Viewpoint -- Microsoft The Manufacturer?

Gates & Co. enter computer games fray with Xbox.

Okay, I know, Microsoft Corp. isn't really making the Xbox game player itself. Companies such as contract electronics manufacturer Flextronics, and chipmaker Nvidia, are doing the hands-on dirty work. Still, the Xbox is Gates & Co.'s first foray into the strange new world of actually designing and building a piece of hardware. It's a lot more complicated than simply churning out compact discs and shrink-wrapping them for delivery to customers. In case you missed the news, Microsoft recently unleashed its latest attempt to dominate the world of software in the form of an electronic game machine designed to go head-to-head with similar products from Sony and Nintendo, the leaders that control over half the business. Initial reports on the Xbox seem pretty positive, with the new device containing all kinds of cool new features likely to attract buyers. Mind you, it's not that Microsoft really wants to make game hardware, any more than it would want to be in the business of making personal computers. It's just that Microsoft needed its own box to run its game software, because that's the way this business works. No machine, no software sales. Of course, the Xbox represents an even bigger first for Microsoft -- entering the game-player business. This is one hurdle that can't be overestimated. The reason is that computer games are a far cry from stuff like WindowsNT, Windows2000 and WindowsXP. The adult man or woman who sits down at a desk to write a letter or a report, or massage numbers across a spreadsheet, has a whole different mentality than an 11-year-old with hair like a blue jay. The challenge for the average latte-sipping, pizza-munching software developer is a little like asking someone who designs tract homes to suddenly think like Frank Lloyd Wright. Not only is there an adjustment to be made on the software side, Microsoft also is trying to get a foot in a door through which some NFL-sized players have already passed. Suffice it to say that Gates & Co., with the possible exception of the browser market which it took over from Netscape, hasn't had a lot of experience in markets that it didn't already dominate through its ubiquitous operating system. The heavyweights in the business, Sony and Nintendo, have a huge advantage in having thousands of boxes out there already in use. They also benefit from having far greater libraries of games on the market that run on their machines. To make sure that it gains a solid toehold in the game business, Microsoft's plan is to subsidize the Xbox, taking a loss on every machine built. Microsoft also is stoking the fire in advance, laying up an estimated 1 million to 1.5 million game players before the end of the year, backed by a massive marketing campaign. The latter includes promotions with Taco Bell and MTV. According to one press release, Microsoft expects to sell up to 2.5 million Xboxes in the next few months. Another unknown is the risky nature of the video game business. Games -- and game players -- have been known to fall out of favor with the younger set that uses these things almost overnight. Today's hot tamale can easily become tomorrow's burnt toast. In that respect, Microsoft's decision to outsource the manufacturing of the hardware is a smart move. Yet another issue is the proprietary nature of the business. Microsoft is accustomed to having its proprietary software run on a host of manufacturers' PCs, ensuring greater sales than if it ran on only a single platform, the approach that Apple Computer took for so many years. But the Xbox will be just the opposite. Only Xbox-designed software will run on an Xbox, just as software for Sony's PlayStation2 only runs on a Sony. Likewise with Nintendo's GameBoy. Again, a key difference between Xbox and the others is that they have been on the market for years and enjoy the benefit of hundreds of games that play on them. By launch time, Microsoft figures to have only about two-dozen games available. One analyst estimated that Microsoft's retail price of $299 for the Xbox will yield the company a loss of $125 for every console sold. It's a bit like Titleist trying to promote the sale of a revolutionary new golf ball by offering clubs below cost. Obviously, Microsoft figures to get all that back and more on future sales of game software. Make no mistake, the pot of gold at the end of the electronic game rainbow is huge, certainly worth Microsoft's placing a few bets. One estimate pegs the total market for the game business -- hardware and software together -- at $20 billion for 2001. By one trade group's reckoning, some 20 million game consoles will be sold next year. Will Microsoft lose money on Xbox in the short term? Absolutely. But the real question is whether Gates & Co. will be able to make money on its gamble on the game console and software business over time. For the answer to that one, only time -- and those youngsters with the rainbow-tinted hair -- will tell. Doug Bartholomew is an IW senior editor. He is based in San Francisco.

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