.
Microsoft expects to sell 3 million units of the Xbox 360 in 90 days. But that may not be enough to prevent temporary shortages, considering the nearly simultaneous worldwide launches, said Reid. Still, he expects Microsoft will rapidly replenish the supply of Xboxes.
Analyst Cole says that "the main goal for Microsoft this holiday is to get people talking about the system and build awareness. It's a battle for mind share right now."
source: http://www.mercurynews.com/mld/mercurynews/business/technology/personal_technology/13162777.htm
