Microsoft’s online gamble

The Wall Street Journal has a good article up looking at Microsoft’s Xbox Live bet. This adds some numbers and business context to Seth Schiesel’s paean to Xbox Live as a way to recapture the high-score nostalgia of old-school arcades.

First, some numbers: One analyst in the article estimates Microsoft spent $200 million to develop Xbox Live. Another analyst estimates Microsoft spent “more than $1 billion total on the service, including marketing costs.” I can’t tell if those numbers conflict, or if the $200 million doesn’t include marketing and other nondevelopment costs. As for subscribers, the article says: “More than two million users of the original Xbox have subscribed to Xbox Live, or about 10% of the customer base. Adoption has been ‘much faster than expected,’ said Aaron Greenberg, Microsoft’s group marketing manager for Xbox Live, who declined to say whether the service is profitable. With the Xbox 360, Microsoft hopes to persuade 50% of users to hook up to the Internet, he said.”

Greenberg is spinning, but let’s assume the 360 will have a bigger installed base and a faster rate of Live sign-ups than the original Xbox. And let’s split the difference on the analysts’ estimate. Say Microsoft spent $600-700 million on Xbox Live development, marketing, etc. And let’s say that the 360 succeeds and the installed base is 7 million by the end of 2006 (I think that’s high, but go with it), 14 million by the end of 2007, 30 million by the end of 2008. If Microsoft greatly increases the rate of Xbox Live subscriptions, say to 30 percent of 360 owners, that would be 2.1 million subscribers in 2006, 4.2 million in ’07, and 9 million in ’08. At $50 a year, that’s $765 million for Microsoft in three years — or breaking even on the initial Xbox Live cost.

Does that make sense for Microsoft? Figuring that Xbox Live will carry through the 360’s life and into whatever comes after, it seems to be a sound bet. By year four they would be making money on the service, and that’s not counting other revenue streams the company can squeeze out of Xbox Live. But this really hinges on increasing the subscriber base, and that’s where Schiesel’s piece on nostalgia and Xbox Live as the new arcade comes in.

Here’s what I said in my post about Schiesel’s piece:

If the goal is to bring the old-school arcade community back together and introduce them to the competitive gaming community that grew up in the NES era, then Xbox Live is perfect. But that’s not the goal, or at least not the primary,
long-term one. The main goal is to grow the gaming community — and telling game novices that they should join Xbox Live because it will connect them to score-obsessed fanboys isn’t the way to do it. As I say in my Guitar Hero review, video games need to show they offer newbies more than upgrading chain mail or 32-player online death matches.

Giving lapsed and hard-core gamers a way to reclaim the arcade spirit is a good idea, since they’re the ones who will support the Xbox 360 at first. But while social gaming may be key to the future of video games, it’s not the same as competitive gaming.

The 2 million original Xbox Live subscribers were probably most interested in going online to play first-person shooters. That’s a major reason why the service exists, and it’s a major reason why FPS games exist. But if growing the installed base for the Xbox 360 is based on growing the number of casual and new gamers who buy the system, Microsoft won’t get a 25-50 percent Xbox Live subscriber rate if the main reason to go online remains to play deathmatches. Yes, you can also find a Madden, Dead or Alive 4, or Project Gotham Racing opponent whenever you want, but that’s not going to be a huge draw either in the long run. Fighting and racing games also overwhelmingly attract hardcore gamers. And as I say above, high scores and the arcade spirit are side benefits, not reasons in themselves to subscribe.

The key for Xbox Live is the same as the key to the future of games in general. Just as growing the gaming audience requires trying new things and expanding the idea of what a game can be — Nintendogs, Guitar Hero, The Sims, the upcoming Spore are all good examples — growing the online gaming audience requires new ideas and expanding the idea of what online gaming can be. Massive mulitplayer online games have become so successful because they do precisely that. You don’t just log on to World of Warcraft to see how many times you can frag somebody who’s playing across the country. You log on to talk to that person, to organize trade or battle with him, to plan out your guild’s future with her. These titles have changed the notion of what games are and what online gaming is. And people have responded in kind.

Xbox Live’s success will be determined by how much Microsoft understands this. If Microsoft keeps going after hardcore gamers and emphasizes the leaderboards and gamertags over everything else, it’ll probably remain a niche service. But if enough 360 games take advantage of the possibilities of a robust online service, if Microsoft focuses on releasing games that break the mold and show people there’s a real reason to play and interact online, then Xbox Live will be worth every dollar and every bit of hype.

— January 2, 2006

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