I recently explored the hill that Microsoft (MSFT) has to climb if its Xbox One is going to be a success, not only as an entertainment box but also as a next-generation video game console.
The Xbox 360 did very well for the company, but in trying to cover so many bases with the successor — taking on so many competing devices and companies at the same time — there are worries Microsoft might have overreached. The Xbox One is packed with features designed to appeal to such a broad audience that it might end up alienating the hardcore gamers that are currently the Xbox’s primary demographic.
Gaming website Kotaku’s roundup of the big event was titled “That Xbox One Reveal Sure Was A Disaster, Huh?” reflecting the general grumbling from the gaming community. It’s being referred to as the “Dad Box” because its look and features seem targeted more toward the gamers who grew up with the Atari than the ones who grew up with an Xbox.
Meanwhile, as the event wound down, Sony (SNE) — whose PlayStation 4 will be going up against the Xbox One as a game-and-entertainment console — saw its stock surge an incredible 9% while MSFT shrugged. Sure, there were other things going on in Sony land (the company was mulling spinning off its Entertainment unit, Japanese stocks as a whole were still on the upswing), but the timing and optics of the move couldn’t have been better for the Xbox One doubters.
But what if they’re wrong? What if Microsoft’s big gamble pays off?
Consider the current numbers. Microsoft has some 77 million Xbox 360s in circulation. Sony has more than 70 million PS3s, and Nintendo (NTDOY) has sold 100 million Wiis. That puts the established market for next-gen gaming consoles near the 250 million range.
If Microsoft can hold onto those Xbox 360 users and convert some PS3 and Wii owners to the Xbox One, it’s in a pretty good position for big growth of its business. Sony has faced heat so far over its PS4 plans and Nintendo’s Wii U sales have been significantly off the pace set by the Wii. So it’s not that farfetched to think the Xbox One could gain ground in the next generation.
But Microsoft isn’t just gunning for video console supremacy with the Xbox One — it also has set-top boxes like Apple’s (AAPL) AppleTV in its sights.
We don’t know for sure, but best guesses are that Apple has moved at least 10 million of these things since 2007 and the adoption rates are accelerating — the company sold over 2 million of them in the last holiday quarter alone. Take those current Xbox 360 numbers, throw in some frustrated Wii and PS3 owners, add some of the would-be set-top box crowd and the potential market for Xbox One gets bigger.
Also throw in some owners of older HDTVs who would like to add smart features like Skype, web browsing and Netflix (NFLX) streaming without spending the money for a new TV — an Xbox One gives them all that on their existing set (plus gaming and a Blu-ray player for movies) at a significantly lower cost than a new flatscreen.
Trouble for Apple
Just as important as all the Xbox One’s many features could be its timing. Google (GOOG) has made attempts at the living room with set-top boxes and smart TV apps, but has failed to get much traction. Apple, too, is limited to its Apple TV set-top success, which has been steady, but not on fire.
One of the big features missing from both of these competitors has been the ability to offer a compelling video game experience: In Apple’s case, you can’t even play games at all on its boxes, and Google TVs have a limited number of mostly casual gaming apps.
You can bet they’re working on that problem, and rumors have been flying for years that Apple in particular is developing its own television set — one that would presumably incorporate streaming, web services, apps and gaming. The thought is that this could be Apple’s next big market, the one that gives it the sales needed to boost its stock back to 2012 levels.
But, as Slate’s Farhad Manjoo points out, Steve Jobs’ dream device — a living room hub with the ability to switch between devices and sources with a simple voice command or gesture, one that’s web-connected, leverages a tablet or smartphone and plays video games — is now a reality.
And Microsoft made it.
With growing demand for such an entertainment hub, stoked by years of Apple Television rumors, Microsoft has the very real opportunity to beat Apple to the punch by getting there first. Its Kinect motion and voice control system is second-generation and vastly improved. The company knows games and its Xbox Live network is second to none. It’s even been busily lining up exclusive content from the likes of the NFL.
The Xbox One won’t require a new TV, so the price barrier to entry will be much lower than an Apple television set. And most importantly of all, it will be available. Microsoft has said the device will be ready in 2013, and you can bet that means in time for the holiday shopping season.
If enough Xbox Ones get snapped up as gifts this year, Microsoft’s foothold in the living room, combined with its value proposition, may be too strong for Apple to overcome.
Based on any of these scenarios, the Xbox One could turn into a big hit and make Microsoft’s Entertainment and Devices division — already the company’s third largest in terms of revenue — even more important to its future. Stranger things have happened.
Remember, in 2001, Microsoft had zero market share in the video game console business and zero credibility with gamers. It gambled by introducing the original Xbox, and look at how well that turned out.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.