SAN FRANCISCO (Reuters) – The first time around, Microsoft Corp. (Nasdaq:MSFT – news) wanted to establish a beachhead in the video game business. Now, with its much anticipated Xbox 360 console, it wants to rule that $25 billion global market.
The world”s largest software company aims to break even in the first year or two after it starts selling the Xbox 360, the successor to the first-generation Xbox, as it tries to knock rival Sony Corp. (6758.T)(NYSE:SNE – news) from its position of market leadership.
Analysts have estimated that Microsoft had operating losses of more than $4 billion from the first Xbox, which it introduced nearly four years ago.
In an interview with Reuters in Tokyo on the eve of one of the industry”s biggest trade shows, Microsoft Chief Xbox Officer Robbie Bach said the advanced console and the lineup of games for it would give the company an edge over Sony.
As of June, Microsoft had sold nearly 22 million of its original Xbox consoles — fewer than one-fourth the number of PlayStation 2 units sold by Sony. Nintendo Co. Ltd.”s (7974.OS) GameCube is the third biggest seller in the console market.
Now Microsoft wants to get many more of its next-generation consoles to market faster, buoyed by a wider selection of titles and an improved ability to keep costs in check.
"We will wind up cost-reducing the product every year," Todd Holmdahl, corporate vice president of the Xbox product group, said in a recent interview.
Microsoft is working to break-even on the Xbox 360 hardware in the first year or two — roughly the first third in its expected six to seven-year console cycle.
Lifting a page from Sony”s PS2 launch, Microsoft plans to have the Xbox 360 on U.S. store shelves on November 22 — months before the upcoming PS3 — giving it a leg-up in market share and an edge with hard-core gamers willing to pay top dollar for the latest technology. Last time around, Sony beat Microsoft to market by slightly more than a year.
Like Sony and Nintendo, Microsoft will own the intellectual property inside the console — buying performance and pricing flexibility because it can shop around for chip manufacturers and reduce costs as technology advances.
The first Xbox was built with off-the-shelf components, including an Intel processor and an Nvidia (Nasdaq:NVDA – news) graphics chip. That configuration got Microsoft to market relatively quickly, but limited its ability to control performance and cost.
Chips account for 60 percent to 70 percent of a console”s cost, Holmdahl said.
Microsoft co-designed the processors for the Xbox 360 with International Business Machines Corp. (NYSE:IBM – news), based on IBM”s PowerPC architecture.
Sony, Toshiba Corp. (6502.T) and IBM jointly designed the PlayStation 3 "Cell" chip, which includes a PowerPC processor.
On the content side, Microsoft has worked with publishers to have as many as 40 Xbox 360 titles on the market by year end, roughly twice the number for the first Xbox launch. It is also investing in Xbox Live — a service that allows Xbox 360 owners to compete head-to-head online.
Microsoft, which is aiming to double its market share to up to 40 percent, is less willing than before to subsidize console sales with more lucrative video game software, Piper Jaffray analyst Anthony Gikas said, citing management discussions.
The high-end Xbox 360 package, priced at around $400 in the United States, includes a detachable hard drive needed to play very sophisticated games and those written for the first Xbox.
Microsoft could cut consumer prices on that hard drive — an area where prices have been dropping rapidly — if Sony”s PS3 price comes in lower than $400.
IDC video game analyst Schelley Olhava expects Microsoft to see results from its new strategy. By 2009, she”s forecasting an Xbox 360 installed base of about 40 million units, vs. 49 million for the PS3.