Microsoft Xbox Online Kosar Kazemi Hengameh Vahabzadeh

Overview The Video Game Industry Competitive Landscape 1 Competitive Landscape 2 Video Game systems/Software/Online Communities 3 Xbox Xbox lunch Factors Driving Company Lunch Building The Box Cracking The Consumer Electronic Business Identifying A target Market Priming The Developer Pump Pricing Against Competitions Achieving Differentiation 4

Key Question Why was Microsoft betting so much on the home gaming console industry? 1 Was there enough market potential to justify Microsoft’s hefty investment? 2 Would online gaming provide a market opportunity for consoles? 3 Could the game console potentially reduce the importance of the PC? 4

8-bit entertainment system History In 1975, an agreement between Sears Roebuck & Co. and Atari ignited the home video gaming industry. Product Company Year 2600 Atari Late 1970s 8-bit entertainment system Nintendo 1985 16-bit Genesis Sega PlayStation1 Sony 1995 N64 1996 128-bit Dreamcast 1999 2PlayStation1 2000

Online Gaming approximately one-third of Internet users regularly played online games. Forty-three percent of those playing online games had been doing so for less than a year Seventy-nine percent of online gamers were between the ages of 25 and 55. 89 % (1 in 10 online game players) paid for a subscription to any of the online game services

Market attractiveness Technology analysts has predicted that: American video game market would grow to $40 billion by 2003 Online gaming subscription revenues in the U.S. would grow from $270 million in 2001 to $4.6 billion in 2005 35.1 million people played online games in 2001. The two most comprehensive gaming websites Microsoft Game Zone (“the Zone”) EA.com, Electronic Arts’ online and e-commerce business.

Industry revenue breakdown : Industry Segment software hardware accessories game consoles (the Sony PlayStation) portable game players (the Nintendo GameBoy) personal computers featured the games that ran on the hardware. game controllers and other peripherals Industry revenue breakdown : 70 percent software, 20 percent hardware, 10 percent accessories

Business Model & Pricing Loss leader strategy: -Selling hardware for minimal to negative margins -Earned higher margins on sales of video games and accessories Console makers profited from this loss leader strategy in three ways: Produced game software and earned revenues directly from the game sales. Royalty agreements with third-party software publishers to publish games for Console manufacturers system Console manufacturers profited from selling accessories and peripherals for their systems.

Monitoring the success of the loss leader strategy Attach Rate : the number of games sold for each individual console in a given year. greater attach rate : achieving profitability goals via the loss leader strategy

Online Gaming Challenges Two major points of uncertainty for console makers, software developers, and online communities: How readily consumers would change their video game playing behavior Varying qualities of connectivity to the internet

Competitive Landscape Two dominated players in video game console market: Sony and Nintendo Controlling roughly 70 percent of worldwide industry revenues in 2001 through Extensive user bases, popular products, tremendous brand recognition, and widespread distribution

Competitive Landscape Online Communications Software Video Game system AOL Communities Sega Sony Yahoo Electronic Arts Nintendo Gamespot

Xbox Console Priming the developer Pump Lunch Fueling Xbox Identifying Target Market Pricing against competition Cracking Customer Building Achieving differentiation

Xbox Lunch $500 million marketing campaign $2 billion in development costs 4 percent market share for the PC game industry No experience in manufacturing game consoles The company brought Xbox to market in mid-November of 2001

Factors Fueling the Xbox Launch Three major factors driving the company’s product launch decision: Booming industry Trojan horse strategy Supplement PC revenue stream

Building the Box The company had to overcome two major hurdles: Competencies in software development, not hardware Sony’s PS2 had a one-year head start

Cracking the Consumer Electronics Business Nintendo and Sony were dominate in market Microsoft sought to penetrate the online gaming sector For Microsoft to build a sustainable and profitable Xbox customer base, it faced issues regarding: Target market Developer support Competitive pricing Product differentiation

Identifying a Target Market Both Nintendo and Sony had been successful because they realized early on who their target consumers were Microsoft decided to position the Xbox to attract older gamers, aged 18 to 34. Market research indicated that these players were key influencers for younger players. By targeting this segment, Xbox would compete head to head with PS2. Microsoft Sony Nintendo 18 to 34 6 to 14 gamers age

Priming the Developer Pump Xbox team not only abandoned the company’s usual hard-nosed tactics Consulted with industry game developers for nearly a year before beginning design work. By fall 2001, Microsoft had signed agreements with over 200 companies to develop games for the Xbox. Sony had approximately 300 developers at that time Microsoft’s contractors ranged from small development firms to powerhouses like Activision and Electronic Arts

Pricing against Competition Entering the market at a price of $299, with a $125 loss per unit To remain competitive: Monitoring how the market responded to the aggressive GameCube pricing Monitoring how Microsoft priced online services and accessories for the Xbox.

Achieving Differentiation Inserted an Ethernet port for broadband Internet access and an 8-gigabyte hard drive directly into the console 8-gigabyte hard drive broadband Internet access store digitized music, play games online, create and save personalized game scenarios, talk to other gamers over the Internet,. load detailed graphics more quickly surf the World Wide Web, and download game enhancements

Product Spec Comparison