Microsoft Should Never Have Built the Xbox

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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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