By Matt Rosoff [bio]
Posted: Dec. 5, 2005

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. Each month we make one or more key articles available to non-subscribers.

Great Expectations

Microsoft expects to sell 2.75 million to 3 million Xbox 360s by mid-February and plans to take in more than US$1.5 billion in revenue by that time from the sale of consoles, peripherals, games, and subscriptions to the Xbox Live online service. This will help the company establish an early sales lead over Sony and Nintendo, which plan to launch competing consoles in 2006.

However, it's not clear how quickly such a lead would translate to profits. For example, Merrill Lynch estimated the cost of components for the full Xbox 360 at US$340—significantly less than its US$399 retail price. But iSuppli estimated the cost of components at US$525, suggesting that Microsoft would once again be suffering a loss on each console, expecting to make it up on related products. (Microsoft has said only that the total Xbox business would break even over the course of 2006 and become profitable in 2007.) Regardless, analysts agree that each Sony PlayStation 3 will cost significantly more to manufacture than the Xbox 360, thanks to its Cell processor and Blu-ray disc drive. Microsoft is likely to cut the price of the Xbox 360 as the PS3 launches, placing price pressure on Sony.

Games. The Xbox 360 had 18 titles available at launch and will have 25 by the end of 2005. The games include three exclusive titles from Microsoft Game Studios: Kameo, a colorful adventure game created by Microsoft's Rare subsidiary and aimed at younger gamers; Perfect Dark Zero, Rare's sequel to a well-received first-person shooter it created for the Nintendo 64 in 2000; and Project Gotham Racing 3, the latest in a popular auto-racing series for the first Xbox. All three games will cost US$50 at launch.

Seven other game publishers, including Activision, EA, Sega, and Ubisoft, are releasing titles for the Xbox 360 at launch. However, most of these titles are sequels or the latest editions of ongoing series, such as EA's Madden NFL 06, rather than completely new titles, which are more costly to develop. This suggests that third-party publishers are waiting to see whether the console is a success before committing to develop exclusive new titles for it.

None of the initial Xbox 360 titles will be playable on the original Xbox, but Microsoft expects that some future Xbox 360 games will work on both consoles.

In addition, more than 200 titles from the first Xbox will be playable on the Xbox 360 at launch, but gamers must have the full version of the console, which has a hard drive—not the cheaper Core System—and must install emulation software for each game. (Emulators for Halo and Halo 2 come preinstalled on the 360's hard drive, but allow only offline play; gamers must download additional software for online play.) Gamers who have a broadband connection and an Xbox Live account, including the free Silver-level account that comes with every 360, will have the easiest time getting this emulation software: when they insert an old game, the console will automatically download and install the emulators, each of which will be less than 5MB in size. Customers without a Live account can download the emulation software from the Xbox.com Web site and burn it to a CD-ROM for later installation on the console, or can sign up at Xbox.com to receive it on a disc from Microsoft (for a shipping fee).

Marketplace. The launch of the Xbox 360 also coincides with an update to the Xbox Live online service. The most significant new feature is the Xbox Live Marketplace, where gamers will be able to access more than 400 downloads on the day of launch. Most of this material is game-related, such as add-ons to current games and demos of upcoming ones, but the Marketplace will also feature two free music videos and a handful of movie trailers. This suggests that Xbox Live could eventually become a distribution channel for many types of entertainment, such as downloadable songs and movies.

Much of the content in the Marketplace will be free. Users will be able to acquire other content by spending Microsoft Points, which can be purchased directly from Xbox Live with a credit card, or on prepaid cards sold by retailers. This allows Microsoft to use a single billing system (created and operated by MSN) and pricing scheme worldwide, while letting the cost of a Microsoft Point vary from country to country—in the United States, for example, a prepaid card with 1,600 points will cost US$20. Points can also be used to purchase so-called casual games from the Xbox Live Arcade, with prices ranging from 400 points (US$5) to 1,200 points (US$15).

Resources

The Xbox site is www.xbox.com.

Backward-compatibility information, including a link to a list of compatible titles from the first Xbox, is at www.xbox.com/en-US/games/backwardcompatibilityqa.htm

An overview of the Xbox 360 and corresponding updates to Xbox Live is in "Xbox Successor Unveiled" on page 31 of the June 2005 Update.

The two versions of the console and hardware peripherals are detailed in "Two Versions of Xbox 360" on page 20 of the Sept. 2005 Update.

Xbox Live Arcade is covered in "Casual Games Could Boost 360" on page 28 of the Dec. 2005 Update.