Economics of game boxes

Jim Whitehead ejw@cse.ucsc.edu
Mon, 20 May 2002 13:35:48 -0700


Two interesting game box articles today.

Slashdot is linking one from the Monday Morning CEO column of Red Mercury on
XBox Economics:
http://red-mercury.com/mmceo/mmceo_current.html

For Microsoft's sake, let's debunk that mythical "sell the hell out of
blades" (translated: "make up for extraordinary hardware and marketing costs
with software sales") part of the equation. If, on average, every XBox owner
buys 7 software titles over the life of the console (a reasonable estimate),
that's $35 per console sold that the first party gets without investing a
penny more in development, manufacturing, or marketing. That's nice to have,
but in light of all of the costs involved, it's not going to pay for extra
hardware expense and still turn a profit. That little $35 figure kind of
blows a hole in the whole razors and blades thing, doesn't it? Even if
Microsoft's kickback is closer to $10, Sony and Nintendo can bring that down
by starting a software price war. Sony and Nintendo are perfectly happy to
let you believe that they are selling their hardware at a big loss. They are
even happier to let Microsoft believe that. Sony and Nintendo both know that
software sales are for profits, not for hardware subsidies.

----

Makes sense, until you realize that Microsoft's strategy is really focused
on network gaming:

http://www.nytimes.com/2002/05/20/technology/20GAME.html

{Microsoft} is betting the service will save its Xbox video-game system,
which began shipping last November but still lags far behind the
industry-leading Sony PlayStation 2, which has nearly 30 million units in
use worldwide, compared with only 3.5 million for the Xbox. (There are an
estimated four million to five million Nintendo GameCube consoles now in
use.)

....

For Xbox Live to become a success the company acknowledges that it will have
to attract millions of customers willing to pay $50 or more for each game's
software and perhaps a $9.95 monthly subscription, in addition to the $40 to
$60 a month for the high-speed Internet connection the service will require.

----

So now, instead of getting just the $5/game platform tax, Microsoft would
receive $5/game *plus* $10/month. Hmm, now the economics look much more
attractive. But, competition is on the way (from the NY Times article):

Sony, which has said that it will begin selling a $40 adaptor for connecting
the PlayStation 2 to the Internet either via dial-up modem or high-speed
connection in August, makes no apologies for its approach. Although the
company will not attempt to match Microsoft's ambitious online theme-park
environment, neither will Sony attempt to charge users for playing its video
games online  at least not initially.

----

So, we have Sony willing to accept non-economic returns from running its
gaming centers to build the business, while Microsoft is betting their
experience will be so compelling customers will pay for it from the start.

It strikes me that the key ingredient to a successful online gaming service
is the creation of some sense of community. Lack of community is one reason
why, after playing Age of Empires online a few times, I've been more than
happy not to play it for several years. Community is one reason why Ultima
Online has been a success.

Ideas on fostering community:

* Create a competitive ranking system, a sort of decathalon of video games.
Only by doing well in a number of games, in online competition, can you
succeed. Periodically reset, so newcomers have a chance. A bridge or chess
like ranking ladder?

* Make it possible to have *local* game parties. Make a "party server" which
is essentially a game-portal-in-a-box, with a 10 port hub. At parties, your
friends bring their Xbox and a TV and plug it in.

The other idea is that, with free competitors, Microsoft needs to hide their
game service cost. Perhaps they can ink a deal with large ISPs to create a
value-added service that includes MS game portal access as part of the ISP's
mothly cost. The ISP could throw in guaranteed QoS to the MS portal as well,
for an improved gaming experience.

- Jim