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Playing Games With Mr. Gates
By Monica Rivituso
IN THIS CORNER, The Rock, otherwise known as the World Wrestling Federation star Duane Johnson. And in this corner, The Geek, otherwise known as the world's richest man, Bill Gates. They were facing off in Times Square at midnight (over a video game, not in a wrestling ring, fortunately for Mr. Gates).
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That's just a small taste of the $500 million extravaganza Microsoft (NASDAQ:MSFT - news) has in the works to pitch its highly anticipated new video-game console, the Xbox. Gates himself presented the first buyer with a machine at the new flagship Toys ``R'' Us (NYSE:TOY - news) store in Times Square at 12:01 a.m. ET on Thursday.
A splashy launch, Times Square, midnight madness — why all the razzle-dazzle? Microsoft, known best for its ubiquitous PC operating system (and perhaps its legal entanglements with the Justice Department), is entering fresh territory with the Xbox. And just like any new kid on the block, it needs to make a good first impression to be accepted.
There's good reason to seek welcome here. After all, video games are something consumers are actually still buying these days. The U.S. video-game market is expected to grow to $21.1 billion by 2003, up from an estimated $11.4 billion this year, according to IDC. Microsoft would like nothing more than to grab a piece of that with its own hardware — but more important, with its own software. For now, the company may lose an estimated $125 on each box, but it's the long-term goal here that matters. Says P.J. McNealy, senior analyst at GartnerG2, a division of market-research firm Gartner Dataquest: ``It's about the software. It's about the software. It's about the software.''
It's the old strategy of giving away the razor in order to sell the blades at a handsome profit. Microsoft will create roughly one-third of Xbox game titles in-house, says CIBC World Markets analyst Melissa Eisenstat, with third-party developers making the rest. (It's acquired some game developers to help. Last June, for instance, it bought a private Chicago-based company Bungie Software Products, the architect of such games as ``Halo'' and ``Myth: The Fallen Lords.'')
But is Xbox merely a game console — or part of some broader Microsoft strategy to get its own hardware into consumers' homes? With the console's 733MHz Intel Pentium III, 64 megabytes of memory and built-in hard drive, you'd have reason to wonder. It can play CDs, DVDs, attach to a home theater and connect to the Internet for online gaming.
Still, most analysts are treating Xbox as nothing more than a gaming device — if for no other reason than the business of video-game consoles is pretty darn complicated. ``I think Microsoft has their hands full with getting the console out,'' says Schelley Olhava, senior analyst at IDC.
Gates & Co. insist that Xbox is nothing more than a beefy gaming console. While Sony (NYSE:SNE - news) has marketed its PlayStation 2 as a machine that will eventually support lots of stuff — games, digital-music-subscription services, downloading digital-movie services and even email — Microsoft has steered clear of any such claims for its machine.
But since this is Microsoft, there's some skepticism that the company's only aim is to sell video games. With a hard drive and a broadband connection, Xbox, along with other next-generation consoles hitting the market, will have the storage capability for nongaming services like music subscription, says Gartner's McNealy.
But that sort of thing is still a few years away. A more realistic expectation in the near term, McNealy says, is for Microsoft to make a big push into online gaming in the hope of raking in big subscription fees. Of the big console makers, Microsoft has been the most aggressive on this front. It has its own online-gaming site through MSN, and it will launch a new online-game service in the upcoming months. According to GartnerG2, online gaming in the U.S. should grow to be a $2.3 billion industry by 2005, from $138 million in 2002.
Others see Xbox as much more — the Trojan horse into the home, if you will. Danny Lam, an analyst at research firm FHI Research.com, sees Xbox as eventually being bundled with MSN Internet service. In addition to online game rentals, Lam thinks Microsoft will use Xbox to bolster its Internet service subscription rates. (Perhaps a new Xbox for a one- or two-year commitment for Internet service?) You never know, especially since right now this is a hotly contested area between Microsoft and AOL Time Warner (NYSE:AOL - news).
But while Xbox's power may give it all sorts of long-term potential, for now, it's a game console — and one that faces some pretty stiff competition at that. Sony dominates the video-game-console market. PlayStation 2, its latest console, has been a smashing success, with sales of some 20 million units world-wide since its debut last October. Nintendo is another established player, with a lock on the hand-held gaming market with its Game Boy devices. Nintendo is also unveiling its new GameCube console (which targets a slightly younger audience than Xbox) in North America on Nov. 18. The company expects to have 700,000 GameCubes available at the launch and 1.1 million by Dec. 23. Microsoft, meanwhile, is estimated to have about 300,000 consoles available at the launch, and between one million and 1.5 million by year's end. Since the company scaled back its launch expectations, originally calling for 600,000 to 800,000 consoles, analysts expect sales to come in at the low end of that year-end range.
Of course, a good way to go broke is to underestimate what Microsoft can do once it sets its sights on a market. Well before the Xbox launch, the Redmond, Wash., giant worked hard to generate buzz in the gaming world. Two weeks ago, it held a 48-hour continuous game-play marathon in New York and Los Angeles to promote Xbox. Meanwhile, the games available so far have received favorable reviews. That, plus Microsoft's vast money and muscle, certainly give it a fighting chance to be a player, IDC's Olhava says.
To fully capitalize on its fighting chance, however, Xbox has to fly off store shelves this holiday shopping season. As a newcomer to this market, Microsoft faces something of a chicken-or-egg problem. It needs robust sales to convince game developers that an audience for Xbox games exists. And it needs those developers to create games before Xbox can really take off. A challenge, to be sure. But even though Microsoft is the new kid on the block, it's worth remembering that it's the biggest, strongest and probably meanest kid on the block, too. |
