The X-Box.

by Calvin on October 8, 1999

A lot of noise has been made about Microsoft’s secretive project, but what the hell is it?

I was not shocked by the announcement of the X-Box. I’ve been watching Microsoft’s actions for sometime now, and they’ve been working up towards a home entertainment system for a while: Their purchase of WebTV, their highly successful foray into the game controller market, their erratic line of video games (with gems like Age of Empires and bombs that I can’t quit recollect right now…), and of course their development of a Windows CE for the Sega Dreamcast.

The problem with the hype, though, is that everyone assumes that Microsoft is creating a game machine. Why? Because there is a lot of money there. The Interactive Entertainment industry generated 5.1 Billion Dollars in 1997, and it’s been steadily increasing ever since. Recently, Sega sold 400,000 Dreamcasts in about a week, along with tons of controllers, games, etc. That’s some serious cash, blowing movie openings out of the water. So why can’t Microsoft do this? They could conceivably throw together a Celeron with some RAM, a small Hard Drive, a modem, slap on a copy of Windows CE, and BOOM, they have a game console. Seems so easy, doesn’t it?

Well it doesn’t work that way. Sega is extremely happy with the opening of the Dreamcast, as they should be, but for different reasons than most think. Sega probably isn’t making a cent on the Dreamcast sales, in fact, they may be losing money on each one sold. So why would Sega be happy about selling lots of Dreamcasts? Because Sega makes money on each game sold for the system, and the more systems sold means that more developers will see the system as viable, and develop for it, and pay Sega royalties.

Why couldn’t Microsoft do this? Well, if they threw together the above system, the least the could sell it for with out taking a major dive is ~$300, which is too high for the console market. This system would have the advantage that any PC game out there could probably be easily recompiled for use on the X-Box, but it would also have the disadvantage that every game made for it is also available on the PC. Why would a PC owner pay $300 just to buy games that they can already play? And why would any sane company pay Microsoft a royalty when they can just release the game on PC for free? It just doesn’t make sense.

So here’s my theory: Microsoft is trying to get everyone online. The low-end market isn’t really profitable for chip-makers (see AMD), but even the cheapest computer needs software, and even the cheapest computer can participate in e-commerce. Microsoft could sell a decent system at a slight loss, and then be the exclusive ISP for everyone with this system, a la WebTV. Obviously, this wouldn’t be much of an improvement over WebTV’s business model, but let’s carry it a little further.

Let’s say that Microsoft reaches deals with certain large companies, and makes these companies the first ones you see when you search for a product online. Maybe you look for a TV, and the X-Box brings you directly to a Sony site to look at TV’s. Sony would pay a pretty penny to know that they were the first, if not the only place, that online shoppers looked. Microsoft can do this, but this isn’t much improved over the traditional web surfing using a PC.

Think back, a second, to the console market: consoles are so popular because the games are made to take advantage of the console, and there is no hassle in getting the game up and running. Microsoft can use this same principle in e-commerce using the X-Box: let web developers know the exact specifications of the machine they’re developing for, and they’ll make superior web sites. Shopping can literally be made a 3 click process, and the web sites can be motivated completely towards sales, because that’s all the X-Box users are looking for. So who wins? Well, Microsoft gets money, companies like Sony pay a little up front, but essentially get a monopoly on a certain consumer group, and consumers can be convinced to buy the X-Box because they’ll presumably be getting discount rates over what you’d find in the mall, plus shopping is hassle-free!

Will it work? Only time will tell, but I think that with enough marketing muscle, people would snatch up a product like that, especially if they were convinced that the product would pay for itself over the course of a year or two.

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