My friend John Obeto and Rob Enderle (and now Jay Livens) have been debating the merits of Microsoft in the gaming console market after Silicon Alley Insider’s “Chart of the Day” nicely demonstrated where Microsoft gets their profits. Enderle believes that Microsoft should have never entered the console gaming market because they “would likely be better off, defined by more profitable and with a higher market valuation, had they not entered the console market and instead focused this same effort on Windows gaming.” Obeto believes that “a consequence of Microsoft’s entry into the game console market has been the fall from grace and into almost complete irrelevancy of Sony” among other reasons.
I have an Xbox 360 and I love it… not for the gaming (I’m not a “gamer”) as much as using Windows Extender to bring multimedia to my HDTV. While there are a number of ways to stream content (movies, music and pictures) through your network to your entertainment system, the Xbox is probably the easiest. That said, it’s a financial loser for Microsoft and at the end of the day, that’s all that matters if this is a debate is about business.
You don’t need to be an MBA to realize that Microsoft is first and foremost a software company and this is where they make their money. Consumer electronics have been a disaster for Microsoft for one reason: they know how to build software that can be run on multiple hardware platforms from multiple OEM hardware vendors. Hardware and software are two totally different beasts, different business models and (most importantly) different margins.
How many successful software companies have been a success in the consumer electronics market? You’ll probably have to think awhile before coming up with an answer. Forget Apple - Apple’s complete control of the software and hardware ecosystem makes the two inter-dependent and unique from Microsoft’s model. For a better comparison, look at the challenges Google is now facing trying to sell phones.
“If Microsoft had a PC platform that had the Xbox capabilities they likely could license it to OEMs who would position it against game consoles without Microsoft incurring the hardware risk or cost. Dell has indicated they would be interested in such an endeavor.”
This strategy would still give Microsoft a footprint in everyones family room without the burden (and lower margins) of developing, managing and supporting hardware. Selling gaming consoles makes as much sense as Microsoft making PC’s and, as Enderle rightly states, the Xbox is simply a computer.
I will differ slightly with Enderle on one semantic point: Vendors often compete with their OEM partners in different business lines. In enterprise technology we see this all the time between storage, server and networking companies. It doesn’t always work out (such as Cisco’s divorce from HP this week) but it does happen. Enderle’s distinction is that PC’s and gaming consoles are functionally the same business line.
