Xbox Problems? Microsoft’s not Singing the Blues

When Microsoft Corp launched its Xbox game console 18 months ago, Microsoft
watchers braced for a long,

costly slog. The company had started years behind the leaders, Sony Corp and
Nintendo Co. And when the billions spent began to drag on earnings, analysts
wrung their hands over the Xbox "black hole."

Xbox may be a money drain, but it’s hardly a black hole. Worldwide, 7.84
million Xbox consoles were sold through Mar. 31, vs. 7.78 million Nintendo
GameCubes. Now Xbox is looking up only at Sony, says market researcher
International Development Group. Emboldened, Microsoft is moving the Xbox beyond
the $27 billion video-gaming industry. On May 12, Microsoft will unveil Music
Mixer, a karaoke product for Xbox that lets users sing along. "We think of
ourselves as being in the interactive entertainment business, not the game
business," says Robert J. Bach, chief Xbox officer.

KARAOKA KID: With the music Mixer, says moving from video games into "the interactive entertainment business"

That puts Microsoft in direct competition with Sony to be king of the digital
living room–where it has little expertise. Not only has Sony’s PlayStation 2
outsold Xbox sixfold, thanks to its superior portfolio of games, but it’s also
a leading brand for TVs, stereos, computers, and digital cameras. Most analysts
don’t expect Microsoft, which lost nearly $250 million on Xbox in the first
half of the fiscal year, to turn a profit on its video-game foray until at least
2005. And Microsoft may never dislodge Sony from its throne. But the spoils of
the digital living room are too lucrative, and strategically vital, for
Microsoft to cede them to Sony. Microsoft is hungry for growth markets. And the
digital revolution in entertainment is taking root. Microsoft says its software
expertise will be the key to manipulating and enjoying digital entertainment.
And Xbox leads the Microsoft rush into the living room, helping it sell software
for PCs and home-networking gear.

There’s a crucial difference in Microsoft’s approach this time that bodes
well for its chances: It hasn’t attacked in the usual way, by leveraging its
Windows monopoly and copying rivals’ technology. That won’t cut it in the
entertainment business.

Instead, the company has out-innovated the competition, creating a
technically superior console to PlayStation 2 and GameCube. Its well-conceived
online-gaming service, Xbox Live, is also more sophisticated than the approaches
taken by rivals.

For Microsoft, Music Mixer signals another step forward on the innovation
front. Microsoft is plotting new ways to pack Xbox with consumer punch. The
updated version of Xbox Live, due this fall, will let users talk with each other
online even if they’re not playing a game. And the company is working on
technology to let users copy TV programs onto PC hard drives and use Xbox to
play those recordings on TV. Sony doesn’t aim to be left behind. It’s
working on PlayStation 3, with eye-popping technology analysts expect will,
among other things, let users record and replay TV programming.

Microsoft is showing it can succeed in the digital living room without using
Windows as a crutch. The key is to replace force with innovation. That’s
welcome news for consumers – and for shareholders.

By Jay Greene Greene is Seattle bureau chief in BusinessWeek. Copyright 2003 by The McGraw-Hill Companies, Inc