Market Overview

Did Microsoft Kill Off an Industry This Week?


Does the rise of one industry mean the death of another?

There's been a lot of hype this week surrounding the way in which Xbox 360 – once touted as a game console that can do everything – is being used. For many years, consumers primarily used the device to play games. But new reports suggest that the tide has turned and that people are now using the Microsoft (NASDAQ: MSFT) game console to stream online content more than anything else.

This has led to a couple of assumptions: (1) video games are a dying breed, and (2) consumers care more about streaming video than anything else.

But these assumptions ignore a few important facts. For starters, quality video content has always been popular. Hollywood has and probably always will make more money than any other sector within the entertainment industry. While you can find a single game (such as Call of Duty) that makes more money than any particular film, the collective sales of Hollywood's venues – from movie theaters and network TV to DVDs and Internet streams – trumps everything else. Now that people can get what they want, when they want it, they are more eager than ever to sit in front of the TV and watch for hours.

That brings us to the second point: the ability to stream content on a TV instead of just a PC. Most people don't have a television set that can receive online content out of the box. Consequently, they have to buy an adaptor or an external device.

Consumers could use an Apple TV (NASDAQ: AAPL) or a similar product. They could purchase a multimedia box from Western Digital (NYSE: WDC) to stream their favorite videos. But none of the video-only devices have received the hype, media attention, or marketing power that accompanied the Xbox 360. None of the video-only devices can do half of what the Xbox 360 offers. Thus, when you're looking at spending $100 on Apple TV (or more for other video-only devices), the Xbox 360 price tag seems easier to swallow, especially now that there is a $200 version.

Third, people like the Xbox brand. They like it so much, in fact, that when the console came out in 2005, many consumers bought an Xbox 360 without having any specific games that they wanted. In surveying the line at a local Best Buy (NYSE: BBY), I couldn't find a single person who was there because they couldn't live without a particular game.

“I love the interface,” one customer told me. He said this without actually using the Xbox 360 himself, as it still had not been released. “It can do so much,” another customer told me. Again, he hadn't used the console either. But both men (and dozens of others) were waiting in line for the midnight launch anyway.

Fourth – and this is the most important point – Microsoft may have actually helped the game industry (not harmed it) with the success of Xbox 360.

Let's suppose that a good portion of the console's new buyers are getting the Xbox 360 as a multimedia device and not specifically because it plays games. These are consumers who, during the ‘80s and ‘90s (when game consoles only played games), the industry could not have served. But if those same consumers have now been persuaded to get an Xbox 360 (which certainly appears to be the case), then Microsoft has actually expanded the game industry.

By placing a game console in the hands of consumers who don't game, Microsoft has increased the chance that those consumers will game. And even if they don't, Microsoft is well beyond the point of taking a loss on Xbox 360. The company now profits from every console it sells. Thus, Microsoft wants to sell as many Xbox 360s as it can – even if some of those buyers never plan to buy a single game for it.

There is the possibility that this is all wishful thinking and that many of Xbox 360's core users are actually shifting their time away from gaming to streaming video. But if that's the case, the game industry as a whole is to blame, not just Microsoft. In fact, I'm not sure Microsoft is to blame at all.

When the Xbox 360 was unveiled, the Windows maker spent a great deal of money (and even paid for a 30-minute MTV special) hyping the game-playing aspect of the device. Microsoft knew that while video and other content may have a bright future, people won't rush out and buy a new device just for that reason. (Unless it's from Apple, apparently. But even Apple's devices play games.)

If, however, you give gamers an incentive to drop $400 on a new console, they will happily get in line. This is the strategy that all game makers should take, and it's why the Xbox 360 has been so successful.

Sony (NYSE: SNE), on the other hand, tried to sell the PlayStation 3 as a Blu-ray player. It worked with a few consumers. But long-term, what has it done for Sony? PlayStation 3 sales will likely never catch up to PlayStation 2, a console that was sold as a game-playing device first and a DVD player second. PlayStation 3 can do so much more than PS2 ever could. But the price ($500 and $600 models were available at launch), the lack of exclusive games, and the success of Xbox 360 have kept Sony from repeating history.

But just as Microsoft cannot be entirely blamed for any shift in the popularity of gaming, Sony cannot either. Both console manufacturers have relied heavily on the content of others to sell their machines. And over the past few years, game developers have failed to deliver what consumers want.

Five years ago, the number of games I played annually far outweighed the number of films and TV shows that I watched. That is no longer the case. It's not because TV and movies have gotten better (though there are quite a few shows worth watching right now). It has more to do with the fact that the game lineup has gotten much, much worse. So while the number of hours I spend watching TV and movies have not actually gone up, the number of hours I spend playing games have greatly decreased.

That decline should be far more troubling to game developers than the news that people are spending more time streaming video on their Xbox 360s.

Follow me @LouisBedigian

Posted-In: Apple Apple TV Microsoft Windows Xbox 360News Rumors Tech Best of Benzinga


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