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Microsoft entered the video games market with the launch of its
PC-Console hybrid, the Xbox, in November 2001 in the US market and in Spring 2002 in Europe. The Xbox with its off-the-shelf PC processor and graphics card, and in-built hard drive and network connectivity was
essentially an utlra-cheap TV-based PC, although Microsoft were keen to avoid the implied threat this proposition represented to their long-term PC OEM partners and went to great lengths to stress its sole
functionality as a games machine. Microsoft has followed this up with the Xbox 360, launched in November and December of 2005 and in doing so has become first to market for the new cycle.
In contrast to
Sony's adoption of a 10-year sales strategy for its consoles, Microsoft appeared to have stopped manufacturing the original Xbox in 2006, just 5 years after its US launch and with some 25m units shipped. This was
largely due to the loss-leading price at which the original Xbox was being sold and it allows the company to put all of its resources behind the promotion of Xbox 360. Microsoft has learned from the mistakes
made with the original Xbox and has created a console that can properly benefit from manufacturing economies of scale and efficiency redesigns (which should allow it to minimise the loss it generates on each unit
sold and possibly even make a profit at some stage in the future) and has dramatically improved the support it provides to third party developers and publishers. Microsoft as a result is already well on course to
make some substantial market share gains with some 10m units sold (11m shipped) after some 18 months on sale, primarily at the expense of Sony. Microsoft is, as a result, the market leader of the current cycle
although Nintendo's Wii is currently outselling it in all major territories. We believe Microsoft will comfortably surpass the 25m shipment figure achieved for the original Xbox, possibly by as much as 50% although
it will need to maintain its currently strong third party software support to achieve this. However, Microsoft's achiles heal is its continued underperformance in Japan, a market where the aggregate unit sales of
both Xboxes have yet to surpass 1m. In the face of direct competition from the PlayStation 3, Microsoft has launched a new premium priced Xbox 360 Elite with a larger hard drive and HDMI output.
One market
in which Microsoft retains a firm lead over Sony and Nintendo is the online console gaming market with Xbox Live enjoying a successful US launch in late 2002 and a European launch in March 03. Microsoft has been
first to offer a revenue-generative online service with both subscription revenues as well as its Microsoft Points micro-billing system that enables premium content downloads such as casual games, levels, in-game
assets and a host of non-games content such as HD movies and TV shows. Many third party publishers are already generating useful incremental revenue from Xbox Live especially with Xbox 360 which is recording a
considerably higher online conversion rate than that for the original Xbox (at around 57%).
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