Xbox One: Ultimate Entertainment Console or Disaster?

by Brad Moon | May 24, 2013 10:12 am

There are many questions yet to be answered about Microsoft’s (MSFT[1]) Xbox One, the all-in one entertainment and video game console unveiled a few days ago[2].

Some of those questions will undoubtedly be addressed at the E3 video game conference[3] in June. However, with the console not expected to hit shelves until the holiday season, the biggest question of all will linger well into next year:

Will the Xbox One be a success?

Well, that depends on the answer to a number of other questions. Like, is Microsoft’s attempt to own your living room, taking over the TV while also trying to become the dominant video game console, simply too ambitious? Does the Xbox One strategy risk alienating hardcore gamers or turning off consumers who have already invested in Smart TV technology or set-top boxes like Apple’s (AAPL[4]) Apple TV? And what about non-gamer customers who hear “Xbox” and dismiss the device as a video game console? Marketing the Xbox One is going to be either a complete breeze, or a complete nightmare.

Potential Problems Galore

According to Entertainment Software Association data, the average age of a video game player is 30[5]. I was listening to streaming radio this morning, and their resident gamer — someone firmly in that age bracket — came on to complain about the Xbox One just based on its name. He felt that after “Xbox” then “Xbox 360,” the name “Xbox One” sounds like a downgrade. He also had suspicions that the other TV-based features could impair its game-playing ability.

Also worrying to gamers, Microsoft has confirmed there will be no backwards compatibility for Xbox 360 games, and the company still is dancing around the issue of whether used games will be allowed[6] or might require a fee to be played. Truth, rumor or misconception, these issues are all out there, they’re all important to gamers, and Microsoft is going to have to deal with them as part of the Xbox One’s marketing.

At the same time, by identifying its living room entry as an Xbox, Microsoft has to face non-gamers — especially those in older demographic brackets. TV viewers are aging, with the average now over 50 years old[7] for most networks. That’s a very steep divide between the 30-year-old gamer that currently represents the Xbox core demographic.

So if a big chunk of your customer base has no real interest in video games, how do you convince them that anything named “Xbox” isn’t just a game console? How do you convince them that their TV viewing experience will be dramatically better on this box (which is likely to cost $300) than on a Smart TV or a $99 Apple TV?

Speaking of Smart TVs, Apple TV and other set-top boxes, there’s another issue. Each of these devices adds its own user interface layer over top of the traditional TV viewing experience. Microsoft has to first convince someone who already owns one of these devices that they need to spend the cash on an Xbox One. But once the Xbox One is installed, whose interface wins? Is it Microsoft’s, since it’s the last box between the cable outlet and the TV? This has the potential to cause confusion and resentment among consumers.

Another potential problem is that Kinect sensor, the now-standard accessory that will ship as part of every Xbox One. It sports 1080p cameras and a multi-microphone array. It can track six people at once, it can detect a heartbeat and it can see in the dark. It’s central to the Xbox One experience and is used to control the system (and the TV it’s hooked up to). And it’s always on.

So, high-definition, IR cameras, multiple microphones, always on and connected to a device that will almost certainly be connected to the Internet. Is it any wonder that it’s already hitting the fan over privacy concerns[8]?

But Don’t Despair

Despite the risks and challenges, the Xbox One has a lot going for it. For one, Microsoft has a huge installed base of Xbox 360 users. While Microsoft lost the last generation’s console sales crown to Nintendo’s (NTDOY[9]) Wii — which moved about 100 million units worldwide compared to the Xbox 360’s 77 million — the Xbox 360 has been on top of U.S. sales charts for 28 consecutive months[10]. And while Nintendo beat both Microsoft and Sony to the punch with its next-generation WiiU console, sales of that system have been disappointing[11]. Sony (SNE[12]) also bungled its PS4 reveal[13] a few months ago.

In addition to its campaign to be the leading entertainment console, Microsoft is going all out with exclusive content, including a Halo TV series from Steven Spielberg and interactive tie-ins with NFL broadcasts.

Plenty could happen at and after E3, but at least at this point in the game, Microsoft isn’t facing any sort of insurmountable lead from competitors. It has some time to fine-tune the message and maybe even the features. (For example, it should add the option to use a remote to power the system on and off instead of having the Kinect always listening in.)

If nothing else, with the Xbox One, Microsoft is going to keep at least a chunk of the hardcore gamers. It’s also managed to take a swipe at living room domination without risking the expense, logistics and potential financial disaster of getting into the TV set manufacturing business itself — this is a far less risky approach than the one that Apple is thought to be taking[14].

However, it’s still taken enough chances that it could well fall flat in this round of the video game console wars.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  2. all-in one entertainment and video game console unveiled a few days ago: http://investorplace.com/2013/05/xbox-one-fails-to-rattle-the-msft-cage/
  3. E3 video game conference: http://www.e3expo.com/
  4. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  5. the average age of a video game player is 30: http://www.theesa.com/facts/gameplayer.asp
  6. dancing around the issue of whether used games will be allowed: http://www.gamespot.com/features/xbox-one-microsofts-phil-spencer-talks-used-games-always-on-6408725/
  7. average now over 50 years old: http://www.businessweek.com/articles/2012-09-06/from-cbs-advertisers-get-the-older-viewers-they-want
  8. hitting the fan over privacy concerns: http://www.extremetech.com/gaming/156515-kinect-for-xbox-one-an-always-on-works-in-the-dark-camera-and-microphone-what-could-possibly-go-wrong
  9. NTDOY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NTDOY
  10. Xbox 360 has been on top of U.S. sales charts for 28 consecutive months: http://www.trustedreviews.com/news/new-xbox-reveal-preceded-by-xbox-360-s-28th-month-atop-sales-charts
  11. sales of that system have been disappointing: http://online.wsj.com/article/SB10001424127887323701904578273120108154866.html
  12. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  13. bungled its PS4 reveal: http://investorplace.com/2013/02/sony-announces-the-playstation-4-proof-of-existence-to-follow/
  14. the one that Apple is thought to be taking: http://investorplace.com/2012/12/will-apple-tv-be-steve-jobs-salmon-of-doubt/

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