Can Kinect save the Xbox 360?
By Kyle Kulyk 
The Xbox 360 is in trouble.
Despite the brave face put on by Microsoft employees such as Aaron Greenberg as they read their PR scripts, Microsoft’s flagship gaming console has been a weight around the neck of the Entertainment and Devices division since shareholders could shake a fist at them. Billions lost on the original Xbox, recent blunders such as the mishandled Zune, the Xbox 360 hardware fiasco and subsequent billion dollar loss on a warranty program that never addressed the underlying problem, and the most recent victim to be thrown under the bus, the Kin phone, Microsoft’s Entertainment and Devices division has been a colossal disappointment to shareholders which recently resulted in the firing of multiple high level execs. But even though the division is responsible for multiple products the primary source of revenue lies with the Xbox 360 gaming platform, and 360 sales have consistently struggled to maintain positive sales growth.
The division’s recent return to profitability seems like a light at the end of the tunnel but belies the underlying problems that still exist. Profits came on the back of thousands in layoffs (primarily striking Xbox related staff) and nearly $100 million slashed from the 360 marketing budget alone during a period of slowing hardware revenue, software revenue and slowing 360 console sales. The Entertainment division this past year experienced virtually zero revenue growth according to Microsoft in their recent fiscal 2010 report. Microsoft also revealed that once again the division responsible for the 360 console has dipped back into the red. Even with $1.6 billion in revenue for the quarter they posted a loss of nearly $200 million in the last quarter reported. This adds to the staggering billions which shareholder have seen evaporate since Microsoft decided to enter into the gaming sphere.
This is not the first time the 360 has hit a sales wall. In 2007, 360 growth sputtered and reversed versus 2006 numbers and the calendar year 2008 was shaping up to be a blowout for the more expensive Playstation 3 console until Microsoft drastically slashed prices for the 360. The effects of the price cut were short lived however and after 6 months the 360 started its longest period of decline which lasted 4 back to back quarters before the most recent quarter showed a slight improvement from the year prior.
In the most recent 18 months reported the 360 console has lost almost 4 million sales compared to the 18 months prior. This amounts to over a 20% decline in sales during a period where their closest rival, the PS3, not only outsold them worldwide but saw a 45% increase in sales during a worldwide recession.
Can this $149 camera aimed at casuals save the Xbox 360?
However, Microsoft has what they think is an ace up their sleeve and the 360’s luck could turn despite analysts like DFC Intelligence’s assertion that the 360 is a console “clearly on the downside of its lifecycle.” Microsoft’s motion control device, Kinect, was unveiled at this year’s E3 to a sceptical gaming public. Microsoft is finally making their play for the elusive “Casual gamer” audience that have flocked to Nintendo’s Wii. The question is, will their risky investment in an expensive camera add-on for a comparatively unpopular console really woo existing and potential Wii owners to spend more for a gaming platform they had previously turned their noses up at?
Don MacCabe, manager of UK retailer CHIPS doesn’t think so. In a recent interview he opined “In some ways Microsoft has missed the boat,” he told GamesIndustry.biz. “Over the last two years the casual market has been declining rapidly.”
“I don’t think it’s going to add any hardware sales.”
Sony and Nintendo both were offered the opportunity to work with Kinect’s technology but ultimately passed, citing concerns about camera lag as well as the unit’s ultimate price tag. These predictions seem to be warranted judging by reaction at E3. Failing to excite gamers at E3, many commented on Kinect’s laggy response, copycat games, limited number of players and restrictive space requirements while Microsoft attempted to distract from the on-stage demos with hired circus acrobats and staged videos. Added to this the newly revealed Kinect price tag of $149 US ($149 Euros) has many questioning the value of the camera given its performance and software line-up.
Continues MacCabe, “The pricing is immature to a certain degree. Consumers see it as just a catch-up with the Wii, but they don’t see it as much of an improvement. When you see a new hardware product or a new peripheral, you normally see quite a response from the public. We’re not seeing that, they’re completely underwhelmed by it, really.”
Or maybe the color and lack of wi-fi was holding the 360 back versus the Wii and PS3
Microsoft has also recently unveiled a redesigned 360 console. Slimmer and quieter, the 360s also includes a bigger harddrive and built in Wi-Fi, something its PS3 competitor has had all along but the 360s still lacks two of the PS3’s main draws, the Blu-Ray playback ability and free online service in addition to a strong software library and multiple exclusives hailed as the best available on consoles. As well, Microsoft has claimed the infamous hardware problems that have long been the bane of the 360 owners existence is finally a thing of the past, a claim they have made multiple times in the past with the release of prior hardware revisions that were proven to still suffer from severe overheating issues. The release of the new 360s has recently spurred 360 sales as Microsoft lowered prices on the old 360 consoles to make way for new stock, but is this a sales recovery in the making or merely a temporary boost?
The latter, according to Wedbush Morgan’s Michael Pachter. Pachter predicts that 360 sales will continue to decline year over year until Microsoft reduces its ‘stubborn’ price point. But even then, history has shown that a 360 price cut’s impact on sales is only temporary and even software heavy hitters such as Halo and Gears of War have historically had a negligible impact on console sales.
Time will tell if Kinect is the cure-all that Microsoft claims it is in restoring the Xbox’s growth, but in the meantime shareholder patience continues to wear dangerously thin. Rob Enderle, principal analyst of the Enderle Group recently referred to the entire Entertainment division as a “vampire” whose “profit, which wasn’t much, was massively offset by the economic cost it caused to the corporation.”
And with growing rumours of a mounting movement within Microsoft to oust Microsoft’s CEO, Steve Ballmer, one of the Xbox’s chief defenders, due to his perceived failures to enhance the company’s value – what would this mean in the coming year to the floundering Xbox if Kinect is unable to boost the consoles flagging fortunes?
Microsoft: http://www.microsoft.com/msft/default.mspx
Sony: http://www.sony.net/SonyInfo/IR/financial/fr/index.html
