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Microsoft's underdog Xbox is looking like a leader online. Sony had better look alive.
Microsoft's videogames have had more fits than starts. Its console, the two-year-old Xbox, loses something like $100 per unit sold, or a billion dollars a year. Xbox had a disastrous launch in Japan and still runs far behind Sony's PlayStation 2 in worldwide sales. But the game's not over. Witness the Electronic Entertainment Expo, or E3, the gaming industry's annual confab in May. For the goateed and backpack-toting attendees, E3 is a big, honking sneak peek at the next killer games, and Microsoft had the best of them all: Halo 2, the sequel to its 2001 sci-fi action masterpiece. People waited hours in line just to see the eight-minute demonstration. "It's one of our most ambitious projects," says Robert (Robbie) Bach, the Microsoft senior vice president in charge of Xbox. "It's a title that will sell anytime, anyplace."
But it will play only on Xbox. And if you want to blast away online with far-flung friends you have to pay $50 a year to subscribe to Microsoft (nasdaq: MSFT - news - people )'s new gaming network, Xbox Live. Halo is just the first of several new Xbox and Xbox Live exclusives, including sure hits such as Doom 3, Project Gotham Racing 2 and Counter-Strike. All of them, Bach says, play better online.
More than anyone predicted, online gaming is driving the all-important software sales that are the profit engine of the $10 billion videogame industry. Dwarfed by Sony, which claims 60% of the North American market, Microsoft has bet far bigger and bolder to grab the online advantage as both feverishly race to get their next-generation consoles into stores by 2006.
"This generation we were statistically out of the playoffs before we even laced up our shoes," concedes J Allard, vice president in charge of Xbox Live. "Next season, there won't be an 18-month head start. We'll be neck and neck right out of the gate, and Xbox Live will give us a huge online head start."
The Xbox Live network launched in November and passed the 500,000 subscriber mark in seven months, beating, by 80,000, the number of people registered to play PlayStation 2 games online, despite the fact that Microsoft has sold only 9.4 million Xboxes to Sony's 51 million PlayStations. Nintendo, with 9.6 million GameCubes sold, has limited online ambitions.
Consider the case of Ghost Recon. This military-style shooting game was released on both Xbox and PlayStation 2 in November. The Xbox version was online-enabled, and the PlayStation version wasn't. Despite the enormous differences in installed base, more copies of the game have sold on Xbox, (650,000) than on PS2 (550,000).
Sony (nyse: SNE - news - people ) sniffs at the comparisons. "Online gaming is a very important part of our strategy, but not the end-all and be-all," says Kazuo Hirai, the president of Sony Computer Entertainment America. "When you're losing market share, you're tempted to talk about things down the road."
Microsoft has a habit of herding customers into its own technology corrals. Xbox Live is no exception, with Microsoft reaping nearly all of the financial benefits and exerting total control over the game network. PlayStation throws the gate open to allow any game developer to run its own player network. In May Electronic Arts (nasdaq: ERTS - news - people ), the world's biggest game publisher, shunned Microsoft and announced that through March 2004 its bestselling sports games will be playable online only with Sony.
But Microsoft may be onto something. There are currently 28 online games for Xbox and 18 for PS2. By January the gap will widen a bit: 50 for Microsoft, 32 for Sony. Bach has directed much of his reported $500 million marketing budget toward Xbox Live games such as Mechassault. Live kiosks are now prominent at many retailers, and Xbox is sponsoring high-profile events like this summer's Lollapalooza rock tour.
In June Microsoft launched the XSN Sports network, which will allow players to create leagues and maintain long-term records while playing games such as NFL Fever, a nice counter to the Electronic Arts snub. The network will also be capable of paging cell phones and PDAs to invite players to join games. "Xbox is the superior online gaming platform, and by the next wave of consoles, Xbox will be the online brand,"says Daniel Hsu, editor of Electronic Gaming Monthly magazine.
Xbox Live's success almost didn't happen. In 1999, when Xbox was still a skunkworks project, Allard and online strategist Cameron Ferroni wanted to produce a console without a jack for what were then ubiquitous dial-up modems and install only a jack for speedier broadband cable or DSL modems. At the time broadband was only in 4.6% of U.S. households, and most analysts were saying it would take years to catch on. "My attitude has always been to bet on the future, not against it," says Allard.
Bach and gaming content vice president Edward Fries were adamantly opposed. Says Allard: "Bill [Gates] played both sides, but Ed and Robbie said the numbers were not enough. Their first-year subscriber estimates were between 20,000 and 80,000, and we needed hundreds of thousands of gamers online in the first year, and millions by the next generation, to be successful."
So Allard and Ferroni conducted a survey with 3,000 gamers, who told them they craved the ability to quickly download large files such as new game levels and characters, making broadband a must. Bach got the picture, but he didn't make the financial decision to go exclusively with broadband until the summer of 2000, several months after Xbox was officially announced. Since then, broadband penetration in the U.S. has doubled, to 20%.
Sony's original option for online gamers was to sell them a network adaptor as a separate $40 peripheral. Then it saw what happened last year when it released Socom Navy Seals. The military-style shooter sold 1 million copies rapidly, with nearly half of the buyers routinely engaging in online play. Lesson learned. In June Sony began prepackaging a network adaptor with every PlayStation. The next-generation PlayStation 3 will doubtless have a broadband jack built in.
Xbox Live may gross $25 million this year, a nanoparticle on Microsoft's income statement. But for now, an online footprint slightly bigger than Sony's is reward enough. "Xbox Live will be in 20 countries this year," Allard says. "Most game developers don't have servers or lawyers in 20 countries."
Microsoft's underdog Xbox is looking like a leader online. Sony had better look alive.
Microsoft's videogames have had more fits than starts. Its console, the two-year-old Xbox, loses something like $100 per unit sold, or a billion dollars a year. Xbox had a disastrous launch in Japan and still runs far behind Sony's PlayStation 2 in worldwide sales. But the game's not over. Witness the Electronic Entertainment Expo, or E3, the gaming industry's annual confab in May. For the goateed and backpack-toting attendees, E3 is a big, honking sneak peek at the next killer games, and Microsoft had the best of them all: Halo 2, the sequel to its 2001 sci-fi action masterpiece. People waited hours in line just to see the eight-minute demonstration. "It's one of our most ambitious projects," says Robert (Robbie) Bach, the Microsoft senior vice president in charge of Xbox. "It's a title that will sell anytime, anyplace."
But it will play only on Xbox. And if you want to blast away online with far-flung friends you have to pay $50 a year to subscribe to Microsoft (nasdaq: MSFT - news - people )'s new gaming network, Xbox Live. Halo is just the first of several new Xbox and Xbox Live exclusives, including sure hits such as Doom 3, Project Gotham Racing 2 and Counter-Strike. All of them, Bach says, play better online.
More than anyone predicted, online gaming is driving the all-important software sales that are the profit engine of the $10 billion videogame industry. Dwarfed by Sony, which claims 60% of the North American market, Microsoft has bet far bigger and bolder to grab the online advantage as both feverishly race to get their next-generation consoles into stores by 2006.
"This generation we were statistically out of the playoffs before we even laced up our shoes," concedes J Allard, vice president in charge of Xbox Live. "Next season, there won't be an 18-month head start. We'll be neck and neck right out of the gate, and Xbox Live will give us a huge online head start."
The Xbox Live network launched in November and passed the 500,000 subscriber mark in seven months, beating, by 80,000, the number of people registered to play PlayStation 2 games online, despite the fact that Microsoft has sold only 9.4 million Xboxes to Sony's 51 million PlayStations. Nintendo, with 9.6 million GameCubes sold, has limited online ambitions.
Consider the case of Ghost Recon. This military-style shooting game was released on both Xbox and PlayStation 2 in November. The Xbox version was online-enabled, and the PlayStation version wasn't. Despite the enormous differences in installed base, more copies of the game have sold on Xbox, (650,000) than on PS2 (550,000).
Sony (nyse: SNE - news - people ) sniffs at the comparisons. "Online gaming is a very important part of our strategy, but not the end-all and be-all," says Kazuo Hirai, the president of Sony Computer Entertainment America. "When you're losing market share, you're tempted to talk about things down the road."
Microsoft has a habit of herding customers into its own technology corrals. Xbox Live is no exception, with Microsoft reaping nearly all of the financial benefits and exerting total control over the game network. PlayStation throws the gate open to allow any game developer to run its own player network. In May Electronic Arts (nasdaq: ERTS - news - people ), the world's biggest game publisher, shunned Microsoft and announced that through March 2004 its bestselling sports games will be playable online only with Sony.
But Microsoft may be onto something. There are currently 28 online games for Xbox and 18 for PS2. By January the gap will widen a bit: 50 for Microsoft, 32 for Sony. Bach has directed much of his reported $500 million marketing budget toward Xbox Live games such as Mechassault. Live kiosks are now prominent at many retailers, and Xbox is sponsoring high-profile events like this summer's Lollapalooza rock tour.
In June Microsoft launched the XSN Sports network, which will allow players to create leagues and maintain long-term records while playing games such as NFL Fever, a nice counter to the Electronic Arts snub. The network will also be capable of paging cell phones and PDAs to invite players to join games. "Xbox is the superior online gaming platform, and by the next wave of consoles, Xbox will be the online brand,"says Daniel Hsu, editor of Electronic Gaming Monthly magazine.
Xbox Live's success almost didn't happen. In 1999, when Xbox was still a skunkworks project, Allard and online strategist Cameron Ferroni wanted to produce a console without a jack for what were then ubiquitous dial-up modems and install only a jack for speedier broadband cable or DSL modems. At the time broadband was only in 4.6% of U.S. households, and most analysts were saying it would take years to catch on. "My attitude has always been to bet on the future, not against it," says Allard.
Bach and gaming content vice president Edward Fries were adamantly opposed. Says Allard: "Bill [Gates] played both sides, but Ed and Robbie said the numbers were not enough. Their first-year subscriber estimates were between 20,000 and 80,000, and we needed hundreds of thousands of gamers online in the first year, and millions by the next generation, to be successful."
So Allard and Ferroni conducted a survey with 3,000 gamers, who told them they craved the ability to quickly download large files such as new game levels and characters, making broadband a must. Bach got the picture, but he didn't make the financial decision to go exclusively with broadband until the summer of 2000, several months after Xbox was officially announced. Since then, broadband penetration in the U.S. has doubled, to 20%.
Sony's original option for online gamers was to sell them a network adaptor as a separate $40 peripheral. Then it saw what happened last year when it released Socom Navy Seals. The military-style shooter sold 1 million copies rapidly, with nearly half of the buyers routinely engaging in online play. Lesson learned. In June Sony began prepackaging a network adaptor with every PlayStation. The next-generation PlayStation 3 will doubtless have a broadband jack built in.
Xbox Live may gross $25 million this year, a nanoparticle on Microsoft's income statement. But for now, an online footprint slightly bigger than Sony's is reward enough. "Xbox Live will be in 20 countries this year," Allard says. "Most game developers don't have servers or lawyers in 20 countries."
