Xbox Launch Starts Long Campaign for Microsoft
Microsoft Corp. has been called a monopoly and worse, but seldom an underdog. But when the world's largest software company enters the hyper-competitive, fiercely loyal video game market with Thursday's launch of its Xbox game machine, it will do so from a standing start and as a distant third in a $20 billion industry led by Sony Corp and Nintendo Co. Ltd.
Microsoft is spending some $500 million to hype its powerful new game machine and could lose twice that in the coming years on Xbox in order to stake a claim to the future of consumer electronics beyond the personal computer, analysts said.
The $299 Xbox, which makes its retail debut in New York City on Thursday, outmuscles rival boxes, with features similar to many laptops that are three times the price, including a 733 MHz Intel Corp Pentium III chip, 64 megabytes of RAM, an 8 gigabyte hard drive and the ability to play DVDs.
Many industry observers see the Xbox evolving into a larger home entertainment device, a strategy Sony has signaled with its year-old PlayStation 2. "We're about building a cornerstone for our consumer business overall," Microsoft's Chief Xbox Officer Robbie Bach said.
But for the Xbox to live up to that promise, it will have to build a lasting following in the game box industry that Nintendo Co. Ltd. (7974.OS) is credited with reviving in 1985 and Sony Corp. (6758.T) emerged to dominate a decade later.
The Xbox -- a stark black box with a green plastic gem bearing the signature logo -- costs as much as Sony's market-dominating PlayStation 2 (PS2) and $100 more than Nintendo's next-generation offering, the GameCube, which goes on sale in the United States on Sunday.
Given the high stakes for both Microsoft competitors and collaborators, the Xbox has been closely followed during its two-year development cycle. Some of the initial demonstration units sent out in the last month had problems that Microsoft says are now fixed. Microsoft also backed off from an initial commitment to have between 600,000 to 800,000 units ready to sell by Thursday.
"There will be units in stores (on day one). ... They may not last all day," Bach told Reuters. Sensing an opening, Nintendo said retailers clamored for an increased shipment of GameCubes for its competing weekend launch. Microsoft plans to ship at least 100,000 units each week to re-stock stores and plans to ship between 1 million and 1.5 million Xboxes by yearend, he said. "We feel very good about that number," Bach said.
AVOIDING PAST MISTAKES
Analysts and game publishers expect Microsoft to sell out an initial shipment of about 300,000 Xbox consoles on Thursday and say the company has been prudent in its forecasts. "Microsoft is being very careful in setting expectations," said P.J. McNealy, an analyst at GartnerG2. "They are really trying to avoid over-hyping this and under-delivering it. That's one lesson Microsoft seems to have learned from the PS2 launch last year."
Sony launched the PS2 in the United States in November 2000 with less than half the quantities it had originally promised, and had problems meeting demand into spring, leaving gamers empty-handed and frustrated.
Microsoft has said repeatedly it intends to avoid that mistake, limiting pre-orders to keep the Xbox from being over-sold. And while retailers may be nervous about whether Microsoft can deliver, game players apparently are not. "Nobody's canceling orders," said Michael Wallace, an analyst at UBS Warburg who follows both Microsoft and the video game industry.
XBOX: 'GET USED TO IT'
Morgan Stanley analyst Mary Meeker said last week Microsoft could lose $1 billion on Xbox by fiscal 2004 before breaking even and the company has said it will look to make up any losses on the box with high-margin game software.
"I don't think of that as upside or downside, it's just called running a business," Microsoft's Bach said. Other companies have a stake in the ultimate success of the Xbox. Graphics chip manufacturer NVIDIA Corp. (NVDA.O), already the leader in that industry, said last week 15 percent of its revenue in the last quarter came from its Xbox chip.
Contract manufacturer Flextronics International Ltd. (FLEX.O) is building the Xbox for Microsoft, and some analysts have estimated the contract could be worth over $1 billion a year. Analysts estimate Flextronics is being paid about $375 for each Xbox it makes, meaning a $76 loss for Microsoft at the cash register.
"The better Xbox does, the more money Microsoft will lose...because they're losing money on every unit they sell," said Art Russell, an analyst at Edward Jones and Co. But with $36 billion in the bank, Microsoft has staying power, he said. "I think Microsoft is here to stay in the video game industry and I think people better get used to it," he said.
SOURCE: Reuters.
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