X Marks the Spot

by Rick Powers - March 2, 2001, 2:22 pm PST

Can a new player survive in a market dominated by the old-line, even if that new player is a big-name like Microsoft? Rick explains how they will survive, and the exact plan for domination.

If there’s one thing Microsoft needs right now, it’s something to distract the public from their legal troubles. A corporate legal battle hasn’t been this big since the AT&T breakup in 1982, and Microsoft is getting smeared in the press. More than that, it seems that the company just needs to desperately have some fun. One would think that X-Box would work on all accounts. Of course, like any good novel, it’s not quite that simple …

Insiders would tell you that Microsoft has been dying to get into the game market ever since Bill Gates noticed the incredible sales of Flight Simulator 5.0. The game sold very well, but the problem was, there was nothing there to drive additional sales. Looking at the game market, “disposable games” (titles with a distinct end point) sold just as well, but more frequently. Since Flight Simulator had no goal (you can fly around indefinitely), there was no reason to buy another game.

Further analysis of the market showed that console games sold much better than PC games, and in a better ratio to possible sales. Since the PC is not just a “game machine”, sales tend to be in the 1:10000 range. Console games? 1:100, or better. Console gaming is clearly the better market in which to be involved. That’s why you see many PC game developers porting high-selling games to the console market … sure fire sales. The real money, however, is in making the consoles. The way the market works, console makers charge a license fee to any developer wanting to make games for its machine. For example, say there are 100 developers each looking to make a run of 1,000,000 copies of one of their games. (That’s 100 Million for you math dropouts.) If you have a license fee of, say, $3. That’s $300 MILLION in revenues, and it didn’t cost you anything to make. Free and clear. That’s very tempting, isn’t it? Remember, these are LOW numbers for a successful console, a talented developer can churn out 5-7 games over a console’s lifespan. At a run of (conservatively) 1 Million each, that amounts to $15-$21 Million in license fee revenue for just one developer.

Of course, you need to have a console first, and you have to convince developers to make games for it. This is why it’s so incredibly difficult for a new company to make a console and generate those license fees. You need to be able to prove that consumers will buy your console, and will buy GAMES for it. Without a proven record of accomplishment, this is nearly impossible for a new player to achieve. When you have no installed base numbers, and no proven business plan, developers will not take the risk, and you end up like 3DO, Nuon, Indrema, etc …

So other than being the 800-pound gorilla of the PC world, what makes Microsoft think that they can pull off this stunt? No reason is needed, other than their brand. Even given their legal troubles, Microsoft is a gigantic name, second only to Coca-Cola at this point. With money to burn, Microsoft can market a new console in any channel or manner it chooses. That will generate sales. They have the R&D dollars to build a very competitive machine, technology-wise. Then you need to court developers to the machine. That’s easy, make it easy to make software for, and ensure sales and you’ll generate developer interest. That’s Microsoft’s forte. But how do you GUARANTEE that developers will flock to the machine and create games, which will generate consumer interest? Simple, lower the licensing fees and development costs. That’s the true barrier to entry, and it makes it easier for developers to take a risk on you.

Microsoft has approached this thing correctly on all fronts, something it learned from watching Sony in the last market war. They have signed well over 180 developers, created technically impressive hardware, and are generating the proper buzz among consumers. Moreover, they have an open-door policy amongst developers, where they’ll pretty much take everyone. This is working out to be a tremendous advantage as PS2 exclusive code shops become frustrated with Sony and need to find a way to generate some revenue.

Timing in this market is key, and there’s no better time than the present. Nintendo has not endeared themselves to most third-party developers with their stubbornness and reluctance to eschew the cartridge format for the N64, and Sony has let their corporate arm take over the game business, alienating the developers with their newfound propensity to “milk the cash cow”. With Sega out of the running, Microsoft can step in and easily win this round.

Nintendo has a shot at pulling out a win in this race. Gamecube is impressive, and while the mini-DVD format isn’t ideal, it’s plenty of space for creativity and promotes clean, tight code. The unit is small and elegant, and sure to be a hit in Japan. Plus, Nintendo has franchise games that Microsoft simply can’t duplicate. Mario, Zelda, Pokemon, and the various Rare titles are all console exclusives, and consumers will buy into Nintendo simply for the privilege of playing those games. Microsoft doesn’t have any marquee games that consumers are familiar with, and while “Raven” is an intriguing mascot, there is no brand-recognition with Microsoft yet. EVERYONE on the planet knows who Mario is, and is familiar with Pokemon.

Finally, Nintendo has interoperability sewn up. Gameboy Advance will be a blockbuster system, and its connectivity with Gamecube will help sell systems. While Microsoft is rumored to be considering an “X-Boy” handheld, there are no firm plans, and no pedigree. Gameboy has sold more systems worldwide than any other system ever, and any attempt to infiltrate that market has resulted in failure. Leveraging Gameboy with Gamecube is the smartest decision Nintendo ever made. Its success will not be duplicated, and quite simply, it can’t fail.

Nintendo is not out of the running yet, but certainly needs to realize that Microsoft just can’t be stopped if they continue operating as perfectly as they have been. Nintendo needs to not be resting on their laurels and consider going on the attack against the X-Box. More than ever, Nintendo needs to allow itself to take risks and not play the safe game; Microsoft is poised for the kill, and should not be underestimated. This is Nintendo’s battle to lose, and Microsoft will not be giving any easy victories to anyone.

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