When the Xbox Kinect was unveiled at the Electronics Entertainment Expo in June 2009 by Microsoft (NASDAQ: MSFT) as “Project Natal,” it looked like the future of home entertainment. An unobtrusive device barely bigger than a ruler that not only allows families to play video games without a remote control, but that recognizes each individual users face and voice. Netflix (NASDAQ: NFLX) instant streaming video with hands-free browsing, instant photo uploading to Twitter and Facebook, the ability to scan household items like a skateboard for use as a prop in skating games – impressive stuff. Investors were pleased to, since the Kinect would also extend the lifespan of the Xbox 360, originally released in 2005, well passed the five year lifecycle typical of devoted gaming hardware.
Now the Microsoft Kinect for the Xbox is set to release in just a few short months. As the Kinect gets closer and closer to its November release, however, that early hype has turned to skepticism.
The first hurdle Microsoft needs to clear is the Kinect’s sizable price. A standalone unit will run for $149.99 when it hits retail. While it comes packed in with the game Kinect Adventures, software tailor-made to show off the device’s motion sensing capabilities, this is still a steep price when coupled with the $299, 250GB Xbox 360. Microsoft plans to release a bundle of the Kinect and it’s lower-priced 4GB model of the Xbox 360, but at $299, the bundle will still out-price the Nintendo (PINK: NTDOY) still popular Wii by $100. That the Wii comes packaged with two games will only increase the value proposition compared to Microsoft’s new device.
Kinect’s price point will most likely be a sticking point for existing Xbox 360 owners as well. As Wedbush Morgan analyst Michael Pachter said in June, the price is simply too high for the casual market the Microsoft hopes to capture with the device as well as the gamer market that tend toward early adoption of hardware. “The Kinect bundle costs only $100 more than the cost of a standalone console, so they can afford to sell Kinect for $100. [The] standalone price for Kinect is too high, and core gamers will be put off by the price. My bias is that most core gamers will wait, but that 5 to 10% will buy it. That suggests 2 to 4 million standalone units [sold].” Hardly the success Microsoft is hoping for this holiday season.
Microsoft also faces the problem of not delivering on the early technological promise of Kinect. Word out of E3 2010 is that while the Kinect works marvelously when users are standing up and have plenty of space to move around, the device has trouble interpreting the movements of users sitting on a couch. While active game playing is the device’s major selling point, Kinect’s problem sensing individuals sitting down will seriously hamper its multimedia functions like hands-free Netflix browsing. Word also came out this week that Kinect’s voice control features will not be available out of the box in November. Robin Burrowers, Xbox Live EMEA marketing manager said, “We will be announcing when voice control will be turned on in due course.” Microsoft quickly released a statement to the contrary saying that voice control would be available in some form at launch.
Technical issues with the device may be the least of Microsoft’s worries though. As of now, Kinect is not supported by all third-party video game publishers, most notably Activision Blizzard (NASDAQ: ATVI). The world’s biggest video game publisher announced in June that they would not be shipping software this fall for the Kinect – or for Sony (NYSE: SNE) and its new Playstation motion controller, the Move. ATVI COO Thomas Tippi thinks that Kinect’s high price point will limit the size of its audience. “[As] a publisher, you have to be concerned about how the price drives a lot of the outcome of how big of an install base there’s going to be [for hardware.] The bigger the install base, the more likely that you can make sense out of your investment. The lower the price, the better.”
Microsoft has enjoyed an uptick in Xbox 360 sales since they released a redesigned version of the hardware in June. While it’s likely that those healthy sales will continue throughout the holiday season, it’s doubtful that a consumer populace leery of spending will splurge on an unproven, expensive device that doesn’t seem dramatically different from the Wii.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
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