Microsoft's game plan bound to fail

HOW many of them, I asked, wanted an Xbox 360? Every hand in the room of seventh-graders shot up. Even the teacher's.

Then I asked how many wanted to pay $400 for it. Almost every hand went down.

The game console may be cool, but it's just too expensive, they said. They think the games are overpriced, as well. Microsoft, which makes the Xbox, jacked the average game price by about $10 from the earlier Xbox version.

In a few months, the students at W.I. Stevenson Middle School told me, both the games and the console would cost less, Sony would be coming out with a new Playstation, and the cycle of hype would start all over again.

Gaining insight

Sometimes, Career Day is a two-way street. I went to talk about journalism and wound up gaining market insight into the hottest item in this increasingly lukewarm holiday shopping season.
Granted, my market sampling was small. As seventh-graders, the students are younger than Xbox's target demographic, and their purchases are probably controlled by their parents. But they are the emerging generation of gamers, and their skepticism could spell trouble for an industry whose hopes for profitability hinge on frenetic marketing and the fickle tastes of the young.

Because at $400, Microsoft is losing money on the Xbox.

Sum of its parts

Just before Thanksgiving, iSuppli, a California market researcher, ripped apart the Xbox and analyzed the costs of its components. The guts alone — the processors and memory chips — cost $370. Factor in the controllers, the DVD drive, cables, hard drive and packaging, and the cost zooms to $525, iSuppli found.

Microsoft's entertainment division, which includes the Xbox and other computer games, lost $391 million for the fiscal year ended in July. The previous year, it lost $1.2 billion. When I asked about the loss, I got nonsensical PR drivel from the firm that fields questions about Xbox:

"We'll make Microsoft-scale profits on Xbox 360 over its lifecycle.

"If we reach the share we expect to, we will be profitable. Profitability will be sustained with powerful, continuous innovation."

Elsewhere, Microsoft has said it expects to turn a profit for the division in 2007.

Don't count on it. The company is betting on games to make up for the losses it's taking on consoles. So far the strategy hasn't worked.

Last year's narrower loss for the gaming division largely reflected the release of Halo 2, which added $300 million in sales, Microsoft said. Even the hottest game of the year, though, wasn't enough to offset the division's loss.

Costlier games

Meanwhile, games are getting more expensive to produce as they add sophisticated graphics and intricate story lines.

Higher production costs mean the danger of a flop is more expensive. To lower the risk, the industry is borrowing a page from Hollywood. It's turning to more sequels and rehashes, rather than backing new concepts.

Microsoft's "continuous powerful innovation" is likely to be Halo 3, the newest version of last year's blockbuster, set for release in mid-2006. New titles in the coming months include another Ghost Recon, another Tomb Raider and Dead or Alive 4, which uses characters from Halo.

In such retreads lies the hope for profitability, which is why even the most modest changes are breathlessly hyped as revolutionary.

Gaming magazines rarely pan new titles. The current hot-ticket game, Star Wars Battlefront II — another sequel — has received rave reviews because, unlike its predecessor, players can fight space battles and play as a Jedi.

Now, being a Jedi is pretty cool, but the new game is essentially the same as the old, with a few new characters and backgrounds. It sells for $50. Battlefront I, which is about a year old, sells for about $20.

Is being a Jedi worth an extra $30? Or is it worth waiting a few months to wield a light saber at a 60 percent discount?

Shelf life limited

For now, Xbox's audience lives for the moment, pays a premium and ignores the planned obsolescence of it all. But if Microsoft continues to pass off hype as "powerful innovation," that could change.
At $400, Microsoft is selling an expensive razor at a loss, and hoping to make up the difference with pricey blades.

The new Xbox may have lots of high-dollar components, but its biggest selling point is basically "better graphics," the same plug that's always used to push new consoles. That's not enough "powerful innovation" to justify the price.

Even seventh-graders can see that the Xbox 360, no matter how cool, isn't worth the money. Hands down.