The Microsoft Xbox has been a fascinating product to watch; it was really a showcase of Steve Ballmer’s Microsoft and it reflected its highly reactive strategy. Microsoft has never been a good fast follower, and neither has Apple for that matter. Being a fast follower is typically tied to Asian companies like Sony and Samsung, so creating a platform that, at its heart, was chasing Sony has always been problematic. Let’s revisit the Xbox’s history and talk about why the Xbox One S, available today, is far closer to what Microsoft should have always done.
Xbox: The Corporate Blunder
The creation of the Xbox was based on the belief that Sony would succeed in replacing the home PC with the PlayStation, which never even came close to happening. Microsoft became convinced that Sony was going to take the PlayStation into the PC space and that they’d be unable to complete with a system that could both game and run PC things for the cost of a game system. Back in the 80s, the PC market was dominated by Commodore and Atari who used that same strategy, though they both failed trying to chase the business market. So Microsoft had a reason to be concerned, and the Xbox was created to block this anticipated Sony move.
So, the Xbox absorbed most of the gaming resources that had been going into Windows, and Microsoft launched a very expensive program to block Sony. But not only was it initially a huge money losing effort, it deemphasized gaming from their Windows platform; gaming was one of the primary reasons people bought new desktop PCs, so not only was the direct cost massively high, the indirect cost was a significant weakening of their PC operating system Windows.
Sony’s PlayStation 3: Blu-Ray Disaster
Sony, however, was having its own issues. They decided they wanted to control the next generation of disk based media and, even though the industry had decided to go to a format called HD-DVD, Sony decided to fight this with their own technology: Blu-Ray. This was at the time very expensive and they took their already over the top PlayStation 3 and combined it with Blu-Ray in order to force the issue. They also spent millions effectively buying the market and, through this massive heavy lifting, did win the Blu-Ray vs. HD-DVD fight. But the cost was that the PlayStation, which was massively over cost and overpriced, lost its market leadership to the Xbox 360, which was less powerful, but far more reasonably priced.
Sony’s bet was bad for two reasons. Not only was the cost to Sony massive, but the market had begun to shift to streaming and Netflix drove this change into the market with a passion. It is interesting to note that, with Media Center and an early iteration of MSN, Microsoft could have become Netflix but they pivoted away from this opportunity before the market was ready for it.
Nintendo Wii: Short Lived Fad
Of course then Nintendo, which had largely been on life support, launched the Wii. A far less expensive system that incorporated movement, and suddenly that was all anyone could seem to talk about. This was a relatively low performance gaming system that seemed to appeal more to a class of gamer that neither Sony nor Microsoft were addressing, which forced both companies to incorporate cameras into their solutions, thus pushing up price and cost in order to match Nintendo. This effectively gave us the first Xbox One and PlayStation 4. This not only made the systems more expensive, but rooms weren’t really set up for this kind of entertainment and the fad, which was what it was, eventually petered out. This was partially due to the emergence of smartphones as gaming systems and the attractiveness of that approach to the casual gamers who had initially gravitated to the Wii. By the way, VR has a lot of these same issues with regard to setup difficulty and needing dedicated space.
Xbox One S
Now with the advent of 4K TVs people are increasingly able to play 4K content. However, traditional Blu-Ray players don’t output it and streaming in 4K, while growing, is still pretty limited. Most 4K TVs have streaming built in and there is some Netflix and Amazon content to be had. But Blu-Ray Ultra, 4K Blu-Ray disk players, cost over 3x what a regular Blu-Ray player costs because of the extra needed performance. So, and they aren’t chasing Sony or Nintendo this time, the Xbox One S provides this capability almost for free. In effect, you get both an Xbox One and a Blu-Ray Ultra player for the cost of an Xbox One. This gives you both 4K and HDR capability which should show beautifully on one of those new 4K TVs. Be aware that there are no 4K games in market yet and this doesn’t up-convert an HD game so, initially, you are only going to see 4K movies and TV (not a lot of TV out there yet either).
Gone is the camera and the pain of installing it, and you are back to a far simpler and better value than they had before. In addition, Microsoft has started to aggressively reinvest in Windows gaming and to drive more and more games onto both platforms and their cloud services maintains state, so you can game on your laptop and then, when you get home, pick up right where you left off on your big screen.
Strangely, because generally these things are kept secret nearly until the launch, we already know where they are going to go next. That is to something called Project Scorpio which is slated for late 2017. This promises a massive performance upgrade and, of course, will also likely require new games. The promise is that it will be able to provide performance in line with a strong gaming PC, which means games that you’d never think to run on your TV will now play there without connecting your PC to the TV. (Be aware you can get a sense of what this will be like today with a combination of a gaming PC and the NVIDIA Shield set top box). But Scorpio promises to blow the doors off what we think of as console gaming.
Wrapping Up: Fast Follower No-More
With the Xbox One S, Microsoft moves from fast follower to attempting to lead the market, or at least drive it in a different direction. Ironically this comes at a time when Nintendo is again in the news with the latest game fad Pokémon-Go (which, given its massive success, doesn’t seem to be helping Nintendo much). What is also fascinating is that the Xbox One S seems to go where Sony should have gone given their heavy focus on Blu-Ray, but Sony is again dominant and they are aggressively moving VR instead. I wonder if this, given the high relative cost for the solution and complexity of setup, won’t be a repeat of the mistake they made with the PlayStation 3. The VR upgrade costs $100 more than the new Xbox One S, potentially making a PlayStation 4/VR bundle wicked expensive.
We’ll see, but for now, Microsoft is again focused on finding their own way and not trying to rapidly pivot to where a competitor already is or where they may think they are going. That typically works far better for the company and makes the Xbox One S, even at its current $399 price, a far better value as a result. In effect you are getting a nice 4K HDR Blu-Ray player for close to list price and a gaming system for free.
President and Principal Analyst, Enderle Group
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