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Microsoft Has an 'Uphill Battle' for Xbox One (MSFT)

June 12, 2013 8:36 am
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Microsoft’s (NASDAQ: MSFT) Xbox One will endure an uphill battle in competing against Sony’s (NYSE: SNE) PlayStation 4 this holiday season.

That’s according to Michael Pachter, the Managing Director of Equity Research at Wedbush Securities.

“Microsoft has an uphill battle convincing consumers that its console is worth a premium to PS4, especially with limitations on transfer of games and with its DRM policy,” Pachter told Benzinga. “Both are unpopular and both were highlighted by Sony.”

To combat PlayStation 4 effectively, Microsoft must change the story. Instead of focusing on the elements consumers don’t want — and the benefits that come with buying Sony’s console instead — Microsoft needs to remind consumers that Xbox One is the only console with a next-generation Kinect.

“While I think Kinect and the multimedia features are cool and valuable, Microsoft must convince its core audience of that before it will be able to justify the price differential,” Pachter added.

As popular as Kinect may be, it has also been the subject of controversy. Many consumers fear that the next-generation Kinect will allow game developers and advertisers to more or less spy on them. After all — Kinect is a high-end camera that also picks up audio. The new version can allow users to communicate in high-definition via Skype. With those capabilities, a sneaky game company could do some very bad things.

Microsoft has tried to soothe consumers’ concerns by explaining that Kinect is safe. While the new version must be plugged into Xbox One at all times (otherwise it wouldn’t be able to pick up the voice command to turn it on), Microsoft insists that users will be able to turn it off. Company representatives have been telling the press that users “are in control of what Kinect can see and hear.” Microsoft also insisted that when users are simply having a conversation near the device, it is not “being recorded or uploaded.”

Regardless, consumers are worried about what Kinect could allow the wrong group of people to do.

For example, in this Polygon story on the topic, 56 individuals chimed in to comment. Many argue that if Kinect is truly a safe, spy-free device, users should be able to unplug it without locking down the Xbox One. Others say that with the NSA using consumers’ existing devices to spy locally and abroad, Microsoft cannot guaranteed that Kinect will never be used to spy on consumers.

This doesn’t mean that Xbox One won’t be a successful. In fact, many GameStop (NYSE: GME) locations have already sold out of their first round of Xbox One pre-orders. To be fair, GameStop has not been taking many orders for the new console. But even if these stores were limited to just five units per location, Microsoft would still be guaranteed to sell 22,170 units (five units per store x 4,434 domestic stores = 22,170 units).

And, that’s just one day of sales from one retailer. Target (NYSE: TGT), Best Buy (NYSE: BBY), Wal-Mart (NYSE: WMT) and dozens of other retail chains will also carry the new console.

Investors should wonder how many of those who pre-ordered Xbox One know or care about the privacy concerns, used game restrictions and the forced online connectivity. If they simply don’t care, Microsoft wins — but if they are unaware of these controversies, they could be in for a rude awakening when they get the unit home.

Louis Bedigian is the Senior Tech Analyst and Features Writer of Benzinga. You can reach him at 248-636-1322 or louis(at)benzingapro(dot)com. Follow him @LouisBedigianBZ

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