Microsoft's console gaming raises the bar not just for competitors, but for other Microsoft products as well

(This is part 4 of 6 of "Microsoft: Can Elephants Really Dance?" series. For earlier parts, please follow the links below the post)

It’s been a while since Microsoft’s heyday as the monopolistic king of technology.  Called “too big to innovate”, “inefficient”, and “crippled [by redundancy]”, the bearish outlook on Microsoft’s once glorious future seems pervasive.  But with the highly anticipated Project Natal arriving this year, a healthy 32.5 million Xbox 360 consoles sold, and a blossoming Xbox LIVE community of over 20 million users, Microsoft’s console gaming division has shown everyone that Microsoft can still come up with some cool new tricks. Let’s take a look at how the Xbox 360 is faring against its two fiercest competitors (*cue battle music*):

Estimates of global console sales. (VgChartz)
*Note: Updated chart thanks to Zia Syed*

Project Natal

Project Natal: Xbox 360's new add-on that can SEE YOU (I know, it kind of creeps me out too). 

I must admit, when I first heard about Project Natal, I wasn’t impressed in the least. Natal’s marketing team has two things they like to harp on the most: its 3D motion sensor technology and its lack of a controller. For the casual gamer, the motion sensor technology seemed like nothing new – Sony came out with the EyeToy (now called Playstation Eye), a digital camera add-on that allows you to play interactive games, nearly a decade ago, while the Nintendo Wii had been reaping in profits with its physical gesture detection since 2006. As for Natal’s lack of a controller – removing the controller from a game console seemed almost as ludicrous as removing the keyboard from a computer.

Suffice to say, I was a bit surprised when Project Natal started incurring more and more interest. Developers are clearly excited about Natal, citing its skeletal tracking system and unprecedented ability to read any motion as opening up some really interesting opportunities. The fervor isn't just because Natal's the next new-fangled piece of shiny tech -- Sony's Playstation "Arc", a motion control detector that eerily resembles Sailor Moon's crescent scepter, is also set to release this year and it hasn't generated nearly the same kind of anticipation. 

Playstation Arc : Sailor Moon Scepter. Or is it the other way around??

One of the things that got me really interested in Natal was its demo for a game called “Milo & Kate”. The game allows you to befriend and interact with Milo, a young boy who is capable of recognizing voice, gestures, facial expressions and everyday items. While the concept (as it stands) might not make for the most exciting game play ever, it does showcase the potential of Project Natal’s superior specs. Playing with friends imbued with artificial intelligence, having all of one’s gestures and actions appear on screen – it all sounds amazingly futuristic. But is Natal ready for the market? Perfecting the device and eliminating any lag is one huge hurdle. Just as important, however, is whether Natal will be easy to develop for. After all, it’s taken almost FOUR years and a lot of frustration for 3^rd party developers to understand how to develop for the Wii. 

    

If Project Natal does become successful, it will open up the Xbox, traditionally seen as a hardcore gamer device, to a whole new market segment. As the Nintendo Wii has proven, introducing casual and inexperienced gamers to console gaming can bring in a whole host of rewards (which, after the failure of the Nintendo GameCube, may include salvation from doom).

Xbox LIVE

 Xbox LIVE is becoming very popular, with a 35% increase year-over-year in its number of users (which currently total around 23 million). This is particularly impressive given it's the only online gaming service on a console that charges a fee. Costing player's $50 or more annually, subscribing to Xbox LIVE is no chump change. So what's the big draw for Xbox LIVE, given players can easily switch over to the free Playstation Network (PSN) on the PS3? Apparently, there's no contest here. Sony fans and Microsoft fans alike agree that Xbox LIVE has an extremely active massive multiplayer online community, while PSN's Home, a virtual community-based environment, has fallen flat and unpopulated. The lack of competition facing the Xbox LIVE has certainly placed Microsoft in a much envied territory: almost 1 billion pieces of gaming and entertainment content have been purchased from the Xbox LIVE Marketplace, which, added to the annual subscription fees, have brought Microsoft some nice padding for its wallet.

Not only that, Microsoft's got some big plans to expand the exposure of Xbox LIVE through it's "Live Anywhere" integration with the recently announced Windows Phone 7. If this works out, and Microsoft keeps its focus on making LIVE available "across the Web, the console, mobile, and beyond," we could bear witness to a baby boom of Xbox LIVE gamers in the not-so-distant future. 

Welcome to the Seventh Generation

We've talked about two add-on features that have helped propel Microsoft to the number 2 spot on Fastcompany.com's "Most Innovative Gaming Companies" list, but what about the main console? As it stands, the Xbox 360 has a user base that consists almost entirely of hardcore gamers. This has been true since the release of the original Xbox, whose iconic launch game "Halo: Combat Evolved" set the standard for Xbox as the console for first-person shooter (FPS) games. Because its hardcore user base overlaps substantially with the user base of the Playstation 3, the two consoles are often seen as close substitutes, with the goings-on of one directly affecting the sales of the other.

Rivals in love only war

Luckily for Microsoft, Sony seems to have committed somewhat of a kamikaze (self-inflicted suicide) with the Playstation 3. While PS3 sales have taken a recent spike and its number and quality of exclusive game titles have increased over the past year, its performance has still been extremely disappointing. At its 2006 release, the 20GB PS3 was losing $307 per console, even at its exorbitant $499 price tag (after some cost-cutting, Sony has only recently taken the loss down to $18 per console). The loss is due in large part to Sony's extremely advanced processor. Called "the Cell", the processor has immense speed and capability, which would be a huge draw if the PS3 didn't have such a difficult development platform; its game offerings are not only sparse, but they also don't take advantage of the Cell architecture. The Xbox 360, on the other hand, benefits from Microsoft's long history and expertise with creating usable development environments, and has shown it through a high software attach rate of 8.8 games per console. 

    

This is not to say the Xbox 360 has convincingly beat the PS3 in every aspect -- far from it. The Xbox 360 is notorious for its ridiculously high failure rate of 54%, which is five times higher than the failure rate of the PS3 and eight times higher than that of the Wii. With such high failure rates, Xbox 360 owners often comment that it's not a question if you'll get the appropriately named "RED RING OF DEATH", it's when. This shoddy manufacturing problem has brought Microsoft not just a legion of angry gamers, but it's also forced Microsoft to extend the warranty on red-ring-o-death-Xbox 360's by 3 years, costing Microsoft an estimated $1 billion.

It...it's frightening...

In addition, due to Microsoft's fruitless support of the HD DVD in the HD DVD/Blu-ray battle that raged a while back, the Xbox 360 is only capable of running DVD's. The PS3, on the other hand, is an advanced multimedia player and game console all in one: it has an integrated Blu-Ray player, will play all major codecs, and can stream from Netflix through a tricky arrangement that bypasses Microsoft's exclusivity contract.

    

Nevertheless, in the end, the main reason consumers buy game consoles are for the games. With the low numbers of games developed for the PS3 and the low numbers of consoles sold, what can Sony do? Developers won't want to develop games if 1) there aren't enough consumers and 2) the developing environment is bad. While it's typical for game console manufacturers to make the glut of their profits on licensing and accessories, as opposed to sales of actual consoles, Sony doesn't seem to be making much on former and it's losing money on the later. Sony's missteps are particularly egregious given Nintendo's ablity to turn a profit since the Wii's release and Microsoft's faster cost cuts and plentiful Xbox LIVE revenue. 

Final Thoughts

Given the Wii's unique user base, there's little Microsoft can do to penetrate Nintendo's market share at this point except make sure Project Natal is AMAZING, keep it affordable, and market it to people who aren't their traditional users, meaning casual and inexperienced gamers. With Sony, on the other hand, Microsoft has an unprecedented opportunity to beat its closest competitor. Sony seriously lost its footing this generation, and Microsoft can trip it up even more through aggressive price cuts (it's in a good position to do this, given the Xbox 360's lower manufacturing costs), feature upgrades (Blu-Ray player, anyone?), and stronger marketing, particularly for Xbox LIVE.  Microsoft, as evil as you may be, we know you're an expert in squashing competition -- let's see if you've still got it.

Score: 4/5

Scoring Explained:

1 -> in deep trouble
2 -> in bad shape, but there are chances of recovering
3 -> can't say
4 -> in good shape, need to execute well
5 -> in great shape

Part 1: Productivity Suite
 

Part 2: Mobile

Part 3: Search

Google Buzz flies high, but won’t kill Twitter or Facebook

With Google Buzz, Google has launched yet another product to compete in the social networking arena. It’s just one week new, and already Buzz has a significant user base and poses a viable threat to several existing players. (...more)

Can Avatar save the movie business?

Internet video has the media industry worried. DVD sales, which are projected at $17 billion today, are expected to slow down substantially in the next few years, as online streaming picks up momentum. In the meanwhile, Avatar, with its record breaking sales of $2.2 billion, has injected new hopes in the industry. Would movies like Avatar be enough to save the sinking ship?


A key incentive of buying a movie as opposed to renting one is ability to watch it multiple times, whenever you want to. However, with the advent of online streaming, the incentive to own a DVD is going away. Netflix, for example, encourages more people to watch movies online by giving them instant access to a huge digital library at a minimal fee. Many studio executives are rightly concerned that this trend will reduce the market size of DVD sales, while promising only a small gain in streaming revenue.

The DVD sales were estimated at $17 billion in 2007, but the sales will undoubtedly decline fast as online video goes main stream. Netflix, the leader in online video streaming, is expected to generate $2.2 billion in revenue in 2013 – assuming it keeps growing at 22% year over year. Blu ray sales are estimated at $2.36 billion in 2013. The sales of online streaming (Netflix) and blu ray sales combined still do not match up to $17 billion in DVD sales. What’s more, studios need to worry about online piracy that can cost them up to 6.1 billion, a number that would only be higher with online distribution.

But that’s not it. On the device front, Boxee and Apple's iPad promise to change the way we watch online videos by providing better portability and excellent viewing experience for internet based content.

In response, studios are trying several different models such as a deal with Sundance and YouTube to rent movies. Warner is said to have given Netflix up to 50% fee discount in exchange for the delay of new releases by a month. However, I doubt this will reverse the consumption trend of DVDs.

New media strategy: Discrimination on both quality and availability

But all is not bad for movie studios. Lines of people waiting to watch Avatar in a theater were long even after a few weeks of the release. The movie distinguishes itself on its superior image quality and unique theater experience. With a production budget of $300 million to 500 million, Avatar will contribute greatly to Fox's profitability next year.

It is easy to see that Avatar type of movies will also be more successful in Blu ray format (the hopeful replacement of DVD) than regular streaming, which does not provide the same picture quality - at least yet.

Avatar is a glimpse of what might save this industry. Movie experience at homes and in theaters needs to stay ahead of streaming technology. As box office numbers have shown, consumers are willing to pay for 3D experience. Soon, 3D enabled TV will enter the home video market. Electronic manufactures just need to figure out a standard that will combine both blu ray and 3D image processing. 3D streaming via Internet connection will take longer due to infrastructure requirements. However, storage solution is easier to achieve. It would be much easier to pack more on a disc than to stream it on an overhauled infrastructure.

Going forward, studios should embrace the online streaming market but differentiate it from its DVD market based on features, quality, and time. In order to do so, they need to invest aggressively in high quality 3D movies that would set the viewing experience between streaming and purchased DVDs apart. Consumers will be more willing to pay a premium to watch higher quality content, either in theaters or 3D TVs. At the same time, they will watch internet streaming sources such as Netflix for casual consumption.

Why iPad will sell despite “missing” features

Since Apple announced its forthcoming iPad tablet device last week, there’s been quite a bit of banter about its shortcomings. The device has no camera, no phone, no Flash support, no way to project to a big screen (TV), and doesn’t allow multitasking, just to name a few of the issues.

But before you conclude Apple’s made a terrible mistake here, remember, this is exactly how Apple it’s launched several of its most successful devices.... (more)

Would the rise of social media transform online shopping?

2009 marked another profitable year for online retailers with e-commerce growing by 5% despite lower overall consumer spending . This implies the continued decline of brick and mortar stores and rise of online commerce. This is due, in part, to the richer online experience, which helps consumers make better purchase decisions from convenience of a few clicks. What's next for online retailers? Would social media transform online shopping into "social shopping"?

Let's first look at what physical stores offer that online ones do not. At a physical store, consumers use senses to evaluate a purchase and receive instant feedback from friends and employees who work there. Therefore, for online retailers to grab even more consumers, they need to solve two basic problems: fitting and instant feedback.

A few retailers such as H&M are experimenting with virtual fitting rooms and augmented reality to solve the fitting problem, but with limited success so far. Zugara offers a Webcam Social Shopper to try remote fitting. With momentum behind augmented reality, there are reasons to believe that remote fitting would become more practical in a few years. What online shops are still lacking is instant feedback. Popularity of social media such as Twitter and Facebook appear to suggest that this is going to change soon!

Studies have suggested that social experience can drive higher conversion as well as improve buying experience for customers. Customer reviews and Facebook fan pages have become perhaps the most effective social tactics for driving sales. However, it is only the beginning to a true social shopping experience.

Social experience is about providing buyers the ability to communicate with others and tools for self expression. Communication and self expression should be a seamless experience that happens simultaneously as consumers browse through different items online. Twitter is an example of how instant communication and feedback can totally change the web social landscape. So far, in the e-commerce realm, this communication is limited to static reviews, comments, and email sharing with limited interaction opportunities. It's still hard to get the instant dialog and conversation on a retail website. As companies try to figure out how to do social shopping, a new landscape of social shopping begins to emerge, and a new value chain is created.

Social platforms will become the source of identities. They define our social graph and can be a source of list of people to include in our online shopping trip. Perhaps one day we will tap our LinkedIn friends to our professional purchases and negotiations, and Facebook friends for casual decisions. With the increasing popularity of Facebook Connect, Facebook promises to be the most influential force in becoming the de facto social identity. Inevitably, all online retailers would need to find a way to integrate seamlessly to these social platforms.

Social shopping communities are the new product aggregators. These companies provide consumers with self expression tools to create designs from a collection of items found on the web and share them with the community. Going forward, I expect that consumers would start their shopping process by going to one of these communities to find hot trends or by asking and receiving instant product suggestions from their extended community. Success of communities such as Kaboodle or Polyvore relies on the assumption that wisdom of the crowd would be better than any machine generated recommendation. At the end of the day, trends and hot items are based on subjective opinion of consumers. It's hard for any recommendation algorithm to compete with human judgment.

Technology providers enable retailers to create an environment where consumers can shop together by sharing viewed items and participating in chat discussion. Fluid, Decisionstep, and Sesh are promising companies that have partnership with major retailers. Fluid is behind the Jansport’s social design that creates a lot of marketing buzz while Decisionstep’s ShopTogerther solution powers Charlotte Rousse’s experiment with social shopping. The biggest challenge for these companies at this point is the adoption. These players are in a tough position right now as the market is still in its infancy. The winners in this market segment will be the one who manage to stay afloat while waiting for the market transition to happen.

Traditional online retailers are still trying to figure out what technologies to invest in. Majority of retailers are still working on the basic functionalities such as customer reviews and product videos. Full social experience is still only an afterthought and not a product feature. However, experience has taught us that the winning retailers will be the ones who keep their eyes open and invest in innovations.

Is the timing right for social shopping to go mainstream?

What social shopping can't compensate for is physical interaction with friends and socializing that takes place while shopping in a store. While it is true that one reason behind people wanting to go shopping with friends is that they want to solicit their feedback, more often than not this is an implicit reason. In an online environment, the model is reversed: Users deliberately solicit feedback from a friend for a specific item before they can chat and socialize. Moreover, your friends might not be available online when you need them. That's part of the reason why social shopping at Charlotte Rousse is not gaining enough traction.

Nevertheless, convenience and benefits of social shopping would result in increased adoption with time. Just the way Facebook stretched users limits (very few users could even imagine they would be leaving messages to their friends on public walls), social shopping would also gradually change users behaviors. Tapping into immediate social network will become part of the online shopping experience in future.

Pakistani startup lets mobile developers outsource customer support

Life as a mobile developer can be tough. First, you’re hoping and praying your app will get noticed among the thousands in Apple’s App Store. Then, if you’re lucky, you hit the jackpot — your app’s downloaded by 10,000 users. But your excitement lasts only until you start getting tons of customer complaints and you have no money to pay a customer support staff.

Now, if you could outsource that customer support when you need it,… (more)

Power of Mega Tweeters

There are only a few users with more than a million followers on Twitter. A few of them might be flukes (Ashton Kutcher ?), but most are not. They are celebrities such as Britney Spears and Oprah Winfrey or popular media sites such as The Onion and New York Times. I call them “mega tweeters”.

If you can get more than a million followers somehow, would you be “powerful” or influential as well? It’s the infamous chicken-and-egg problem: Unless you are already influential, it’s hard for you to get a million followers – and if you do not get a million followers, you can’t become a very influential tweeter. Well a million is just an example. But you get the point.

So what could you do with a million followers? I will give you just one simple example. The example is based on a real first-hand experience. I have modified the numbers a bit to maintain confidentiality, but these numbers are not very far off from the actual numbers.

Primary source (ans in most cases, the only source) of revenue for blogs is advertising. Most advertisers pay by CPM (cost per 1000 impressions) – that is, if a particular ad is served 1000 times, they would pay the publisher a certain amount. Let’s say there are 20 display ads on any page, and let’s say average CPM from a particular ad is $5. That would amount to $100 for 1000 impressions. Please note that I have highly simplified the value chain and numbers.

So when I write a really good article – I mean really good that kicks ass – on my site, I can get pretty decent number of views (I do not monetize my personal blog though). If I write the same article on a popular site, I get several times more views. Obviously the range of number of views you get on one site vs the other is huge, but the number is a function of three things in general: (i) quality of the article, (ii) popularity of site it is published on, and (iii) popularity of people (or tweeters) who read it.

Sometime back I wrote an article on a fairly decent site. The article was pretty well done too – at least people liked it. I got like 300 “retweets” on it in just a few hours. But then everything changed. A mini celebrity who has more than a million followers apparently liked my article and retweeted it. The message went on to his more than a million followers. The number of retweets almost doubled in a matter of couple of hours. Number of hits on my article was already in 5 digits, but it almost got doubled too.

So in the end let’s imagine this. If I had 20,000 views before the “mega retweet”, the article was earning $2,000. After the retweet, the revenue shot up to almost $4,000! Less than a 140 character message can put more than $2,000 in your pocket! (Do not get overexcited though: getting this many hits is not easy)

So my first question to you is this: If you get lucky enough to get more than a million followers, would you simply promote good writings and take a share of the revenue? Second, are you still skeptical of social media in general and Twitter in particular?