E3 2013: Fighting the Console Wars One More Time

E3 is technically a trade show closed to the general public, but E3 apparently grants industry status to anyone who has ever worked at a Gamestop or Target (Target sells videogames, right?). As such, the show is more like Comicon than CES. Some attendees dress as their favorite video game characters, there are enormous props (World of Tanks had an actual tank parked in front of the convention center), and there are longer lines for free t-shirts than to try new game systems.

Oddly, E3 also does not evenly represent the world of electronic gaming. Exhibitors didn’t highlight the highest revenue platforms and genres or the biggest areas of growth. Instead, they skewed their exhibits towards a very specific audience: 25 year-old U.S. male console gamers. Fighting and role-playing genres were everywhere, while strategy, sports, dance, and puzzle games were not – even though more people play the latter category overall. E3 focuses more on living room consoles than PCs, even though PC gaming brings in more revenue, especially outside the U.S. PopCap was heavily promoting a new iteration of Plants vs. Zombies, but other than that, casual PC and web games were not well represented. A greater emphasis on consoles is to be expected in a year when a new generation of them is launching, but this pattern has held for several years, and the enormous growth in mobile gaming was almost entirely ignored. Last year, several major mobile game vendors from Asia had booths; this year they stayed home.

Finally, there was barely any mention of other forms of electronic entertainment at E3 beyond video games, despite the name of the conference (Electronic Entertainment Expo) and the fact that Microsoft reported consumers spend more time watching streaming media on their Xbox than they do playing games.

Sony and Microsoft both preempted E3 with previews of their next-generation game consoles. Sony held a large press conference in New York back in February, and Microsoft hosted a much smaller event on its Redmond campus in May. Just ahead of E3, Microsoft clarified its incredibly complicated policies on connectivity and used games, which allow consumers to play their games on friends’ Xbox One systems from the cloud, but restrict how games can be transferred. That left a lot less to talk about at E3 beyond pricing and extensive game demos.

The Main Event (Microsoft v. Sony: Fight!)

Sony’s decision to price the PS4 at $399 drew cheers, but mainly in comparison to Microsoft’s $499 Xbox One. Drawing even more positive feedback, Sony lampooned Microsoft’s move to DRM and connectivity mandate. Microsoft’s policies are definitely not consumer friendly – or easily understood – but are likely to be more significant to E3 attendees than average gamers. The E3 crowd was disdainful of the entertainment and motion gaming capabilities that Microsoft highlighted at its preview, and both Sony and Microsoft focused on traditional console gaming genres in their press conferences. Today’s motion games tend to focus on dance, fitness, and sports. However, the technology included in the Xbox One’s Kinect is truly astonishing, and the fact that every Xbox One will come with Kinect could lead to must-have game titles in the future.

The new Kinect is dramatically more sophisticated than the original. It works in low light and is not affected by concentrated light sources (like halogen lamps). It works in smaller rooms, enables a larger number of gamers, detects an incredible amount of detail – including gamers’ heart rates based on skin coloration! – and its microphones are more sensitive for voice commands. Sony does have a new PlayStation Camera (replacing the PlayStation Eye) for the PlayStation 4, but it is a $59 add-on, and Sony discounted its importance at E3. There were apparently Camera-equipped PS4 systems somewhere at the show, but I couldn’t find them. When I asked Sony about this, they were fairly dismissive about the importance of motion gaming. One rep noted, “you can buy the [PlayStation] Camera, and the new controller can be used with that if you want that type of game.” This could prove to be a big mistake over time as the Xbox One price comes down and developers design software that incorporate voice and gestures alongside the controller – even in traditional game genres. Sony is also behind Microsoft in cloud services; Microsoft has more Xbox Live subscribers than Sony has PlayStation Network accounts, and Microsoft is scaling up its servers further in anticipation of moving more gaming information to the cloud.

Console game sales are down ahead of the new hardware from Microsoft and Sony, but it isn’t clear that consumers are clamoring for new boxes that cost $400 – $500 before factoring in software costs and mandatory subscription fees for online play. I played a lot of games at E3, and the graphics on the next-generation consoles are better, but on many titles, that didn’t appreciably affect gameplay. There will be a lot devices fighting over limited consumer budgets this fall. Tablet and smartphone sales are exploding, and gaming titles for iOS and Android are either free-to-play or cost at most a few dollars a game. Some of these games are coming directly to the television. Ouya’s $99 Android game system was funded in record time at Kickstarter, and Apple is rumored to be opening its $99 Apple TV box to developers in the future as well.

Producing a winning living room game console is still a huge prize, but Sony and Microsoft seem focused exclusively on the living room, when gaming is clearly following computing into mobility. Sony execs were understandably proud of their performance at E3. However, Sony did not provide any more details on how the PlayStation will deliver on the larger vision of consumer-centric, location and device -independent gaming that it described back in New York. Microsoft is not doing much better in this regard. While a Halo game was finally announced for the Windows Phone, it will be an arcade-style top-down shooter, making it Halo in name only. The heavily promoted cross-platform game Spark impressed us by allowing consumers to design their own games on an Xbox One controller, an Xbox 360 controller, or a Windows 8 touchscreen, but it also lacks a Windows Phone version.


Microsoft clearly felt the heat from Sony – and gamers – on the Xbox One’s DRM and connectivity policies. A week after the show, Microsoft reversed nearly all of them: the console will not require connectivity to play standalone games, games will not need to “check in” every 24 hours to remain playable, and it will be possible to share or resell Xbox One discs without restrictions. While some damage was done, the updated policies were received well by the online gaming community. Microsoft was forced to change due to its downright consumer unfriendly DRM, incredibly confusing rules for sharing or reselling games, and the fact that Sony didn’t follow Microsoft into cloud gaming. (Sony gleefully turned the knife in Microsoft with YouTube ads ridiculing Microsoft instead.) However, Microsoft’s original plans offered consumer benefits, too. Microsoft failed to articulate them, but the connectivity and DRM enabled sharing games among family members, and playing games locally or remotely without requiring a disc in the drive. Faced with a consumer backlash, Microsoft had to make changes. Microsoft could have made disc-based purchases work DRM-free, and downloaded purchases work with DRM restrictions but with all the cloud benefits. However, this would have been a more difficult message to deliver. Instead, Microsoft simply went back to the old way of doing things, and consumers will lose out.

Why Microsoft Can Win the Living Room

As Ben Bajarin pointed out in his post here yesterday, Microsoft’s Xbox One is a whole lot more than a game console. Of course, the Xbox has long been the leading edge of Microsoft’s effort to dominate digital home entertainment. But a combination of clever new hardware and Microsoft’s unique positioning with respect to the entertainment industry could propel it to victory–and reverse in faltering fortunes in consumer businesses.

Of course, the hardware still has a lot to prove. The ultimate goal of the digital living room is a single box that can deliver all your entertainment desires. On paper, at least, the Xbox One comes closer than anything we have seen before. But features on paper, or even in a demo, are one thing and real life is another. Even Google TV looked sort of good in a demo before flopping with consumers.

The biggest challenge facing the Xbox One is the promised integration with cable set top boxes. Success will depend on the new Xbox’s ability to control the set top box through an easily set up HDMI connection. It needs to banish the cable box to irrelevancy for everything except accessing and decoding content, ultimately becoming your DVR and your gateway to video on demand. That would make it a huge breakthrough. But if it needs IR blasters to control cable, it will go the way of Google TV. Microsoft is so far silent on which boxes from which cable operators the Xbox will integrate with.

It also remains to be seen how well the gesture and voice control will work to replace traditional remotes or controllers. Again, these are technologies that often demo better than they work, but successful elimination of the need to use hardware to control the box would also be a huge step forward.

So it looks like Microsoft will have a hardware edge when the Xbox One ships “later this year.” The real challenge is to build on what already appears to be a slim lead in the availability of content. Here Microsoft can built on two advantages. One is that it has been a technology partner of both studios and and cable and satellite operators for years. For example, AT&T U-verse service runs on Mediaroom IPTV technology developed by Microsoft (the division was recently sold to Ericsson.)[pullquote]If Apple ever announces that unicorn of tech unicorns, an Apple television, it will have to get over a bar that has been raised by Microsoft. It’s been a long time since we could say that about any product.[/pullquote]

But a more important reason, and an odd one given Microsoft’s history as the big bully of the tech industry, is that Microsoft is the company that Hollywood is not afraid of. Microsoft’s leading rivals in the living room are Apple, Amazon, and Google (Sony could claw back into contention, but it has fallen a long way behind.) Each of these competitors inspires fear and loathing in the studios. Apple is the company that ate the music business. Amazon is the company that seems to destroy value in every market it enters–good for consumers, but torture for producers. And Google is a company whose ambitious are scarily unbounded. Apple and Google TV effort has been hobbled by lack of cooperation from content owners and distributors’ Google so far has restricted itself to selling and streaming downloads to other companies’ devices, though it is rumored to be contemplating a set top box of its own. In this company, Microsoft can position itself as an honest broker, a neutral player with no dog in the fight.

The only entertainment content deal that Microsoft announced at the Xbox launch was an exclusive with the National Football League that will bring a lot of “second screen” content, such as stats and highlights, while watching a game on your Xbox. But there was no word about making the games available outside of the NFL’s existing deals with CBS, Fox, NBC, and ESPN. (Microsoft will also get branding on the hoods of replay stations; let’s hope that works out better for them than Motorola branding on coaches’ intercom systems.)

In the end, it is Microsoft’s ability to strike content deals with studios, networks, and sports leagues and getting cable operators to support deep integration of Xbox with their services that will determine success in the living room. At a minimum, though, it seems that if Apple ever announces that unicorn of tech unicorns, an Apple television, it will have to get over a bar that has been raised by Microsoft. It’s been a long time since we could say that about any product.


Microsoft’s Strongest Asset is XBOX Not Office

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.

Tech Journalists Need To Learn Something About Business

Microsoft 10-KA week ago, Engadget published a thinly sourced report that Microsoft would sell its new Surface tablet for an improbable $199. Despite a lack of any further confirmation, the report was endlessly repeated, commented upon, and used as the basis for endless speculation. My colleague Tim Bajarin did a very effective job of puncturing the rumor, based on supply chain reporting and his extensive knowledge of the industry. What very few others did was to look at the report with a jaundiced eye and ask whether such an action made any business sense for Microsoft.

This is a rampant problem in technology journalism today, whether in print, online, or broadcast. Many technology writers appear to have little interest in the business side of their industry and little background or training in the intricacies of operations or finance. If they ever read financial reports, it doesn’t show in their work. I doubt that most of them know an S-2 from a 10-K. And this is unfortunate because it often produces shallow and uninformed reporting.

Let’s go back to that $199 Surface. The Surface is the most interesting product announcement from Microsoft in many years because it represents an important break with the company’s core business model of  licensing software while leaving the hardware business to its OEM customers (Yes, Xbox is an exception, but a very limited one. We’ll get to that in a bit.)

Microsoft makes nearly all of its money from three roughly equal revenue streams: Windows and Windows Live, Servers and Tools, and Microsoft Business. The first is the core Windows business, the second all the back-office software Microsoft sells to enterprises, the third is mostly Office. Recent trends in the industry, especially the rise in tablets and the accompanying collapse of consumer software prices threaten the first and third streams.

Microsoft is getting into the hardware business because it wants to shake things up–a bit. But its position is not so threatened that it wants to destroy the ecosystem that it has spent the last 30 years creating. A $199 high-quality tablet would have two drastic effects on Microsoft’s business. It would produce enormous losses of perhaps $150-200 per unit; modestly successful sales of 5 million units–about the number of iPads Apple sells in a month–could knock a billion dollar hole in Microsoft’s earnings. And it could make it impossible for OEMs such as HP, Lenovo, Dell, and Acer to enter the market. With the traditional PC market beginning to shrink,  a Microsoft loss-leader tablet would be an existential threat to these OEMs–with no guarantee that Microsoft rather than Apple or Google and its partners would pick up the pieces.

Some speculation (for example) focused on the possibility of typing that $199 price to a subscription to–something. But again, this reporting failed to do any real business analysis. Wireless carriers provide up-front subsidies for phones, so why not Microsoft for Surface. For one thing, contracts for smartphones bring in around $100 a month, leaving lots of room to pay for the service and recoup the subsidy. A similar model was tried for both some notebooks, especially netbooks, and Android tablets, but it has been a dismal failure to the point where carriers are abandoning it. And the availability of free services is so great that it is hard to see what would get Surface buyers to pay a monthly fee.

The Xbox has also inspired a lot of bad business analysis. It’s true that that the Xbox was introduced at a price well below its cost in the hopes that game licensing feeds and outright sale of Microsoft games would make it profitable. Fortunately, the Xbox has never been a huge part of Microsoft’s business because this strategy took years to pay off. It’s true that today you can buy a $99 Xbox if you agree to pay $15 a month for two years for an Xbox Live subscription. But this is really a financing alternative rather than true subscription, since you will pay $359 for a subscription that could be bought on its own for $120. The Xbox is simply a very different kind of business than Windows, aimed at a very different audience.

The big problem here is the fact that too many tech writers don’t look at the numbers or don’t know what to make of them if they do. In an earlier generation, it was common for tech writers to have put in some time on the business beat, and the most of the best still have that experience. The quality of tech writing would improve immeasurably if such skills were more widespread.

Why Microsoft Should Make an XBOX Mobile Gaming Console

Yesterday I shared a column on why casual gaming, or even more immersive gaming on smart phones is not going to threaten dedicated mobile gaming consoles any time soon. To come to this conclusion I had been using the Sony PS Vita for a few weeks. Using that device also led me to the conclusion that Microsoft needs a device like the PS Vita for their gaming ecosystem. There are a number of good reasons for this.

Strategy for Windows and Windows Phone
Microsoft includes on their Windows Phone platform an XBOX Live hub. This is simply an application that lets you interact with your XBOX Live friends and view your own profile information and achievments. Given the success of the XBOX 360 it makes sense for Microsoft to branch the service out to mobile devices. They even have an iOS app for XBOX Live as well.

What would be interesting for Microsoft strategically would be if they built this device and had some of the main dashboard UI be much closer to the Metro UI they are orienting around. The new XBOX Live dashboard is getting closer but is not the fully Metro UI yet.

I would expect a device like this from Microsft to be quite successful given the passion of the XBOX 360 audience and the number of live users gaming online. If that were true then a large number of consumers who purchased the XBOX mobile device would get immersed in the Metro UI and become familiar with it. Thus making them partial, perhaps, to Windows 8 and Windows Phone products in the future. One could make a strong case a dedicated XBOX Live mobile gaming console could be more successful than Windows Phone in the short term.

Gaming as a Service
Another key element of strategic interest in this thinking is the role of the XBOX Live service as a part of such a device. I can imagine that if Microsoft demonstrated with such a device how groups could play Modern Warfare with their friends online from both the XBOX 360 and the mobile console, that it would generate quite a bit of excitement. The PS Vita and new software that will be rolling out will support this feature as well. However, XBOX Live is such a good gaming service for hard core gamers that a mobile device tied to XBOX Live gaming could be a big hit.

This would further the revenue model for XBOX and perhaps even generate more XBOX Live Gold customres. Gold is the package where you pay $50 a year for special online features. Perhaps using XBOX Live on the mobile platform could even cost slightly more as a package. Either way it makes for an interesting extension of a core servce Microsoft is invested in.

Game Software Developers
Lastly a move like this would attract game developers for the Windows Platform much more rapidly than I believe is currently happening. Games are a rapidly growing category on mobile devices and even casual games on notebook and desktop PCs are gaining steam.

Microsoft could include in many of the same development toolkits the ability to easily also make games for the mobile XBOX console on top of their other Windows products. The byproduct would be more key apps, and in this case games, for the Windows ecosystem. Something they desparately need.

Microsoft could make it easy to buy these games for the mobile device through their own digital store, similar on Windows phone and Windows 8, which in turn would bring more consumers to their stores doorstep.

There is actually quite a bit strategically I like about this idea for Microsoft. I know the push back on this concept is around how big the market would be for a device like this. Especially since a piece of hardware like this has a longer product cycle life of more than 2 years conservatively. But I will again default to this market being similar to the console market at large. A market where the value has never been in hardware but is always in software and services. Although the hardware may have a long life the annual revenue opportunities come from soft are and services.

The thought of being able to play a game like Modern Warfare, Battlefield, or Gears of War from a mobile console while I travel and my friends are playing as well from their consoles is just exciting.

The key in all of this thinking is the hardware touch points that Microsoft can use to get consumers into their ecosystem. XBOX has been one of those key peices of hardware. So naturally with the world going mobile and Microsoft wanting a peice of that pie, my opinion is that a dedicted XBOX mobile gaming console is a good business strategy for Microsoft. It is also a product I think they would sell very well.

Netflix as a Streaming Service is the Bandwidth King

News broke yesterday that Netflix was raising the price of its streaming plus DVD-in-the-mail plans. It was interesting to see all the backlash from some media and from consumers on Twitter. As much as this may be shocking in the short term what it really signals is the bigger picture story that Netflix is really a streaming video service not a DVD-by-mail service.

In fact I think this piece in the Wall St Journal got it right: Reed Hastings Doesn’t Want You To Pay More For Netflix. He Wants You To Stop Using DVDs.

If you noticed, the cost of their streaming only service did not go up at all. Only the packages that included an option for DVD-by-mail went up in cost. The age of Internet video is undoubtedly upon us. This reality is cemented in stone if we do a quick case study of Netflix.

I’ve recently analyzed a Q2 2011 report on Netflix from Sandvine Networks. Here are the key points from that report as I see it.

  1. Netflix now accounts for 29.70% of all downstream traffic during peak period (evening traffic)
  2. Netflix has 23.6 Million Total Subscibers
  3. The average Netflix consumer consumes more than 40gb of data per billing period
  4. Playstation 3, XBOX 360, PC, and Wii (in that order) account for 85% of Netflix traffic
  5. Average consumer using Netflix on an XBOX 360 consumes over 80gb of data per billing period

To quote a statement from their report:

“It is difficult to understate how truly staggering the growth has been. Lest the reader think that this phenomenon
is limited to peak period, even when measured over 24 hours, and when measuring all traffic (upstream and
downstream), Netflix is #1.”

Netflix is now the undisputed bandwidth king of the Internet in North America. What’s more is that they have caught Comcast in total US subscribers both with just over 22 million.

What I find most interesting about the Netflix streaming service is how the non-techie community has embraced it. We are hearing more and more frequently in our interviews with mainstream consumers (non-early adopters) how they are turning to Netflix as a part of their prime time evening experience. The reality is for this to happen Netflix time is taking away from their service providers time. In fact we are beginning to hear frequently in these interviews how many are cutting the chord to cable and using Netflix streaming only.

These are telling signs about the value these types of services offer into the main part of the market. As more online streaming services from companies like Apple, Amazon and perhaps even Google continue to grow and become attractive, traditional MSO’s will have no choice but to adapt and adapt fast.

The Bandwidth Story
The real point I want to make is around bandwidth demand. The bandwidth Netflix is demanding from North American service providers is simply stunning. Keep in mind this is just one service. I expect many entrants into the streaming media sector from major players over the next 5 years. The impact on broadband will be overwhelmingly significant.

Not only are the bandwidth demand numbers I pointed out above only from one service; they are also only from one device and one concurrent stream. What happens when you have multiple people in homes consuming Netflix on a tablet, PC and TV all at the same time? The answer is the 29% of downstream traffic could double or triple.

The multi-connected-device reality that is coming is one i’m not sure the network and broadband providers are ready for.

Are Service Providers Prepared?
The Wall St Journal Heard on The Street section published a commentary on this subject titled: “The Time Bomb in Netflix’s Streaming Strategy.”

If we do see a continued explosion in streaming services how will the broadband service providers meet the demands of their consumers? Are the networks themselves capable and ready to handle this explosion of streaming media?

These are all questions we will have to wait to see how they are solved. I do however hope that whatever costs that get passed to consumers do not hinder the success of these services as the WSJ article suggests. What could very well happen is that the costs of traditional TV packages go down and data packages go up – just a thought.

It is in the best interest of the network and service providers to add more value to their broadband networks. Right now they believe their broadcast services are the most valuable but very shortly that value will transition into their broadband services. And that transition will happen on the back of services like Netflix.