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Microsoft Should Never Have Built the Xbox

Rob Enderle
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Image used with permission by copyright holder

I’m having an ongoing debate with a number of folks on whether Microsoft should have ever made the Xbox. I’m arguing against it, and the best argument so far for the Xbox can be found here where there are links to all of the posts so far. What started all of this hullabaloo was a snarky comment I made on Twitter after seeing a chart that showcased that the vast majority of Microsoft’s profit came from Windows and that the Xbox wasn’t contributing much at all to the bottom line. That comment was something to the effect of “Does anyone want to debate Microsoft’s Xbox now?” And evidently a bunch did. Now realize that this is in hindsight and we are doing this for fun, so neither side is using any language that would embarrass our mothers. Still, I feel it’s a debate worth having.

Arguments for the Xbox 360

PRJ, who posted the latest position, argues seven points in favor of why the venture makes sense. I’ll cover each briefly here, but it generally is best to bring up his site and see his original words.

His first point is that PC gaming isn’t going anyplace. MMOs own the space and there really hasn’t been an innovative game for the PC for some time. Even when a game does come out it is buggy and needs significant patching.

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His second point, which dovetails to the first, is that the Xbox 360 is Microsoft’s only stable platform. It is too easy for everyone from manufacturers to users to screw up the PC and destroy the gaming experience.

The third point made is that by owning the hardware, Microsoft can assure quality for both the hardware and the game. This guarantees that the game experience is top-notch, and that the system also works for products like the Zune and Windows Extender.

The fourth point presented here is that Microsoft is driving the Xbox 360 into the home as the core product, not Windows or the PC. It is more likely to be in your media cabinet and it does more media functions.

His next and fifth point is that, with the Xbox platform, Microsoft has executed better customer support and satisfaction than it has with Windows. The company has had problems, but addressed them more quickly and effectively then with its Windows line of products.

As for the sixth point, he says that it’s a great platform for developers and much better than the painful PS3 platform or the limited Wii. Investment is minimal and the Xbox Marketplace is effective and successful at moving indie titles.

The seventh point presented is that profit isn’t important, with popularity and market share more crucial. The Xbox 360 sold nearly 5 million units in 2009 and eclipsed the PS3. With Project Natal, it stands poised to dominate gaming with the possible exception of the Wii, which is really a different kind of gaming system with less interesting games for heavy game players.

In short, Microsoft stands alone when it comes to providing amazing games like Halo 3 and seamless, solid experiences.

Arguments Against the Xbox 360

Let’s talk about opportunity cost, which is the cost of not doing something. Let’s go back to Microsoft’s initial choice, which was to develop a separate game platform for a market selling in the low millions with small margins and royalties, or improve the game experience in a platform selling in the hundreds millions at huge margins. That was the decision that had to be made, and by building the Xbox, Windows gaming became less strategic. PRJ’s arguments one through four are valid, but only because Microsoft made this deliberate shift. Had they put the same effort into Windows gaming and targeted the same result, the company could have used a variety of tools from hardware certification to virtual machines to provide a similar experience on gaming PCs. The consumer segment of the PC market is around 75 million users, and Microsoft has around 90% market share. However, most of the other 10% is owned by Apple and this longtime rival owns nearly 90% of the premium market.

The rest of the points speak to how good the Xbox 360 is, but the cost of the Xbox 360 being good was Windows not being better at both gaming and media. If the negative impact on Windows was just 10%, that would be between $200-600 million of profit lost per month, or nearly $5 billion a year in lost profit. To make that up, Microsoft would have to sell 100 million Xboxes (assuming a $50 profit for each which is probably high) a year vs. the five million they are selling.

Look at the Windows Phone Series 7 product, which does gaming and is positioned against the iPhone. It is appliance-like by nature, with Microsoft specifying the hardware, assuring the applications, and even dramatically improving the user interface. Had the company funded PC gaming as it chose to do the Xbox 360, this result might have happened on Windows, resulting in greater success for Vista (which would have been more popular and better focused) and more advancement for Windows 7, which might have been even more improved in terms of both gaming and media capabilities than it currently is.

There is no argument that the Xbox 360 is a sound game system, and it isn’t uncommon for a company struggling with its primary product to broaden their product portfolio and look to other areas for growth. The problem is that the opportunity cost is generally greater than the benefit, and that is the case here. As PRJ points out, PC gaming isn’t what it should be, but that was a cost of doing the Xbox 360, so Microsoft effectively sacrificed a product that generates billions to assure the success of a product that makes millions.

The ultimate cost to Microsoft to produce the Xbox platform was a weakened PC ecosystem, a stronger and more profitable rival in Apple, and an overall poor computer gaming experience. Bottom line: The cost of the Xbox significantly exceeded its benefit.

Wrapping Up

These sorts of arguments are kind of fun, but they also tend to be binary, and the world doesn’t work that way. If Microsoft had put the same effort into Windows that it did into the Xbox platform, it probably would have resulted in a better version of Windows. However, the people heading up the project wanted to do a console and likely wouldn’t have hung around to deal with the Windows politics. Either way, this does showcase going forward that perhaps Microsoft should use what it learned from the Xbox project to improve Windows gaming and bridge the platforms much like it is with Windows Mobile 7. I’d pay extra for a laptop that played Xbox games, and I sure as hell am not dragging my Xbox 360 on a cross-country flight. Using a virtual machine and the right hardware, you could emulate the Xbox 360 on a high-performance laptop or PC, and Microsoft could likely charge a bit more for the related OS version or simply get more game royalties, both of which are nearly pure profit.

Regardless of whether Microsoft should or should not have done the Xbox though, why not now apply what was learned to the product making millions and turn it into an even bigger cash machine? The company might not sell as many Xbox 360 game consoles, but I’ll bet they’d sell more high-end versions of Windows, make the PC OEMs vastly happier, piss off Apple and Google more, and make more money. Oh, and as an added benefit, I’d also be able to play Halo in my hotel room. What do you think?

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Rob Enderle
Rob Enderle
Former Digital Trends Contributor
Rob is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm. Before…
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