Xbox 360 - First Take Analysis

Michael Gartenberg | May 13, 2005, 09:37 AM

Last night Microsoft introduced the next generation of the Xbox, now officially called Xbox 360. So what does this mean? Well for one thing, Microsoft is changing the rules of the game with how this console is being launched. A few weeks ago Jay Horwitz and I spent some time with the Microsoft Xbox team in Seattle to get a first look at the system and some of the titles. Here's some analysis of what the Xbox 360 launch means.

Here's a riddle. Why was a $300 PC with a Pentium III system, an 8gb hard drive, 64mb of RAM, 10/100 Ethernet, a DVD player and an Nvidia graphics chip considered a killer system in late 2001? The answer is because it was NOT a PC but XBox. This new generation changes that model quite a bit. No longer is Xbox a PC system with N-1 rather a targeted and focused piece of engineering that is state of the art, optimized for games and lots more and that will change the how the system will be used to further Microsoft's role in the digital home.

In order to understand Xbox and what it means to Microsoft, it's important to take a quick look at where Microsoft stands in the home. While Microsoft is the dominant player in the world of desktop computing for business users and home users, the home market beyond the PC has remained elusive to them. Despite several attempts, Microsoft has had poor success attempting to jumpstart the home market using the software licensing models that had served it so well in the PC arena. In the handheld market, PocketPC and Smartphone are only now beginning to make some inroads against entrenched competitors such as Palm and Symbian and other efforts such as WebTV (now called MSN TV) and Sega's  Windows CE based Dreamcast system failed to create a Microsoft presence in the family room. We won't even talk about music and the iPod. The result is that Microsoft has learned that trying to sell operating software to third party OEM licensees in the consumer electronics space is a very different world than the world of PC operating systems.

Microsoft has realized that if it wants to further software initiatives in the home, it needed to reluctantly become its own hardware OEM and create the market for the hardware necessary to sell software. As a common folk saying goes, “when all you have is a hammer, the whole world looks like a nail” and of course that is why the Xbox originally resembled nothing more than a low end PC with a souped up graphics than anything else. Looking ahead, in this regard it is important to note that while Xbox 360 is a hardware platform it is really a software play for Microsoft. In fact, Microsoft has long now adopted a traditional video game business model, where it publishes ALL titles for the platform and charges third parties a fee on each disc that they ship for Xbox.

But Xbox 360 is more than a videogame console. With links to broadband via it's built in Ethernet, wireless support, built in Windows Media connect and Media Center Extender and the potential capacity for large storage capabilities, Xbox 360 is clearly poised as a Trojan horse ready to invade the living rooms of Windows users everywhere and leverage their PCs as media hubs, their MSN messenger IDs and happily deliver PVR functions via Media Center, as well as music, messaging and other software services that Microsoft will happily charge for.

Before that happens however, the horse has to actually get in the door and that's why we're seeing such a major push this time around. It's not clear that Xbox 360 will win against competitors just because they are first out of the box and Microsoft will need to translate their early lead into early sales to gain the necessary foothold. Bear in mind Sony is an entrenched player with two generations of experience dominating the game market and Nintendo has plans to launch a new system as well. Xbox 360 will need a great catalog of launch titles and some exclusive “killer apps” that can draw gamers on the basis of their strength. Of course Xbox 360 is also focusing on the core technology of its platform as best of breed from a technical perspective and what I suspect will be hundreds of millions of dollars of marketing to build brand awareness.

Xbox 360 is a brave new world for Microsoft. With new emphasis on secondary functions and formidable competition, Microsoft is anything but a sure winner in this space. It is likely that both Sony and Nintendo on the strength of their current brands, games and systems will reduce the lead Microsoft has with their early launch over time.

If, however, Microsoft can achieve a strong with Xbox 360 beyond holiday 2005, that will begin to pave the way for them to begin moving consumers on to the additional services Xbox 360 offers and take the console beyond the core videogame functions and into the world of a critical spoke in the digital home. Families looking at Xbox 360  vs. the competition might not focus on these enhancements on their own and it's going to be key that Microsoft evangelize these new functions simply and carefully. Next week, we'll talk about how Sony and Nintendo plan to respond to this opening shot.