Xbox 360: The whys of success and what’s next for Microsoft’s console

After taking years to catch its financial stride, the Xbox 360 looks like it is breaking out from its income-statement doldrums. In its just-released quarterly results, Microsoft announced that the Xbox is finally turning a profit for the company and that the entertainment division is showing topline growth year over year on the strength of 360 sales.

What’s allowed the 360 to find success is time itself. Early on Microsoft decided it wanted to create a console with a longer life span than past consoles, mostly because it realized that creating a game console is too expensive an endeavor to do every five years (this is, it should be noted, something Sony has stated as well; with the release of the Wii U, Nintendo was clearly still on a five-year life cycle). By extending the cycle beyond five years, Microsoft has allowed itself more time — and flexibility — to create a successful gaming console.

In particular, the second-generation Xbox has been successful for three reasons:

  • Long cycles mean more hardware flexibility. With a longer console life cycle, the company has had the time to create more-integrated silicon and continue to reduce the cost of the console itself. With the Xbox 360 S, the company has been able to put the CPU and GPU on the same die, allowing them to ship a gaming box with a lower-cost central processing and graphics engine that consumes half of the power. And more integrated silicon on fully amortized silicon investments means a lower cost for the console itself, which has translated to greater profitability for each box, even as the company has lowered prices.
  • Software as core strength. While a longer life cycle and greater cost flexibility is good, Microsoft would not be able to keep selling hardware if it could not refresh the console software every 1 to 2 years. But the company has done just that, refreshing the UI and service offerings for both new and installed base hardware. By keeping the look and feel of the 360 fresh and offering new services like Netflix — and, soon, video chat with Skype — Microsoft can keep finding new customer segments.
  • Kinect. It is partly this ability to consistently refresh the 360 software that made it possible for Microsoft to introduce a new hardware interface: the Kinect. While Nintendo showed itself to be the most innovative of the big three with the Wii’s motion-sensing Wiimote interface, a 10-year product cycle allowed Microsoft to fight back by acquiring and adapting an innovative interface technology in the Kinect, which has translated into a huge second-half sales “kicker.”

So what now?

Microsoft has made it clear that its strategy for the next few years is to expand the addressable market for the 360 by bringing in more casual gamers and those who want connected entertainment experiences. Transitioning the 360 to a living room entertainment hub is the right idea, but I think they could accelerate their momentum with these steps:

  • Create a low-end disc-less 360 for $99. The $99 price point is a psychological barrier that if crossed will push more consumers toward a discretionary purchase. The company sells the low-end 360 S for $199, but it should consider a new “online-only” 360 without the DVD drive that acquires new games and content solely online through Xbox Live.
  • App Store. The company is facing an ever-bigger threat from Apple TV and Google TV as they prepare their app stores for the living room, so Microsoft needs to create a way for innovative software makers to easily push their wares through the 360. Eliminate the higher-cost testing and requirement hurdles for traditional gaming and allow for low-cost apps to be sold where the company takes a 50 percent toll.
  • Free group video chat. Group video chat comes only to paying Skype members, but I think Microsoft should make group video chat free for Xbox Live premium members. Xbox Live users already are fans of group gaming; imagine how popular group video chat could be, particularly if the company can build gaming experiences around video chat to encourage adoption.

Now that the 360 has found its financial footing, Microsoft needs to double down and accelerate its growth. Otherwise next year’s new Wii U — and Apple or Google — could easily knock it back into the sea of red ink.

Question of the week

What other steps can Microsoft take to boost the 360 over competitors’ offerings?
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Michael Wolf

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