This week Microsoft unveiled the Xbox One, its next-generation gaming console and successor to the Xbox 360. Remarkably little time was spent presenting the actual gaming side of the machine, but more emphasis was given to how it takes centre stage at the average family’s general media experience (television – DVD – internet). Gamers soon figured out the reason.
Microsoft intends to radically increase the cash flow it generates from games. There will be no backward compatibility (meaning Xbox 360 games won’t work on the latest console, forcing Xbox One buyers to buy new games) and games will be tied to user profiles (meaning you have to pay a fee to Microsoft to play a game, so borrowing from friends or picking up cheap second hand versions is a thing of the past). The reason? Consoles are bad economics.
The (old) advantage consoles had over PC’s was the price. Besides being cheaper than game-worthy desktop computers, consoles don’t need regular hardware updates to be able to play the newest releases. The reason for this is that consoles are actually sold at a loss, at a cost of between USD 70-130 per console for Xbox 360 and USD 18-36 for PlayStation 3. How do console-makers make their money, then?
According to their business model, they make money through software licenses. Console makers get a fee for every produced/sold game but struggle to make up for incurred costs, which include R&D on top of the expensive hardware of the actual machine. Microsoft recorded USD 3bn in accumulated losses for its gaming division the past 10 years and Sony’s PlayStation division posted a USD 2.8bn loss in 2012 alone. Microsoft’s solution: reorienting Xbox towards other media uses (mostly TV) and trying to increase payments from gamers. The huge margin retailers of second hand games get has always been a thorn in the eye of developers, and to avoid the eighth generation console becoming the last of the species, some money has to be siphoned off from the second hand market to sustain the developing side. The big question is if Sony is strong enough to not make the same decision and thus gain an edge over Microsoft in selling its new console. We will find out at the launch of PlayStation 4 later this year.
Investors have never been impressed with gaming. Microsoft’s share price never recovered from the popping of the dotcom bubble, as their ventures into new media such as gaming and mobile technology (grouped under “Entertainment and Devices”) fail to generate the same profits as its competitors Apple, Samsung and Google. Sony’s picture looks even bleaker: it lost 80% of its stock market value since 2000 and its share price is back at the level of the 80’s. Microsoft’s latest Windows-update, Windows 8, has been coldly received and with CEO Steve Ballmer’s neck on the line it has made the rare move of backtracking on some of its innovations. However, unless the behemoths of the 90’s succeed in reorienting their output towards current demands, it won’t take strong activist shareholders to slay them.