Microsoft’s Strongest Asset is XBOX Not Office

by Ben Bajarin   |   December 5th, 2012

I’m sure if you surveyed many in the industry and asked them what Microsoft’s greatest asset to leverage going forward would be you would get a range of answers. I’m sure people would offer up Windows or Office as the most frequent responses to that question. From the looks of much of Microsoft’s marketing it seems as well that they feel their strength lies in Windows and Office. However, they are sitting on another asset that I believe may be the fundamental cornerstone of their success going forward. And that is the XBOX.

If you think about what drove the bulk of Microsoft’s success during the PCs golden age, most would agree it was Windows and Office. For the bulk of the PCs lifecycle it was productivity use cases that drove Microsoft assets into the corporate world and thus by default into the homes of many consumers. That world has changed and I don’t believe the same kind of strong sentiment exists with Windows or Office as it once did with the broader consumer market.

However the product that I do believe not only has more relevant mindshare with consumers than Windows and Office, but also has a largely positive sentiment is the XBOX. To date the XBOX has sold over 70 million units. Now, although that sounds much smaller than the 350-380 million traditional PCs we sell annually on a world wide basis, XBOXs cover more ground than PCs. PCs generally, have a higher penetration due to their tie to individual consumers. In an average consumer home there is generally more than one PC. But XBOXs are more communal and therefore generally only have one per household but chances are more than one person benefits from the XBOX regularly. But this device plays a very important role from an entertainment standpoint and one that I feel has driven higher consumer sentiment than many of the other Microsoft assets.

When it comes to all of Microsoft’s assets, I would argue that the XBOX is the one that is most commonly being woven into the core of many consumers media and entertainment experiences. XBOX is the new Office and I am not sure that Microsoft understands this at the level they need to.

Had Microsoft launched a XBOX tablet first and not a Surface tablet, my conviction is that they would have had much more success. Surface sales are not going well and our close supply chain sources indicate that its likely to not even sell 1M by the end of the year. Had their first go out the door been much more focused on leveraging XBOX assets and positioned more for gaming and entertainment, then I believe Microsoft would have had much more success.

Jim Dalrymple wrote an article today, that is worth reading, where he points out that Microsoft with Surface created a product that didn’t solve a problem. I agree at one leveld, but I’m sure many can make the case that Microsoft did solve a problem. My point is Microsoft solved the wrong problem with Surface. The problem Microsoft is looking to solve, one where productivity is the emphasis in both design and philosophy of a tablet, is not the one I believe most consumers are leading with when researching which product to buy. Thus with Surface, Microsoft has developed a product for the few rather than a product for the masses.

I fundamentally believe that pure tablet use cases carry more weight with the mass consumer market than notebook use cases. Things like an easy to hold and use form factor, a quality visual experience, heavy emphasis on best of breed media consumption and entertainment, simplicity and ease of use. These are the things the mass market values at the highest level. In my opinion if Microsoft was focusing on these use cases with Surface, they would have made a different product and I believe tied it more to their strongest asset for the mass consumer market–the XBOX.

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Ben Bajarin

Ben Bajarin is a Principal Analyst at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Full Bio
  • capnbob67

    Surface solved a problem of what if a consumer wanted a heavier, clunkier, slower, app-free tablet with an unknown UI, beta OS, with a sub-par version of Office. And a kickstand. And is weak in portrait mode. Problem solved.
    I see zero evidence for your XBox is at the center of the users world. Also no real analysis of the user base itself. If we are working from supposition and anecdote, I’ll tell you that every Xbox user I know is a man child who likes Halo and does not control the family’s media habits. They are all embedded in iOS which the rest of the family know how to use. If Microsoft want the hardcore solo gamer, I’m sure Apple will gladly cede that market. The likely 50M extant X-Boxes probably yield 20-30% of that number as target buyers of tablets and many of those are likely already taken. Office is still their biggest asset…

    • benbajarin

      The XBOX is in the top 5 and in many cases the top 3 devices which access most major over the top streaming media services. Netflix, Hulu, etc. Reports from Cisco and other major infrastructure backbone services validate the changing use cases from the XBOX as a purely gaming device to one in which many over the top services are consumed regularly.

      • http://twitter.com/qka qka

        So XBOX is a popular streaming device. I don’t think being used to access someone else’s paid media streams is much of a foundation for MS to build upon.

        Why else ix XBOX the base of MS’s future?

        • rj

          XBox Live is the third large “paying customers” database out there (along with iTunes and Amazon).

        • benbajarin

          I’m looking at this more from the future viewpoint than the current viewpoint of what XBOX is. My point is that what the XBOX represents in terms of media, entertainment, XBOX live as a social platform, etc., is the assets MSFT needs to build upon for the future. Furthermore, extending the philosophy around the XBOX to other devices in MSFT ecosystem in even tighter ways than they are now with Smart Glass is their best foot forward.

      • capnbob67

        I agree that Office is based in the past and not super relevant to consumers vs. enterprise. My point is that I don’t believe that Xbox is as strong a platform as you think it is. It is very US centric (poor global penetration) and the US is the worst market to try to penetrate since it is the earliest adopting geography where other platforms also have embedded strength. You mention only US streaming services which are not globally too relevant. Apple ipads are selling equally well across the globe. Xbox is a beachhead but it seems less like DDay and more like Galipoli.
        It is clearly better that MS has Xbox than doesn’t but let’s not get carried away. It didn’t help Zune, Kin or WP7.

        • benbajarin

          I definitely see where you are coming from and of course there are giant hurdles competitively at a WW level. But my point is that if we look at this through a lens only focusing on Microsoft and what their assets are to build upon for the future, XBOX is the one.

          Plus it is also what XBOX means in terms of media, entertainment, etc, that they can extent to other products. Tighter integration of hardware, software, Live, etc seems like a good play for them going forward.

          • jfutral

            I kind of agree with @capnbob67. It may be the 3rd largest in streaming and paying customers database but I would be more interested in actual numbers rather than relative placement to see just how significant that is. It could be argued that Windows Phone is the third largest smartphone. But it is so far behind Android and iPhone as to not mean much of anything. I just don’t see the penetration to make the XBOX, itself, the center of anything, especially in terms of brand. Anecdotally, I don’t know any XBOX owners. I know Wii and Playstation owners. Some of them may even be XBOX owners, too, but they don’t talk about that.

            However, if you reframe the argument to deconstruct the XBOX into parts that can be applied more universally and XBOX becomes more of a satellite device to that core, I could buy that, possibly. Maybe call it xOS. Even iPod got folded into the iOS family with the Touch. Is this what you are talking about?

            I agree that MS is making a mistake by focusing on Windows/Office for CE. Even Dell ditched the PC consumer market (so they say). Back in the day, enterprise influenced consumer PC thinking and spending. The tides have turned. I understand dancing with the one who brought you to the dance. But the dance is over. Now its time for the after party.

            Joe

          • http://twitter.com/M_Gauche James King

            LOL at “xOS”

            I strongly championed the “DirectOS” option of Microsoft licensing a unique gaming OS for OEMs built on DirectX right around when it overtook OpenGL as the dominant API for 3D applications. I still don’t know why Microsoft went the console route. It could have folded media center functionality into the platform 5 years ago and, with OEMs cranking out gaming/multimedia HTPCs with 3 to 5 times the graphics power of competing consoles, probably put Sony and Nintendo out of the console business.

            People may not realize it but DirectX is the crown jewel of Microsoft and was the key to it solidifying the dominance of Windows in PCs. For about a decade, gaming PCs drove innovation in the PC space. I should know, I built one of the first PCs to break the 10K barrier in 3DMark.

          • rj

            I don’t think they should turn their back on Office and Windows and their Enterprise business, but if they want to be relevant in the consumer space, XBox is their strongest property to build from.

            One possibility is this: Microsoft uses its XBox expertise to build a really great, game-oriented “XTablet”. I think they could be very successful here, as Apple has left an opening – both in terms of hardware (the touch screen and accelerometer approach just doesn’t work that well for more “serious” games), cloud support (Game Center isn’t exactly lighting the world of fire), and perhaps software (I don’t know for sure, but I doubt iOS’s game dev tools are as good as Microsoft’s). Add Skype integration, maybe Hotmail, maybe Facebook and the XBox/XTablet combination becomes a compelling alternative to the Apple TV/iPad, particularly with younger users. From a marketing standpoint, it wouldn’t be hard to promote the XBox as a cooler, edgier alternative to iOS.

            There’s a lot of money in the “real” gamer business – the latest Halo sold $200M+ in one day, and the latest Call of Duty took in $1B in about 2 weeks. By comparison, the iOS store has taken in about $10B for all types of apps in its entire history.

  • rj

    I’ve long thought Microsoft hasn’t properly taken advantage of the Xbox. I think they might have had more success with the Zune had it been an Xbox peripheral. Tight integration between Windows Phone and XBox would make Microsoft a much more interesting alternative to Apple.

    • benbajarin

      agreed.

    • sON gOKU

      there is deep integration between Xbox and windows phone and it is more interesting then apple

  • steve_wildstrom

    Ben, I agree that Windows and Office are the past and Xbox may be the future. The problem is the present, or specifically, how we get from here to there. The difficulty is stark: In fiscal 2012, the Microsoft Business Division, which includes Office, had revenues of $24 billion and operating income of $15 billion. Windows & Windows Live had revenue of $19 billion and income of $12 billion. Entertainment & Devices, which includes Xbox and Windows Phone, had revenue of $10 billion and profits of $365 million. In margin terms, that’s 65% for Business, 63% for Windows, and 3.8% for E&D. In other words, if Xbox is the future, Microsoft needs the profits of Windows and Office to invest in its growth.

    Fortunately, despite the current perception that Microsoft is on the rocks, Office and Windows are going to produce a healthy stream of income for some time to come. The question is how well Microsoft invests it for the future

    • benbajarin

      Yes the transition is the key and it will be what makes or break them in my opinion. But as I look at this from a 5 years and beyond MSFT standpoint, I keep convincing myself that building upon what the XBOX means as a philosophy for every screen is their best path forward.

    • def4

      They can’t get from here to there because they don’t have and can’t get a monopoly position in the home entertainment market like they have for desktop operating systems and productivity software.

      Overall, XBOX integration makes sense and should be nice to have but I don’t see how it will become the key to unlock the profits Microsoft will need to sustain themselves at their current size after their current cash cows completely lose relevance.

  • http://www.slideshare.net/samirsshah Samir Shah

    It is not one or the other, it is both!!!

  • http://twitter.com/M_Gauche James King

    I’ve tweeted this exact sentiment on numerous occasions. The resistance to the “XBox as the new center of Microsoft’s business” philosophy is based on the fact that the division responsible for it, Entertainment and Devices, contributes relatively little to Microsoft’s bottom line currently.

    However, the strength in the position is that the XBox franchise is the most cohesive and innovative of Microsoft’s products. The XBox360′s UI and UX is easily the best of all of Microsoft’s products and one of the best period, on par with anything Apple has produced. It’s monetization strategy, while it took some time to ramp up, is proving solid with a lot of expansion and upside. And XBox is probably the only brand that Microsoft has right now that has an immediate positive association for many consumers, despite its hardware stumbles. The XBox brand would be just as, if not more, effective than Surface in allowing Microsoft to introduce cutting edge (and profitable) devices with great user experiences a la Apple.

    I doubt Microsoft has the culture or commitment to do the truly radical overhaul of Windows that would make it a more appealing brand for consumers, such as truly tablet specific and media center versions and a major UI redesign of the core Windows experience. But XBox is already where Microsoft wants to go. If Microsoft can find more effective ways to leverage it, it could be its new growth engine.

  • AScholt

    There may be something to this. If they tightly integrated a whole host of services then perhaps the games/entertainment could be fully interactive with skype running the voice/messages..a mini surface that acts as an in-game pda or remote / keyboard, Bing to search for shows/data…maps for surroundings in real life and in games…ad placement everywhere……also, what ever happened to all the voice research that MS did in late 90s/early 20s….how could Siri came out first when Gates talked about voice eons ago…