Archive for Monday, November 12, 2001

Microsoft joins video frenzy, just in time for the holidays

November 12, 2001


— The most anticipated game system of the holiday season is due in stores this week, and the all-too-familiar company behind it might not be readily apparent.

The Xbox console is, like many teen-agers, embarrassed to be seen with its parents. In its $500 million worldwide advertising blitz, Microsoft's name will appear in tiny type, if at all.

If the software giant is mentioned, it'll be to appeal to gamers' parents, said John O'Rourke, the company's director of games marketing.

It's part of Microsoft's push to build Xbox, which is due Thursday, as a unique and very un-Microsoft brand one appealing to the 16- to 26-year-old male "hard-core gamer" whose acceptance is critical.

Don't let the deliberate distance fool you, though. Xbox may break the mold of Windows operating systems and Office business software suites, but executives consider it key to Microsoft's future.

In the past 25 years, Microsoft helped change the way people do business through technology, said Xbox general manager J Allard.

"Now's the time for Microsoft to step up and spearhead an initiative to change the way people play through technology," he said.

Allard and others at Microsoft see Xbox as a first step toward a broad vision of an interconnected living room, powered by Microsoft hardware and software from set-top boxes to digital music and video players.

In this world, video games appear on your television screen over a high-speed Internet connection. Broadcast football games can leave reality and enter your game console with the flip of a switch. Music and videos can be downloaded or streamed as well, and handheld devices and cell phones will allow you to take your entertainment outside the home.

The glue that holds this ambitious Microsoft world together will be Microsoft's Internet subscription services, called .NET, and its authentication system, Passport, Allard said. But Xbox will be the core around which other Microsoft software and hardware are built.

In the words of Microsoft's chief Xbox officer, Robbie Bach, the product "is going to be our foundation in the home."

A lot of firsts

Faced with slowing demand for personal computers and the related products it sells, Microsoft has plenty of reason to look to new markets. But by moving into the living room with Xbox, the company is gambling on a lot of firsts.

It's the first time Microsoft is entering the hardware business, aiming a product initially only at young men and trying to sell something that's only about entertainment, not business.

And it's the first time the traditionally staid Microsoft is using animated characters whose secret weapon is flatulence to excite investors.

At a financial analysts' meeting this summer, Seamus Blackley an executive who describes himself as Xbox's "head evangelist" demonstrated an Xbox game based on the hit movie "Shrek." It was the liveliest demo of the day, but Xbox hasn't done much to animate bottom line-focused Wall Street types.

Brendan Barnicle of Pacific Crest Securities is expecting the company to lose $100 for every $300 console it sells, although its games sales will offset that.

"Ironically, the worse Xbox does the better it is for Microsoft's financials," he said.

Both Barnicle and Mary Meeker of Morgan Stanley Dean Witter believe the Xbox could eventually get Microsoft into the living room. But Meeker is predicting Xbox will lose about $1 billion before breaking even in the company's fiscal year 2004.

Microsoft will not say how much it expects to lose on Xbox or when it thinks it will break even.

A competitive market

Thanks to billions in cash reserves, Microsoft has landed hot game titles like "OddWorld" and "Halo" that are sure to entice gamers though competitors Nintendo GameCube and Sony PlayStation 2 have a strong backlog of games.

The overall competition is stiff. GameCube comes out just three days after Xbox, along with new versions of well-loved Nintendo games. And Sony's already released PlayStation 2 has an installed base of about 20 million users.

Microsoft says it expects to sell between 1 million and 1.5 million Xboxes during the holiday season, and is already accepting pre-orders.

The Xbox console boasts extremely realistic graphics and features such as a built-in DVD player (available with an extra $29 adapter), enhanced memory and a high-speed Internet connection.

The unprecedented $500 million marketing campaign will do much to get games enthusiasts interested, said P.J. McNealy, a games analyst with Gartner/Dataquest. But Microsoft also has to prove it has staying power by delivering a series of games that will appeal to children and adults, not just hard-core gamers, he said.

Other issues may hamper the launch, analysts said, including low consumer confidence, the attention-diverting war on terrorism and the nagging continued federal antitrust case.

Xbox also has been plagued by talk of production problems.

Microsoft denies production issues caused a week's delay in releasing Xbox. The delay, Bach said, was "just technically about getting all the components to work together." He wouldn't elaborate.

Other bumps in the road, including glitches in some product demonstrations and early inventory expectations that later proved too ambitious, have hurt the company's reputation.

McNealy applauds the software giant for learning from some of its mistakes, although he cautions that the next few months will provide the real test.

"You can only make a good first impression once," he said.

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