There is probably no commercial market more unpredictable than that of video games. Anyone who has played video games over the last few decades will remember very clearly what happened to Sega. The Japanese manufacturer went from the market leader, to producing a console that was so unsuccessful that they were forced to drop out of the console manufacturing market completely, and concentrate solely on software. Within a matter of years.
Microsoft’s gaming market is bigger than it seems
Thus, one might wonder what incentive there is for some of the world’s biggest corporations to sink resources into video games. Hasn’t Microsoft Corporation (NASDAQ:MSFT), in particular, got bigger fish to fry? There are two simple answers to this question from Microsoft’s perspective, with the former perhaps rather more predictable than the latter.
ValueWalk's Raul Panganiban interviews Kirk Du Plessis, Founder and CEO of Option Alpha, and discuss Option Alpha and his general approach to investing. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with Option Alpha's Kirk Du Plessis
Firstly, this has become a massive market, and huge amounts of potential revenue does rather tend to attract companies. By now, most savvy individuals are well aware that the gaming industry is now more commercially successful than the movie industry, with Forbes reporting just months ago on the reasons that the video games are now bigger and more engaging than movies “ever will be”, and numerous sources reporting that the recently released Grand Theft Auto V is bigger than any Hollywood release this year.
Secondly, Microsoft Corporation (NASDAQ:MSFT) view their video games consoles as the opportunity to gain a real stake in the living-room. This may seem faintly ridiculous to the uninitiated, but Microsoft’s entire gaming strategy has been leaned towards creating a platform that can be the hub of a living-room from day one. Microsoft quite clearly views consoles as an opportunity to gain a foothold in the potentially massive streaming content market, which is already very much off the ground, but which is likely to ascend to great heights in the coming years as broadband speeds increase exponentially.
Microsoft – Apple competition
With an obvious competitor of Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), having already established an outstanding and hugely successful platform for streaming content with iTunes, it is clear that the brainchild of Bill Gates – who takes more of a backseat nowadays – feel the need to shoehorn in on their territory. Thus, from day one the new Xbox One console has been presented by Microsoft as very much an entertainment hub, which delivers multimedia content, rather than a pure gaming console.
This is something of a curate’s egg of a strategy, both logical and illogical. Dr. Spock would quite possibly question how something can be both logical and illogical at the same time, but I would suggest that Microsoft Corporation (NASDAQ:MSFT)’s strategy both acknowledges their essential long-term goals towards having a sustainable business model in a very sensible way, while also threatening to completely alienate the core audience for a video games console in the short-term.
Short lifespan of the Xbox One
We have already seen in the short lifespan of the Xbox One, and in the build up to its release, that Microsoft Corporation (NASDAQ:MSFT)’s emphasis has not gone down well with the gaming fraternity. The emphasis on television streaming in the launch event for the Xbox One resulted in a particularly memorable YouTube video which focused on this, while Microsoft also made some terrible PR blunders with regard to used game which will certainly take them some time to recover from.
And attracting new users to a video game console can be extremely difficult, owing to the fact that they view a video games console as completely superfluous to their existence. Try selling my mother a next generation video games console on the basis that it’s an ‘entertainment hub’. You’d need to be able to sell ice-cream to Eskimos.
Having said that, after a rocky start to the lifecycle of the Xbox One, it at least seems to be selling well. This was probably to be expected whatever Microsoft Corporation (NASDAQ:MSFT) delivered, given the existing userbase for their previous console, the Xbox 360. But nevertheless, despite the fact that the image of the console took a bit of a battering in the pre-release window, ultimately the Xbox One has shifted around 2 million units, which compares reasonably with the Playstation 4, even if Sony Corporation (NYSE:SNE) (TYO:6758)’s machine appears to be slightly ahead. It seems highly likely that the Xbox One benefited from having a slightly more impressive selection of launch titles, although the general consensus is that its camera functions are superior to those of the PS4.
Xbox One’s future
So what are the prospects for the Xbox One in the future? The first thing to note is that this is a technically inferior system to the PS4, which has been noted in the early reviews of the console. Some of the Xbox One games aren’t even rendered in 1080p, which seems pretty poor for a so-called next generation console. Generally speaking, the indications are that Sony Corporation (NYSE:SNE) (TYO:6758) is going to outsell Microsoft Corporation (NASDAQ:MSFT) in the short-term at least, and the hardware which Sony has released has received more favorable reviews than the Xbox One, which is not all that surprising as it is the more powerful machine.
However, Microsoft Corporation (NASDAQ:MSFT) are very much looking at the future with this machine. One thing Microsoft can always do is absorb a few losses, or moderate profits, in order to facilitate the long game. And the way the Xbox One has been marketed, the capabilities it has been given, and a little knowledge about their future strategy indicates that they do not view this as solely a gaming device, or possibly even primarily.
Whether in the long-term users will be as enthusiastic about the Xbox One’s multimedia streaming capabilities as Microsoft Corporation (NASDAQ:MSFT) hope they are is debatable, but with the very future of consoles far from certain given the coming importance of the cloud, the Xbox One is attempting to create a business model centered around Xbox Live which is future proof.