Xbox, the video game console that Microsoft introduced nearly 14 months ago, is technologically sophisticated and, by many accounts, the best way to play games against competitors over the Internet.
But the advantages have not translated into the returns Microsoft had hoped for. It has sold 9 million Xbox consoles, on the low end of its projections; it continues to lose money on each one it sells; and it remains desperately behind Sony, whose PlayStation2 is selling at a record pace. Wall Street analysts have mixed opinions about whether Microsoft's early effort has been successful, but they agree that it has a way to go.
Avid game players like Brian Green, 26, who spends hours each week on both consoles, have a simple explanation for why Microsoft has yet to make the inroads it sought.
PHOTO: NY TIMES
"The Xbox is cool," he said, "but the PlayStation is where the games are at."
That is not good news for Microsoft, because people tend to buy electronics based on the amount of software they can use. Sony learned that lesson two decades ago, when its technically superior Betamax video recorders were swamped by VHS machines that had more tapes available.
Makers of video games are starting to produce more games for Xbox, but the 2-to-1 gap with PlayStation will take some time to close. And while Microsoft, which has more than US$40 billion in cash on hand, can afford to be patient, analysts and investors wonder how much time and money it is willing to invest before it starts to turn a profit.
The issue is of no small significance. The market for consoles and video games is worth more than US$9 billion a year. Even while losing on selling consoles, Microsoft could still make a lot of money from game makers. They pay the console makers about US$10 for each copy of the games they manufacture -- and they made well in excess of 50 million games in the US last year. Games typically sell at retail for US$50.
For now, though, there are only losses for Microsoft. It declines to say how much it loses on each console, but industry analysts estimate the figure at close to US$100. Sony, by contrast, does not sell PlayStation2s below cost.
Part of Microsoft's problem is the ambitious design of Xbox: its chipsets and other electronic components are more expensive than those of the PlayStation. Microsoft has also been unable to realize certain economies of scale because sales have not been as robust as expected.
Joseph Osha, a semiconductor analyst at Merrill Lynch who follows Nvidia, a company that makes the graphics processing chips for the Xbox, said Microsoft had had to "pull back sharply" on its orders. He estimated that Microsoft had 1 million to 1.5 million unsold Xbox chipsets, which are the brains used in Xbox consoles.
Microsoft is too big to have its stock price move significantly on sales of Xbox. But the effect of all that idle Xbox inventory is evident on its profit-and-loss statement. In a recent filing with the Securities and Exchange Commission, Microsoft said its home and entertainment segment, which includes the Xbox and television divisions, lost US$348 million in its most recent quarter on sales of US$1.28 billion. In the period a year earlier, the home and entertainment unit lost US$180 million on sales of US$833 million.
On a micro level, investors "don't like it because they lose money on every piece of hardware they sell," said Michael P. Wallace, a video game industry analyst at UBS Warburg. But, he added, "on a macro level, they're in the No. 2 spot."
In addition to overtaking Nintendo, which makes the GameCube console, as the second-place console maker, Microsoft has put itself in a position to compete with Sony for years to come, Wallace said.
When Microsoft introduced the Xbox in January 2001, it promised to put US$2 billion into the product -- US$500 million in advertising alone. It may well need to spend it all. Last year, according to UBS Warburg, Sony sold 18.3 million PlayStation2 consoles, while Microsoft sold 5.2 million Xbox machines and Nintendo sold 4.7 million GameCubes. These figures reflect consoles sold to consumers, not consoles that the manufacturers ship to wholesalers or retailers.
The good news for Microsoft is that industry experts expect it to widen its lead over Nintendo this year. Electronic Arts, the world's largest game maker, is projecting that in North America in 2003, Sony will sell 9 million to 10 million PlayStation2's, Microsoft will sell 2.5 million to 3 million Xbox consoles and Nintendo will sell 2 million to 2.5 million machines.
Electronic Arts also projects that Microsoft will beat Nintendo in Europe, the second-biggest market after the US. Still, Microsoft is particularly struggling in Japan, where it has been virtually shut out of the market, selling a mere 300,000 consoles, according to the company. Throughout all of Asia, Microsoft has sold only 500,000 Xbox consoles, according to UBS Warburg, compared with Sony's sales of 3.67 million PlayStation2's.
Microsoft officials say they are hampered in Asia because Sony and Nintendo, both Japanese companies, have entrenched positions and great control over distribution and sales channels there. But industry analysts say Microsoft should come up with more than excuses.
"If Xbox has any chance of closing the gap against PlayStation, Microsoft is going to need a better Japanese strategy," said Michael Gartenberg, an analyst at Jupiter Research. He said it needed to have better games and to burrow into the Japanese distribution channel.
Microsoft said it was already making progress on games, introducing in Japan a game called DOA Xtreme Beach Volleyball. The 80,000 games sold out within two days.
Robert J. Bach, a senior vice president for the home and entertainment division, acknowledged that the Xbox was continuing to lose money, but he said that such losses were natural with a new business. A better picture of the situation, he said, is how the company is performing relative to its business plan. "We're doing very well on that basis," he said.
Analysts said Microsoft must also persuade video game makers to produce versions of their products for the Xbox. According to figures provided by Microsoft but compiled by NPD Funworld, an industry research group, there are 458 games available for the PlayStation2, versus 207 for the Xbox and 168 for the Nintendo GameCube.
Microsoft faces a chicken-and-egg problem: Makers of video games won't make versions of their games for a given console unless the machine has a wide installed base, but it is hard to build a base without a lot of games.
Some big game makers have made versions only for the PlayStation2. Most notable has been Grand Theft Auto, the most popular game the last two years. Microsoft said it is in discussions with the game's maker, Take Two Interactive, to persuade it to produce a version for the Xbox.
Xbox also suffers because video game publishers will sometimes release a Play-Station2 version of a game first, then deliver an Xbox version months later. That happened last year with Medal of Honor, a top-selling game from Electronic Arts that came out some six months earlier on the PlayStation2. Jeff Brown, a spokesman for Electronic Arts, said, however, that the company was increasingly releasing games concurrently for the two platforms.
Industry analysts like Wallace of UBS Warburg said Microsoft needed to find video game makers that would produce hit titles exclusively for its console.
To bolster its game portfolio, Microsoft has been in discussions to buy Vivendi Universal Games. Microsoft would not comment on the issue.
In the meantime, Microsoft has quietly begun to make inroads with a feature that cuts across individual games: Xbox Live. This is a US$50 attachment that lets console owners play games against one another over the Internet. Microsoft, citing figures from NPD Funworld, said it sold 350,000 Xbox Live kits since introducing the service in November. Sony has sold 438,000 of its own online kit, said Microsoft, citing NPD Funworld figures, but Sony has been selling its kit for almost twice as long, since August.
FIVE-YEAR WINDOW? A defense institute CEO said a timeline for a potential Chinese invasion was based on expected ‘tough measures’ when Xi Jinping seeks a new term Most Taiwanese are willing to defend the nation against a Chinese attack, but the majority believe Beijing is unlikely to invade within the next five years, a poll showed yesterday. The poll carried out last month was commissioned by the Institute for National Defense and Security Research, a Taipei-based think tank, and released ahead of Double Ten National Day today, when President William Lai (賴清德) is to deliver a speech. China maintains a near-daily military presence around Taiwan and has held three rounds of war games in the past two years. CIA Director William Burns last year said that Chinese President Xi Jinping
RISK REMAINS: An official said that with the US presidential elections so close, it is unclear if China would hold war games or keep its reaction to angry words The Ministry of National Defense said it was “on alert” as it detected a Chinese aircraft carrier group to Taiwan’s south yesterday amid concerns in Taiwan about the possibility of a new round of Chinese war games. The ministry said in a statement that a Chinese navy group led by the carrier Liaoning had entered waters near the Bashi Channel, which connects the South China Sea and the Pacific Ocean and separates Taiwan from the Philippines. It said the carrier group was expected to enter the Western Pacific. The military is keeping a close watch on developments and “exercising an
REACTION TO LAI: A former US official said William Lai took a step toward stability with his National Day speech and the question was how Beijing would respond US Secretary of State Antony Blinken yesterday warned China against taking any “provocative” action on Taiwan after Beijing’s reaction to President William Lai’s (賴清德) speech on Double Ten National Day on Thursday. Blinken, speaking in Laos after an ASEAN East Asia Summit, called the speech by Lai, in which he vowed to “resist annexation,” a “regular exercise.” “China should not use it in any fashion as a pretext for provocative actions,” Blinken told reporters. “On the contrary, we want to reinforce — and many other countries want to reinforce — the imperative of preserving the status quo, and neither party taking any
President William Lai (賴清德) yesterday said that China has “no right to represent Taiwan,” but stressed that the nation was willing to work with Beijing on issues of mutual interest. “The Republic of China has already put down roots in Taiwan, Penghu, Kinmen and Matsu,” Lai said in his first Double Ten National Day address outside the Presidential Office Building in Taipei. “And the Republic of China and the People’s Republic of China [PRC] are not subordinate to each other.” “The People’s Republic of China has no right to represent Taiwan,” he said at the event marking the 113th National Day of
RSS