Microsoft’s Entry into Video Game / Console Business
Ideally, when Microsoft began selling the Xbox video-game/console in 2001, many wondered why a company that was synonymous with workstation software was branching out into a competitive and unfamiliar territory. The above situation was mainly due to the fact that ever since the company was founded by Bill Gates and Paul Allen in 1975, it had never made such a significant undertaking outside its comfort zone of software business (University of Michigan Business School 1). Moreover, as compared to other competitors like Sony and Nintendo in the gaming and console industry, Microsoft looked like an unlikely competitor. The two had transformed the gaming industry into a billion-dollar empire (University of Michigan Business School 2). Also, the fact that few players were paying for access to games online, and a respected competitor had left the market were enough reasons to prevent another player from joining the market. Nonetheless, Microsoft did not get cowed, and it is like all the negative signs were encouraging the company to go ahead and venture into a new form of business. Therefore, the dominant question that comes up is “did Microsoft make a correct business decision to enter into the video game/console business in 2001?” The following paper will argue that indeed, the corporation made the right call by getting into the gaming industry. However, before that, the article will briefly explain the reasons why Microsoft decided to be part of the video game/console. All in all, despite the challenges that were standing in the way of Microsoft’s success in this new gamble, the entry into the video-game/ console was a sound decision.
Microsoft’s Entry Reasons
It is no secret that Microsoft took a huge gamble when it launched its Xbox video game/console. However, there were valid reasons for making such a risky move. First of all, the gaming industry was booming, and it presented an enticing potential for growth (University of Michigan Business School 7). In fact, the Bank of America estimated that the gaming industry would generate returns to the tune of $18.7 billion in 2001 (University of Michigan Business School 7). Specifically, the revenues would come from selling video game consoles, personal computer (PC) games, arcade games, as well as console games (7).
Secondly, Microsoft wanted to stop Sony’s dominance of the market. The rationale behind this was that Microsoft had 95% of the market in terms of home PCs and Sony’s growth was threatening the firm’s supremacy. Thus, Microsoft had to apply a Trojan horse strategy. Lastly, dependence on PCs to play games was becoming redundant and saturated since it was in its fourth decade. In essence, to make matters worse, the growth rate was slowing down, which threatened profitability. In concluding this section, all the above reasons were valid, and the decision to be part of the gaming industry was accurate.
Microsoft Made the Right Decision
The following section will use the sub-topics of software superiority, improving broadband connectivity, and different target market to support Microsoft’s choice.
In essence, when the online video gaming’s popularity began in the year 2000, it mainly comprised of three primary segments namely hardware, software, as well as other accessories (University of Michigan Business School 2). The hardware part was the game consoles like the Play Station, portable playing devices, and PCs. The software segments were the games that were played on the hardware. Lastly, the accessories were other devices that supported the hardware. It is important to reiterate that software was and is still the backbone of Microsoft. Therefore, the company stood to reap a lot from combining the gaming console with the software that the organization produced for itself. Thus, unlike Microsoft’s main competitor, Sony, that still had to depend on software from Microsoft, the latter would cut costs on this because production would be done in-house. On the same note, since the company had been in the software industry since 1975, it could produce better quality games than Sony and Nintendo. For example by Christmas of 2001, Microsoft games had better graphics processing speeds than those of Sony and Nintendo (University of Michigan Business School 17).
It is important to point out that 70% of the proceeds from video game console were derived from software (University of Michigan Business School 12). In fact, the manufacturers of the consoles did not rely on profits from hardware, as they sold them cheaply to attract customers. The targeted area of generating revenues was the sale of video games and other parts for the consoles. Thus, being a veteran in the software production, Microsoft would gain a competitive edge over Sony and Nintendo that were still dependent on third parties for their software needs. For example, during the construction of the Xbox, Microsoft combined the power of Windows-Intel in the production phase (University of Michigan Business School 8). The above feature presented three distinct benefits to the company. First of all, it cut short the time that would have been spent on developing an operating system. The reason for this is that Microsoft simply adapted the already existing Windows 2000. Secondly, the tools used to create the games were similar to those used in PCs. As a result, the constructors would be familiar with the design process. Lastly, by using a Windows-based operating system, other PC game developers would be included in designing the game; hence increasing manpower.
Also, some online communities like EA.com that ran games through the internet were not interested in selling either hardware or software online. Instead, they charged monthly subscription fees, which then allowed users to play premium games at a cost, and unpopular games for free. Such a provision presented Microsoft with an opportunity to venture into an untapped market. The rationale for this was that the company would develop better-quality games and sell online to boost its revenue pool.
In summarizing this segment, Microsoft’s strength and experience in the software field meant that it had an excellent starting point. In other words, the entry into the gaming business was a well-planned idea. Thus, the decision by Greg Canessa and the entire Microsoft team was rightly executed at the opportune moment.
Improved Broadband Connectivity
The idea of internet gaming was created in 1995 by Electric Gravity, Inc in 1995 (10). It later became known as the Zone. During this period, the connectivity speeds were low, and the kinds of games that could be played over the internet were limited. Nonetheless, Microsoft realized the potential of online gaming and bought the Zone in 1996.
By the year 2000, internet speeds had grown tremendously and therefore presented a perfect opportunity for online gaming. In fact, by 2001, the Zone had the largest share of the market in terms of online gaming. It had simple games like cards and puzzles for beginners, to more complex fighting games for the more hard-core players. The Zone had about 22 million users. Therefore, since Microsoft already had a platform for advertising and selling its games online, it had a strong foundation for market entry.
Moreover, by positioning itself on the online platform, Microsoft stood to reap big. The explanation behind this was that online video gaming had a long lifeline (University of Michigan Business School 6). In other words, even though console games from companies like Sony and Nintendo were hugely successful, the life cycle of a game was shorter as compared to those played over the internet (University of Michigan Business School 6). For example, at that time, the life cycle of a game was six months, while its internet version could last for years.
It is important to mention that online gaming had its entry challenges. The notable one was that the companies were not sure whether gamers would change how they played. The above fear arose from the fact that most players often preferred to play offline at home with their colleagues (University of Michigan Business School 3). Internet was only used for sending emails and web browsing. Nonetheless, Microsoft took the correct calculated gamble because they had realized that slow internet speed was the primary hindrance to online gaming.
Therefore, from the above reasons, it is evident that the market was ripe for Microsoft. The prior business acquisition that the company had made resulted in a competitive advantage over its rivals. Thus, Microsoft made the correct decision.
Different Market Choice
The success of any business undertaking is dependent on the correct identification of the target market. Microsoft’s main competitors, that is, Sony and Nintendo had strategically mapped out their target consumers. For instance, Nintendo focused on young players of ages six to fourteen, while Sony’s PlayStation 1 and 2 attracted gamers between the ages of 18 to 34 (University of Michigan Business School 9). Through this, both companies did well in the market and even managed to sell beyond their target age groups. In line with this, Microsoft also decided to target gamers who are of the similar age group to Sony’s. The primary reason for this was that gamers between ages 18 to 34 had additional influencing power. Moreover, this decision meant that Microsoft had realized that Sony was its only serious competitor.
Such a move only demonstrates that Microsoft was ready for the video game/console business. The reason is that it had conducted thorough market research to identify the best way to enter the market, as well as the customers to target. Therefore, it is safe to say that concrete facts and figures supported Microsoft’s choice.
Microsoft took a big gamble when it ventured into the video game/console business in 2001. Nevertheless, the risk taken was the appropriate one due to the advantages that were in the company’s favor. For example, Microsoft had advanced software knowledge, internet speeds had improved, and the target market was appropriate for its products. Therefore, all the indicators were pointing towards a successful business undertaking.
University of Michigan Business School (UMBS). “Microsoft Xbox Online.” 2001.