Follow The Money: Microsoft Gambles On Gaming - Xbox - Product Information

Computer Technology Review, June, 2001 by Joshua Piven

On November 8, Microsoft Corp. will begin losing millions of dollars a day. At least, that's what company officials hope will happen, if all goes according to plan. You see, that's the day Microsoft's long-awaited entrance into the gaming console market begins with the sale of the first Xbox.

Microsoft officials announced the product launch in mid May, along with a whopping $500 million promotional campaign, by far the most money the company has ever spent marketing a single product. Redmond indicated it will have somewhere between 600,000 and 800,000 Xboxes on store shelves on November 8, and that it expects to sell a whopping 1.5 million by year's end. The console will be priced at $299, in line with competitive offerings from Sony and Nintendo.

The Xbox, however, will be Microsoft's biggest loss leader ever, losing about $125 per unit, according to published reports. This means that, if the company really sells 1 million units, it will actually lose $125 million--and that doesn't include marketing costs. This may not be much in the rarified financial air occupied by Microsoft, but it's still a significant public relations risk.

Redmond, like all console manufacturers, will take a loss on the gaming hardware in order to make money on the games, which generally sell for about $50 a piece. And therein lies the real question: Can the company attract enough game developers, and can these programmers code enough good software, to make them appealing to the Nintendo and Sony faithful? Thus far, the company has announced about 25 titles that will be ready to ship in November, with more expected by Christmas.

Perhaps even more significant than the games, at least from a technology standpoint, is the potential of the Xbox itself. Unlike offerings from competitors, Microsoft's unit will be a full fledged PC, with a 10GB hard drive and an Ethernet interface, making it ready for broadband connectivity. The Xbox is really Redmond's entrance into the set-top box market, and if the product is successful, we can expect to see more powerful systems in the future, and game compatibility with future Windows PCs is likely (nVidia, which makes the graphics chip used in the Xbox is, not coincidentally, one of the largest manufacturers of chips for PC graphics accelerators).

Indeed, Microsoft already makes many of the industry's most popular games (think Flight Simulator). Is Gates & Co. about to fragment its own user base by creating two version of its games, one for PCs and one for the Xbox? Somehow, I don't think so.