Microsoft's big bet

[wco81]

Article reiterates Microsoft's online plans, especially how they may be depending on online to win market share.

No details on Sony or Nintendo.

=============

Microsoft Places Big Bet
On Multiplayer Gaming

By DAVID KESMODEL
THE WALL STREET JOURNAL ONLINE
December 30, 2005

Microsoft Corp.'s new Xbox 360 videogame console comes bundled with lots of bells and whistles, such as movielike graphics. But Microsoft's bid to reshape the videogame industry largely is tied up in one feature: the machine's emphasis on online play.

Microsoft is making a big -- and risky -- bet that videogame players will flock to the opportunity to play lots of games against each other over the Internet. The Xbox 360, released in the U.S. last month, lets users play more games online than the original Xbox. It also lets users purchase and download games.


See how the Xbox 360 compares with Sony's PlayStation 3 and Nintendo's Revolution. Plus, a look at key games for these next-generation systems.
The company has spent hundreds of millions of dollars on its online service, Xbox Live, analysts say. To attract more online users, Microsoft is bundling free but limited access to its online service with the Xbox 360. But to play games against others, users must subscribe for $50 a year. That doesn't include the cost of games, or the required high-speed Internet access.

The Redmond, Wash., company's strategy may usher in a new era in the $25 billion games industry. Sony Corp. and Nintendo Co. are expected to make online gaming a key component of their new systems, scheduled to be released next year.

Online gaming isn't new. It blossomed in the 1990s on personal computers, where tech-savvy players dueled in fantasy games. In recent years, console makers entered the field, allowing online matchups in a limited number of games. Now, the industry thinks it can expand the audience, due in part to increased adoption of high-speed Internet connections. The expansion may help the industry build new revenue streams, including online advertisements targeted at gamers.

But the big move into online gaming carries risks. It is not clear that companies like Microsoft and Sony will be able to lure large numbers of players -- each has attracted a small fraction of users to online play with their previous consoles. The companies also must be careful about new business models for distributing games -- such as games-on-demand -- so as not to alienate game publishers, who still rely heavily on in-store sales. And games designed for multiple players have a mixed record of attracting customers.

The challenge is to expand the appeal of online gaming beyond the core audience of hardcore gamers, and casual players may not bite, said Michael Goodman, senior analyst with Yankee Group, a technology-research firm in Boston.

Added Michael Pachter, an analyst with Wedbush Morgan Securities: "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said.

Online Focus

Even before the launch of the Xbox 360, Microsoft was the most aggressive of the console makers in championing online gaming. More than 150 games for its original Xbox, launched in 2001, allow gamers to play against each other online as long as users pay the Xbox Live subscription fee.

The appeal of online play is that users can quickly find human competitors -- whether they're friends or strangers -- without having to gather in someone's living room. For instance, a user wanting to find a competitor in Electronic Arts Inc.'s Madden football game late at night easily can log on to Xbox Live and find a foe within seconds. Each player would coach a virtual team in the same game.

More than two million users of the original Xbox have subscribed to Xbox Live, or about 10% of the customer base. Adoption has been "much faster than expected," said Aaron Greenberg, Microsoft's group marketing manager for Xbox Live, who declined to say whether the service is profitable. With the Xbox 360, Microsoft hopes to persuade 50% of users to hook up to the Internet, he said.

One of Microsoft's strategies to garner more online users is to make it easier to sign up. Unlike with the original Xbox, users of the Xbox 360 don't have to buy a special online kit at a store. If they get the $400, premium version of the new console -- or pay for extra memory for the $300 core model -- they get a free subscription to a service called Xbox Live Silver. It lets players buy and download certain games and send text or voice messages to other users. If they want to compete against others online, they must upgrade to the pay service, known as Xbox Live Gold.

Users pick a nickname -- called a "gamertag" -- that identifies who they are in any game they play on the Xbox 360. This makes it easier for other users to find them and communicate, and it allows Microsoft to offer features in the Gold service such as a tool that assigns a rating to players and pairs them with competitors of similar skill levels.

High Stakes

Mr. Goodman, the Yankee Group analyst, estimates that Microsoft spent more than $200 million just to develop Xbox Live. Mr. Pachter, of Wedbush Morgan, estimates the company has spent more than $1 billion total on the service, including marketing costs. Microsoft won't disclose the cost, though Mr. Greenberg said it has made "a huge investment" in Xbox Live. Microsoft pledged in 2002 to spend $2 billion over five years to beef up its Xbox business, including the development of Xbox Live and the Xbox 360.

The Xbox Live service is part of an entertainment division which includes the Xbox console, as well as PC games and interactive TV products. The division reported an operating loss of $391 million on $3.24 billion in revenue for the fiscal year ended June 30, 2005. Microsoft expects a wider loss for the current fiscal year, because of costs associated with the Xbox 360's launch.

Microsoft's ability to convince more users to pay for the online service will play a key role in the Xbox's profitability. While online gaming is growing in popularity – U.S. revenue is expected to climb to $1.6 billion next year from $1.1 billion this year, according to Dallas research firm Park Associates -- the concept remains unfamiliar to many users of console machines like the Xbox. And while many of the most popular PC games incorporate online play, such features are often included for free. An exception is multiplayer PC games designed for thousands of players, in which publishers typically charge a monthly subscription fee of about $15.

Microsoft could attract a higher percentage of online users for the Xbox 360 than it has with the original Xbox, industry analysts said, in part because the company has positioned the console to be a one-stop digital entertainment center, allowing users to download and play movies and music and view digital photos. But some analysts said they were skeptical that interest among gamers in playing online is strong enough for Microsoft to meet its goal of getting half of Xbox 360 users to use the online service. "The market for online gaming for Xbox is maybe 20%" of users, Mr. Pachter said.

One strategy Microsoft is using to expand its audience is Xbox Live Arcade, a service geared to more casual gamers that features games that are faster to learn, and don't take as long to play. It lets users download arcade-style games for free and test them for a few days -- or for a few levels of the game. If they like a game, users pay between $5 and $15 to keep it. Multiplayer titles include Gauntlet and Joust, popular games from the 1980s.

The company also will allow players to buy add-on content for games, such as special characters and weapons, and Microsoft will share the revenue with publishers. The move could help push more publishers to make online-compatible games for the Xbox 360.

A Centralized Service

Among console makers, only Microsoft has launched a centralized online service. Sony and Nintendo allow online play for their existing consoles, but users must subscribe for individual games through services offered by game publishers, and typically don't pay extra fees to play online.

Sony has said little about the online gaming features that will be available on its PlayStation 3, scheduled to be released next spring, though spokesman Woodrow Mosqueda said "online gaming is going to be a really big deal." He declined to say whether Sony will charge users a fee to play online on the machine. About 5% to 6% of users of the five-year-old PlayStation 2, the world's most popular console, play games online, estimates Yankee Group. More than 30 million of the consoles have been sold in the U.S. alone, about double the number of Xboxes sold. Sony's lead world-wide is even larger.

Nintendo's four-year old game console, the Gamecube, allows users to play some games online if they have a special adapter. Its next-generation console, code-named Revolution, will offer more online gaming, including a centralized service where users can access multiple games. The company said gamers will be able to download popular older games made by Nintendo. It hasn't said whether a fee will be charged, though its first iteration of the service -- for its portable game-playing device -- is free.

Write to David Kesmodel at david.kesmodel@wsj.com

[blueduke]

Added Michael Pachter, an analyst with Wedbush Morgan Securities: "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said.

Speaking for myself only that's why I play games. Good article. Hope MS bet on the right horse

[DivotMaker]

Hope this is not OT, but it is related to MS and the 360....

http://hardware.gamershell.com/news/xbo ... to_make33/

(Insider Scoop) Microsoft, the PC worlds’ most influencing company, would like you to believe they’re only losing $126 per Xbox 360 they’re selling, every tech site went ahead and reported the numbers, believing Ol’Mighty Microsoft.

A high ranking friend at IBM, one that worked on the Xbox 360 chip design, tipped us regarding the real expenses involved in manufacturing the Xbox 360, and when we mentioned the $126 Microsoft loss, he said:

“$126? It costs Microsoft approximately $715 to make, the manufacturing costs are still too high, another reason why they’re producing relatively small quantities, Microsoft can take it though”

That’s almost a $300 per Xbox 360 loss! Microsoft or not, these guys sure are taking one for the (Entertainment) team!
Microsoft sure are trying to take on Sony, $300 per unit loss? That's quite a bit of money... everyone selling them Xbox's on Ebay should be giggling now.

If this is indeed true, it could explain the shortages, but it would also make me wonder how much the PS3 will set Sony back if they ship with BluRay drives, etc.....

[Rodster]

Again shouldn't be OT since we'r discussing the 360 and MS. I found an interesting article.

http://arstechnica.com/news.ars/post/20051228-5862.html

Microsoft has taken the bold step of announcing that the Xbox 360 will become profitable by the start of the company's 2007 financial year, which begins in July 2006. While this is an admirable and ambitious target, some industry analysts are saying that it will be a difficult goal that would require the release of a popular new game in the following year:

There have been many attempts to try and calculate how much money console makers gain or lose with the sale of each unit. Some estimate that Microsoft is losing as much as US$126 on each non-Core Xbox 360 sold. However, most of these ignore the fact that the manufacturer will get significant volume discounts on the component parts (such as DVD-ROM drives) Besides that, the very nature of attempting to figure out profits on each unit ignores all sorts of sunk costs such as tooling, design, R&D, marketing, and so on. Microsoft has always stated that their Xbox division is part of a long-term strategy to gain entry into the large video game and home entertainment markets, and as such is willing to take short-term financial losses in order to gain market share. Sony did the same thing with the original PlayStation and its successor. Only Nintendo, which relies on video game sales as its primary source of income, has maintained consistent profitability on the sales of their consoles.

[tjung0831]

Added Michael Pachter, an analyst with Wedbush Morgan Securities: "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said.

Speaking for myself only that's why I play games. Good article. Hope MS bet on the right horse

Not me...I have to agree with that quote. If I wanted social interaction I'd just get more invovled in my church!

[kevinpars]

I am also not much of an online gamer. While I hope that online gaming takes off, I hope that developers don’t stop trying to push the envelope when it comes to improved AI in games. I do like having access to online with my 360 and it is great to download demos and to have quick access to updates and improvements (or even patches to games) if/when they come out. I can imagine that I will end up spending some money on downloading games from the arcade and would even consider paying for things like new golf courses and things to improve sports games.

I hope that both MS and Sony have good launches. I think it is in our best interest as gamers if we have multiple consoles and multiple gaming companies. Sony is looking very vulnerable right now. Sure, they have already won the Japanese market by default, and will probably pass MS by when their console comes out in 2006, but the rest of their business has put them in a bad position. They could end up winning the battle and losing the war if they take a big hit on costs per console – especially if they continue to stumble in the rest of their business. And all this talk about Blue Ray is meaningless to me right now. My high definition gaming consists of a 19 inch CRT monitor and the MS VGA adapter and I am a ways from spending money on a high definition TV.

[bdunn13]

M$ wants to use online gaming for a couple of things. One, its so they already have your credit card number so they can get you to buy stuff from your sofa(already seems to be working well for them). They have done a great job at making the 360 a credit card machine.


The other part is testing the lease model for software and services. Expect within the next 2 generations of Windows/Office to be renting/leasing your software. MS is hurting for revanue growth and this is the way to make it happen.

[Dave]

There are two things that keep me renewing my XBL subscription:

DSP
Racing games

If it weren't for either of those, I'd find the whole experience to be too frustrating and immature.

The $50 is like an expansion pack for all of the racing games I buy. The Codies games tend to have pretty solid AI, but there are others (like GT and Forza, to some extent) that have brain-dead drones flying around the track. But no matter how good the AI gets, passing a virtual Sam Hornish can't compare to trying to pass Pigpen on the outside at Michigan. Then there's the sheer humor in watching someone cartwheel off their bike in MotoGP3.

But online gaming is often ruined by the lowest common denominators of the gaming world. I played Halo 2 online once but was immediately burned out by the Mountain Dew crowd using every swear word (and worse) that they knew. Same with the only time I tried Madden online.

Random online gaming is the key to attracting the non-hardcore crowd, but also the worst aspect of online gaming.

MS has their work cut out for them, but they have me as a dedicated customer because of how solid their efforts have been to this point.

[blueduke]

Added Michael Pachter, an analyst with Wedbush Morgan Securities: "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said.

Speaking for myself only that's why I play games. Good article. Hope MS bet on the right horse

Not me...I have to agree with that quote. If I wanted social interaction I'd just get more invovled in my church!

Perhaps I did a shabby job in explaining myself (in retrospect I did). I agree with the quote......I play games as an escape---not social interaction. But I do hope MS is very successful in their latest venture. I prefer MS to Sony

[Leebo33]

I play games as an escape---not social interaction.

I'm not sure why these have to be mutually exclusive. I've had a very good time "escaping" while playing solo in games like ICO, Knights of the Old Republic, Halo, Zelda, Metal Gear Solid, etc. I have also had some of my best gaming moments in multiplayer playing Tetris for hours on end against my mom, playing various games online with my sister and brother-in-law in FLA, the crazy times we had back in high school playing 4 person track and field on Colecovision, DSP racing nights, head-to-head in a text football game via Netmeeting years ago, etc.

[Boom]

I play games as an escape---not social interaction.

I'm not sure why these have to be mutually exclusive. I've had a very good time "escaping" while playing solo in games like ICO, Knights of the Old Republic, Halo, Zelda, Metal Gear Solid, etc. I have also had some of my best gaming moments in multiplayer playing Tetris for hours on end against my mom, playing various games online with my sister and brother-in-law in FLA, the crazy times we had back in high school playing 4 person track and field on Colecovision, DSP racing nights, head-to-head in a text football game via Netmeeting years ago, etc.

Exactly! Who says you can't "escape" while playing games online? That's just bunk! I feel like I "escape" everytime I fire up Madden and play online... or NCAA, NBA etc for that matter.

If I'm taking myself away from the everyday grind and enjoying myself and relieving stress while playing online, isn't that "escaping"?

I was all but done with gaming at about the time NFL 2K1 and PSO dropped. Those games carried me over to Madden 2003 and then NCAA 2004. The more online gaming I did, the more types of online games I wanted to try. Soon games like Diablo II and some MMORPG's got a shot. .. and I loved them.

You can play online and "escape" at the same time. That quote above is about the worst quote I've ever heard! It makes absolutely no sense to me, seriously.

[blueduke]

I play games as an escape---not social interaction.

I'm not sure why these have to be mutually exclusive. I've had a very good time "escaping" while playing solo in games like ICO, Knights of the Old Republic, Halo, Zelda, Metal Gear Solid, etc. I have also had some of my best gaming moments in multiplayer playing Tetris for hours on end against my mom, playing various games online with my sister and brother-in-law in FLA, the crazy times we had back in high school playing 4 person track and field on Colecovision, DSP racing nights, head-to-head in a text football game via Netmeeting years ago, etc.

Exactly! Who says you can't "escape" while playing games online? That's just bunk! I feel like I "escape" everytime I fire up Madden and play online... or NCAA, NBA etc for that matter.

If I'm taking myself away from the everyday grind and enjoying myself and relieving stress while playing online, isn't that "escaping"?

I was all but done with gaming at about the time NFL 2K1 and PSO dropped. Those games carried me over to Madden 2003 and then NCAA 2004. The more online gaming I did, the more types of online games I wanted to try. Soon games like Diablo II and some MMORPG's got a shot. .. and I loved them.

You can play online and "escape" at the same time. That quote above is about the worst quote I've ever heard! It makes absolutely no sense to me, seriously.

I'm not saying you can't escape and socially interact at the same time. I'm just saying I don't. In any case I hope MS guesses right as I like their machines better than Sony's (thus far)

[Boom]

blueduke,
My bad. This is the quote that I meant to have in my reply....

Added Michael Pachter, an analyst with Wedbush Morgan Securities: "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said.

[Jimmydeicide]

Well these launch titles that i have played do nothing to further online gaming , there are less options than xbox for live, realy annoying.

[blueduke]

blueduke,
My bad. This is the quote that I meant to have in my reply....

Added Michael Pachter, an analyst with Wedbush Morgan Securities: "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said.

No problem, Boom. It looks like (on the surface at least) that MS has put most of their eggs in the online basket. I hope they're in the right basket even though online gaming is not my bag. I really like their machines.

[Boom]

Well these launch titles that i have played do nothing to further online gaming , there are less options than xbox for live, realy annoying.

These are the first games of a new generation.

One thing that the XBOX 360 has done that no other console has ever done is actually be online with online games at launch.

The Dreamcast, PS2 and even the original xbox can't say that.

First generation games on next generation consoles are graphical enhancements and nothing more. Sure, you have a few acceptions to the rule, but look back. There's not a whole lot o them.

What did the PS2 offer at launch? (just one example) My God, as far as games go it was terrible. Now it has some of the best games I've ever played. The Dreamcast had a pretty good launch, but i'll take the 360 launch over it any day.

Sit back man, the games along with their improvements are coming.

[RobVarak]

Added Michael Pachter, an analyst with Wedbush Morgan Securities: "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said.

MS may fail or it may succeed, but that is one shoddy bit of analysis. 99% of stock analysts are morons anyway. Well, maybe not, but that statement has as much empirical support as Pachter's conclusion. I would wager that if this is representative of the way he researches securities, one could do pretty well playing the market contrary to Mr. Pachter's suggestions.

[wco81]

I think the analyst's fundamental premise that people play games for escapsim is flawed, as well as his belief that online gaming is necessarily social interaction.

That said, history is on his side as far as attach ratios of people who do go online. At least so far.

Getting 50% of people to play online (that is subscribe to the Gold membership) is a pretty high goal, much higher than they've currently achieved.

[Sport73]

It's true that the experience of random online gaming is most often a turn-off to the concept. It's spectacular to play against an old friend 1500 miles away, but not so much to play against a 12 year old with a trucker's mouth and a superiority complex.

That's why Microsoft should ADD another element to the smart Gamerzone implementation - Groups...

I shouldn't need to add every DSP member to my friends list, since I don't want my friends list to be that big etc. But, it would be great if XBL preferred DSP members whenever they were available in a game. Clans, forum members, or people within a community (church group etc.) could become part of those groups on XBL. Other members of my group(s) would show up on a secondary list of 'friends' that I could challenge, and be automatically paired with me in 'Quickplay' matchmaking.

[Jimmydeicide]

Well these launch titles that i have played do nothing to further online gaming , there are less options than xbox for live, realy annoying.

These are the first games of a new generation.

One thing that the XBOX 360 has done that no other console has ever done is actually be online with online games at launch.

The Dreamcast, PS2 and even the original xbox can't say that.

First generation games on next generation consoles are graphical enhancements and nothing more. Sure, you have a few acceptions to the rule, but look back. There's not a whole lot o them.

What did the PS2 offer at launch? (just one example) My God, as far as games go it was terrible. Now it has some of the best games I've ever played. The Dreamcast had a pretty good launch, but i'll take the 360 launch over it any day.

Sit back man, the games along with their improvements are coming.

Ok im im sick off people saying just wait and see, f*** that, why do i have to wait ? i bought a next gen console , "this is the future", "online is gonna blow me away". Well guess what , its bollocks NO WAY should there be less options than the previous console, its less user friendly. This isnt a company with no prior experience with its first attempt ,its a well established company which has a realy great system out already with a better online system to boot.

I can understand the rushing of the games partly , but to rush the part thats supposed to take us beyond anything else online wise is just stupid to me.

Anyone who doesnt have one yet im offering you a different point of view here it seems , You aint missing nothing.

Yes down the road when ive "waited" im sure ill come around but until then why am i having more fun with New Star Soccer3 ? You want graphics try NSS3 its gameplay is better than anything ive played on 360 so far except COD, which i believe doesnt even have 5.1 sound , another one im not getting.

Ok pile on.

[dbdynsty25]

Assuming you made one compelling argument, people might actually try to pile on. As it is, you just spouted off with a bunch of gibberish that isn't backed up by any fact whatsoever. COD not in 5.1? Uhhh...that's the only concrete argument you made, and it's wrong. Not exactly a good start.

What's really funny is that the only game that you claim is worthy, COD, is the one with all of the limited online functionality that everyone complains about. Virtually all of the other games have the same, if not more functionality online.

[Jimmydeicide]

Ok NHl2k6 ? i guess you dont have that one.

And compeling i wasnt trying to be, i was just spouting off, if thats ok.
And its backed up by the games i own.

[dbdynsty25]

Yup, I've got NHL. Works fine for me.

[Jimmydeicide]

It doesnt have the same options as the xbox.

[Leebo33]

It doesnt have the same options as the xbox.

Is that Microsoft's fault (serious question...not trying to be a smart ass)? Is there something in the hardware or online infrastructure that is preventing that game from having more options or at least the same options as the Xbox version?

I think the online portion of X360 is next gen. Here's what I've noticed/enjoyed so far:

- headset can be plugged into the wireless controller right out of the box (no need for pricey add-ons). Sure, it seems that the voice quality is worse than the XBox, but how cool is it to be able to go grab a beer and not lose voice communications?
- the ability to download demos and try games out is certainly "next gen"
- being able to chat with my sister on XBL and not interrupt my franchise game in NBA 2K6 is very cool
- Always showing up as online no matter what game I'm playing. I can't tell you how many times I ended up waiting for 10-30 minutes waiting for an opponent to "show up" for a scheduled league or tourney game. Now, if I want to play an offline game until they show up I can. Or you can determine a good time to send an invite (ie, if you see someone is just starting a franchise game maybe it isn't a good time).
- I think the gamercards and achievements are cool. It's really nice to browse them and think "Holy, sh*t...JROD finished COD2 on "hardened" or "veteran"...LOL. Or I can see who would be a good person to ask a question about a particular game.