Microsoft Xbox Online

1. Microsoft Xbox Online Kosar Kazemi Hengameh Vahabzadeh

2. 1 • The Video Game Industry 2 Competitive Landscape 3 Video Game systems/Software/Online Communities 4 • 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 Overview

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

4. History In 1975, an agreement between Sears Roebuck & Co. and Atari ignited the home video gaming industry.

5. 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

6. 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. Market attractiveness

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

8. 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. Business Model & Pricing

9. 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

10. 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

11. 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 Competitive Landscape

12. Competitive Landscape

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

14. $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 Xbox Lunch

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

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

17. 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 Cracking the Consumer Electronics Business

18. 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. Identifying a Target Market

19. 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 Priming the Developer Pump

20. 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. Pricing against Competition

21. Inserted an Ethernet port for broadband Internet access and an 8-gigabyte hard drive directly into the console Achieving Differentiation

22. Product Spec Comparison