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Why Microsoft is Still in the Gaming Business.
game: Xbox 360
posted by: Aaron Stanton
publisher: Microsoft
date posted: 10:30 AM Fri Apr 20th, 2007
last revision: 10:30 AM Fri Apr 20th, 2007

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Click to read.Why the Xbox Brand is About More Than Money:

Back in April of 2006, Roger Ehrenberg over at Yahoo Finance wrote an interesting article on Microsoft\'s continuing losses in the gaming industry, and still champions some interesting points. After $5.4 billion lost on their Home and Entertainment division between 2001 and 2006, Ehrenberg asks, why is Microsoft still in the gaming business? No matter how you look at it, even if the H&E division saw a tremendous increase in profitability in 2007, meaning they reverse their billion dollar a year loss, it\'d still take several years to recoup what they\'ve already spent. Several years just to bring them back to where they were before the original Xbox released.

The article does have a point, but at the same time I think overlooks some significant factors - specifically, it looks at the venture entirely from the perspective of the one division, instead of looking at the company vision as a whole. Unlike companies like Sony, which tend to split off their ventures into separate corporations - with different companies for music and electronics, for example - Microsoft has kept their core divisions in-house. Their profits and losses are viewed from the perspective of the entire company, which makes it viable for a division to lose money as long as it satisfies the goals of the company at large. For example, if somehow having an Xbox in the living room allows Microsoft to sell more copies of Windows Vista, where they truly make their money, then it\'s not unreasonable for them to take a loss on one division if the benefits to the entire company are substantial. From a numbers perspective as an individual unit, the Xbox brand has not been profitable, but it doesn\'t make it automatically a bad investment, as the article suggests.

So what purpose does the Xbox serve for Microsoft as a whole?

Microsoft, Nintendo, and Sony all talk about expanding the market beyond the hardcore gamer. Most people assume that only Nintendo is doing this with the Nintendo Wii, because the Wii targets the casual gamer. In actuality, all three systems are doing this, but in different ways. Where as Nintendo is expanding to reach a larger gaming audience, Sony and Microsoft (and Apple, for that matter) are attempting to sell the PS3 and Xbox 360 as a media device to people not interested in games much at all. Hence the Playstation\'s Blu-ray, the Xbox 360\'s downloadable movies from Live, and Apple\'s introduction of Apple TV. Where as Nintendo is expanding the market by trying to entice people into gaming, Sony and Microsoft are trying to do so by drawing people that normally buy consumer electronics.

Why is this valuable to Microsoft as a whole? Microsoft, along with Apple, believes that the living room of the future will be significantly tied to computers. For better or worse, Microsoft is attempting to control how media is fed to your living room on the assumption that the tie-in to their operating systems, like Vista, will promote their ability to sell you things like computer software. Someone at Microsoft does not want control of the consumer electronics in the living room to go to either Sony or Apple. In that sense, the Xbox 360 exists not strictly to make money, but to be a key player in a larger battle plan. To look at a single division of a company that derives the vast majority of its resources from other sources and declare it a waste without first considering its ramifications to the true money-making divisions is a mistake.

Finally, the article assumes that you need Japan in order to be successful in the gaming market. The reasoning goes that if you don\'t have Japan, then the system won\'t have a large enough install base to woe developers into making games for it. This reason ignores the 800-lb gorilla in the corner that completely trumps any comparison to any console that has come in the past. XNA. Microsoft\'s introduction of XNA is potentially one of the most significant moves the company has made in the game industry since its start.

Fundamentally, XNA allows a developer to write code for the Xbox 360, and then easily recompile it to run on Vista. That means when trying to decide between building a game for Xbox, Wii, or PS3, the developer has to compare the install base of the Xbox 360 and Windows Vista against the install base of the other two.

If install base is all that matters, Microsoft wins hands down.

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