0. Microsoft Xbox Online
Kosar Kazemi
Hengameh Vahabzadeh

1. Overview The Video Game Industry Competitive Landscape1
Competitive Landscape 2
Video Game systems/Software/Online Communities 3
Xbox
Xbox lunch
Factors Driving Company Lunch
Building The Box
Cracking The Consumer Electronic Business
Identifying A target Market
Priming The Developer Pump
Pricing Against Competitions
Achieving Differentiation 4

2. Key Question
Why was Microsoft betting so much on the home gaming console industry? 1
Was there enough market potential to justify Microsoft’s hefty investment? 2
Would online gaming provide a market opportunity for consoles? 3
Could the game console potentially reduce the importance of the PC? 4

3. 8-bit entertainment system
History
In 1975, an agreement between Sears Roebuck & Co. and Atari ignited the home video gaming industry.
Product
Company
Year
2600
Atari
Late 1970s
8-bit entertainment system
Nintendo
1985
16-bit Genesis
Sega
PlayStation1
Sony
1995
N64
1996
128-bit Dreamcast
1999
2PlayStation1
2000

4. Online Gaming
approximately one-third of Internet users regularly played online games.
Forty-three percent of those playing online games had been doing so for less than a year
Seventy-nine percent of online gamers were between the ages of 25 and 55.
89 % (1 in 10 online game players) paid for a subscription to any of the online game services

5. Market attractiveness
Technology analysts has predicted that:
American video game market would grow to $40 billion by 2003
Online gaming subscription revenues in the U.S. would grow from $270 million in 2001 to $4.6 billion in 2005
35.1 million people played online games in 2001.
The two most comprehensive gaming websites
Microsoft Game Zone (“the Zone”)
EA.com, Electronic Arts’ online and e-commerce business.

6. Industry revenue breakdown :
Industry Segment
software
hardware
accessories
game consoles
(the Sony PlayStation)
portable game players
(the Nintendo GameBoy)
personal computers
featured the games that
ran on the hardware.
game controllers
and other peripherals
Industry revenue breakdown :
70 percent software,
20 percent hardware,
10 percent accessories

7. Business Model & Pricing
Loss leader strategy:
-Selling hardware for minimal to negative margins
-Earned higher margins on sales of video games and accessories
Console makers profited from this loss leader strategy in three ways:
Produced game software and earned revenues directly from the game sales.
Royalty agreements with third-party software publishers to publish games for Console manufacturers system
Console manufacturers profited from selling accessories and peripherals for their systems.

8. Monitoring the success of the loss leader strategy
Attach Rate : the number of games sold for each individual console in a given year.
greater attach rate : achieving profitability goals via the loss leader strategy

9. Online Gaming Challenges
Two major points of uncertainty for console makers, software developers, and online communities:
How readily consumers would change their video game playing behavior
Varying qualities of connectivity to the internet

10. Competitive Landscape
Two dominated players in video game console market:
Sony
and Nintendo
Controlling roughly 70 percent of worldwide industry revenues in 2001 through
Extensive user bases, popular products, tremendous brand recognition, and widespread distribution

11. Competitive Landscape
Online Communications
Software
Video Game system
AOL Communities
Sega
Sony
Yahoo
Electronic Arts
Nintendo
Gamespot

12. Xbox Console Priming the developer Pump Lunch Fueling Xbox Identifying
Target Market
Pricing
against
competition
Cracking
Customer
Building
Achieving
differentiation

13. Xbox Lunch $500 million marketing campaign
$2 billion in development costs
4 percent market share for the PC game industry
No experience in manufacturing game consoles
The company brought Xbox to market in mid-November of 2001

14. Factors Fueling the Xbox Launch
Three major factors driving the company’s product launch decision:
Booming industry
Trojan horse strategy
Supplement PC revenue stream

15. Building the Box The company had to overcome two major hurdles:
Competencies in software development, not hardware
Sony’s PS2 had a one-year head start

16. Cracking the Consumer Electronics Business
Nintendo and Sony were dominate in market Microsoft sought to penetrate the online gaming sector
For Microsoft to build a sustainable and profitable Xbox customer base, it faced issues regarding:
Target market
Developer support
Competitive pricing
Product differentiation

17. Identifying a Target Market
Both Nintendo and Sony had been successful because they realized early on who their target consumers were
Microsoft decided to position the Xbox to attract older gamers, aged 18 to 34. Market research indicated that these players were key influencers for younger players. By targeting this segment, Xbox would compete head to head with PS2.
Microsoft
Sony
Nintendo
18 to 34
6 to 14
gamers age

18. Priming the Developer Pump
Xbox team not only abandoned the company’s usual hard-nosed tactics
Consulted with industry game developers for nearly a year before beginning design work.
By fall 2001, Microsoft had signed agreements with over 200 companies to develop games for the Xbox. Sony had approximately 300 developers at that time
Microsoft’s contractors ranged from small development firms to powerhouses like Activision and Electronic Arts

19. Pricing against Competition
Entering the market at a price of $299, with a $125 loss per unit
To remain competitive:
Monitoring how the market responded to the aggressive GameCube pricing
Monitoring how Microsoft priced online services and accessories for the Xbox.

20. Achieving Differentiation
Inserted an Ethernet port for broadband Internet access and an 8-gigabyte hard drive directly into the console
8-gigabyte hard drive
broadband Internet access
store digitized
music,
play games online,
create and save personalized game scenarios,
talk to other gamers over the Internet,.
load detailed graphics
more quickly
surf the World Wide Web,
and download
game enhancements

21. Product Spec Comparison