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Games

X Factors Surrounding Xbox

The Xbox's status in the console gaming market is quickly shifting, but where is it headed? Having entered the market first, it leads its competitors in total sales. It's also making an honest stab at the movie download market. Now, however, Sony is attacking it in price, and hardware problems will cost it over $1 billion. What lies ahead?

Microsoft (Nasdaq: MSFT) is in a tough position with its Xbox 360 gaming console and Xbox Live online service.

The Xbox 360 has outsold its key competitors, a position it attained in part by being the first to market by several months. However, since that time it has seen a disturbing number of 360 units die via a hardware failure.

Microsoft responded by increasing the console's warranty to three years, which is anticipated to cost it something to the tune of US$1 billion. At the E3 Media & Business Summit this week, however, Microsoft hasn't slowed down. The company reminded the video gaming world that it has a powerhouse lineup of new games coming out this fall.

"Halo 3" alone will have the power to sell widely, but "Grand Theft Auto IV" and "Madden NFL '08" are also expected to generate massive sales.

Plus, Microsoft is pushing its Xbox Live Marketplace service by offering an increasing number of high-definition movies for download.

Still, What's Wrong With the 360?

"Microsoft's biggest problem right now is this warranty thing," Van Baker, an analyst for Gartner (NYSE: IT) , told the E-Commerce Times.

"It was the right thing to do to extend the warranty to three years, but what's missing is a clear-cut statement from Microsoft that says, 'We know what's causing the problems and it's fixed,'" he added. "Anybody who hasn't yet made up their mind about which console to buy is likely to shy away from the Xbox 360."

Microsoft is the No. 1 vendor for this generation of console, Baker noted. "But the Xbox 360 isn't selling anywhere near as fast as the Nintendo Wii," he said. "Nintendo is expanding the market by attracting people who haven't done gaming before."

Will the Wii Wear Off?

While the is gaining ground by selling to casual gamers with highly interactive sports games like bowling and tennis, it's still selling to casual gamers.

"Will this thing be sitting in the corner after three months when the novelty wears off?" Baker asked. "It's not a viable platform for the traditional game titles. ... Who is going to buy 'Call of Duty' for the Wii? Somebody who's doing 'Wii Bowling' and then decides they are going to get into a heavy-duty first-person shooter game? I don't think so."

What About PlayStation and Price Drops?

A recent slate of press reports assert Microsoft is planning to reduce the price of the Xbox 360 in response to Sony's (NYSE: SNE) recent $100 price cut on the PlayStation 3 or even attempt to drop the price below that of the Wii. However, Baker doesn't believe that Microsoft needs to entertain the idea. Available game titles will still be the primary selling factor for the console, and Microsoft seems to have that angle locked up pretty well for the near future, at least.

"PlayStation needs a kick-ass game title," Baker noted. "And I don't see one on the horizon. I see some good titles in the pipeline, but none that make you say, 'Wow! That's amazing!'"

Despite questions as to the cause of the hardware failures, the Xbox 360 has a solid reputation as a great gaming machine. "I don't think anybody out there sees the PlayStation 3 as a better machine -- unless they are big Blu-ray movie fans," Baker added.

Disney to the Rescue

Microsoft's Xbox Live Marketplace has a solid high-definition video download service, bolstered by the addition of Disney (NYSE: DIS) titles, which the company announced at E3. The question is, will Microsoft's efforts be enough to compete in a burgeoning video download market?

"I have to say, in theory, the movie download strategy on Xbox appears to be a brilliant move, because there are so few ways to get high definition film content in the living rooms today," James McQuivey, an analyst and vice president of research for Forrester, told the E-Commerce Times.

"You've got the Blu-ray and HD-DVD war going on. Most cable systems are barely figuring out how to get their video-on-demand movies into hi-def, so Xbox is a nice end-run in that respect," he added.

Complicated User Interface

Because the Xbox 360 is first and foremost a gaming platform, it wasn't designed with an easy-to-use movie finding and watching interface

"The number of clicks to find a movie and select is really painful," McQuivey said, noting that as Microsoft adds more movies to its library, the process just gets even more difficult.

Relative to Xbox's interface, navigating through Apple's (Nasdaq: AAPL) iTunes store to look for movies is smooth and easy, though the two aren't necessarily competing head-to-head.

"They are essentially looking at leveraging an existing customer base," McQuivey noted. "The overlap is pretty small."

A Possible Solution

While Microsoft will have to compete with new high-definition movie download services coming in the future, in addition to satellite and cable TV providers, the company also has to compete with high-def movie DVD sales and rentals. It takes hours to download a high-definition movie, while much of the U.S. population is within 15 minutes of a brick-and-mortar video rental store.

"But so far, nobody is leading, and this may be a missed opportunity for the Xbox," McQuivey said. If Microsoft could develop a Web-based queue system similar to NetFlix's queue, users could search and find movies much easier -- and possibly even start the download process from work so they could have a high-definition movie downloaded and ready to play after dinner."There are ways to overcome the hurdles ... but they're not going to be able to make downloading HD movies fast," he noted.