Print 48 comment(s) - last by Netscorer.. on Feb 11 at 2:29 PM

  (Source: AFP)
Consoles were a second option for Microsoft

Despite the success of the Xbox, that was not Microsoft Corp.'s (MSFT) first choice plan in the gaming space, according to an IGN interview with a former Microsoft executive.  Joachim Kempin, who was VP of Windows Sales at Microsoft for 20 years starting in 1983, says his former employer only decided to build the Xbox after a falling out with Japanese gaming giant Sony Corp. (TYO:6758).

I. Sony Console Worried Gates

The original Xbox and its successor, the Xbox 360, had their low points (red rings of death, for example), but have established themselves as a popular console gaming option, selling millions of units.  The gaming unit is perceived as one of Microsoft's strong performing businesses.

Perhaps predicting both the rise of the console and tablet as replacements/challengers to the traditional PC, Bill Gates reportedly in the 1990s sounded the alarm when Sony announced the original PlayStation.  Seeing Sony jump into the market, Microsoft became determined to beat its former partner, who was turning its back on PC gaming for a non-Microsoft alternative.

Describes Mr. Kempin:

The main reason was to stop Sony. You see, Sony and Microsoft…they never had a very friendly relationship, okay? And this wasn’t because Microsoft didn’t want that.

Sony was always very arm’s length with Microsoft. Yeah, they bought Windows for their PCs but when you really take a hard look at that, they were never Microsoft’s friend... but as soon as they came out with a video console, Microsoft just looked at that and said 'well, we have to beat them, so let’s do our own.

The original PlayStation launched in 1994.  Then in 2000 Sony introduced the PlayStation 2, which added PC-like media player functionality and broader support for online gaming on third-party servers.  A year later Microsoft countered with the Xbox.

II. Crafting a Console

The payoff of consoles -- by Sony's model, at least -- has traditionally been the licensing fees paid by game publishers.  The hardware itself is often sold at-cost, or even at a modest loss.  For that reason Microsoft had trouble convincing a PC maker to hop onboard the Xbox experiment.

Joachim Kempin
Joachim Kempin, a 20 year veteran of Microsoft is spilling the dirt on the history of the Xbox. 
[Image Source: Twitter]

Recalls Mr. Kempin, "I went out to several PC manufacturers and tried to beg them to do the Xbox thing and keep the device manufacturing out of Microsoft. The guys were smart enough not to bite, because they studied the Sony model and saw that Sony could not make money on that hardware model, ever. So they supplemented it with software royalties, and Microsoft copied that model."

As for Xbox profitability, he argues that developers have always been the winners; that Microsoft has managed to break-even, but not do much better than that.  He comments, "They’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft."

Xbox 360
A former Microsoft exec. claims the Xbox is not a big money-maker for the tech giant.
[Image Source: Gamasutra]

Microsoft is currently diving into a third-generation console, which is expected to launch this holiday season.  After trumping Sony in the last generation (dubbed by some as the "seventh-generation") of consoles, there are some trouble signs for the upcoming Xbox 720.  While the spec looks somewhat similar to Sony, Sony's hardware is reportedly slightly more powerful and considerably easier to develop for.

Microsoft also may alienate customers with its stance on used games; reportedly it is tying purchases to your Xbox Live account, as a means of stopping game resale (which it earns no cut from).  Sony, while a long time support of strict digital rights management, has not yet announced a similar anti-resale provision.

Source: IGN

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3rd generation curse
By ctmac1 on 2/7/2013 7:45:17 PM , Rating: 2
Has anyone ever noticed that the 3rd generation is where companies take a step back. Saturn, N64, PS3. Better watch out Microsoft

RE: 3rd generation curse
By Mitch101 on 2/7/2013 8:07:10 PM , Rating: 2
I think the Saturn was the only dud on that list and maybe to the N64. Microsoft is the exception to that rule. Microsoft usually gets it right with the 3rd version of something although I still have X-Box 1's running XBMC and CoinOps 5.

Original Xbox Console Soft Modded XMBC Coin Ops 5 lite

RE: 3rd generation curse
By ctmac1 on 2/7/2013 9:25:01 PM , Rating: 3
I didn't say dud, just not as successful as the previous generation. PS3 was a definite step backwards from the PS2. 154 million PS2's sold vs 70 million for the PS3.

RE: 3rd generation curse
By inighthawki on 2/8/2013 1:29:32 AM , Rating: 3
154 million PS2's sold vs 70 million for the PS3

It's also been out twice as long.

RE: 3rd generation curse
By SPOOFE on 2/8/2013 5:03:42 PM , Rating: 2
PS2 hit 100 million less than six years after launch.

RE: 3rd generation curse
By StevoLincolnite on 2/9/2013 2:50:55 AM , Rating: 2
The Wii and the Xbox 360 had a bit to do with the lower sales of the PS3.

The PS2's competition was mostly the gamecube in the face of a waning Nintendo and the Xbox which arrived very late.

Then the next Generation Xbox launched first a whole year prior to the PS3, so Microsoft had the head start that round.
Not to mention the Wii for awhile printed money for Nintendo.

RE: 3rd generation curse
By Donkey2008 on 2/8/2013 2:37:54 AM , Rating: 2
Microsoft usually gets it right with the 3rd version of something

So I can't wait for Windows 10!

RE: 3rd generation curse
By inighthawki on 2/7/2013 10:25:03 PM , Rating: 3
Since when is PS3 and N64 a dud? N64 was an outstanding console and had quite a few great games. PS3 is pretty much on par with the 360...

RE: 3rd generation curse
By Guspaz on 2/8/2013 12:15:09 PM , Rating: 3
The N64 wasn't a dud, but it did continue the trend of Nintendo's decline (until the Wii):

Sales figures (rounded to nearest million) versus all major competitors:
NES: 62 million (vs 13 million Master Systems)
SNES: 49 million (vs 42 million Megadrive/Genesis)
N64: 33 million (vs 102 million PS1)
GC: 22 million (vs 188 million XBox/PS2/DC)
Wii: 99 million (vs 146 million PS2/360)

In terms of judging the success of the console in terms of the market, that gives us the following marketshare statistics for Nintendo:

NES: 83%
SNES: 54%
N64: 24%
GC: 10%
Wii: 40%

So, was the N64 a failure? Well, in the sense that it represented a major loss in both marketshare and absolute sales, yes. But that was also true of the SNES, which is not considered to be a failure. It was, however, the first time that Nintendo did not have a majority market share.

RE: 3rd generation curse
By Guspaz on 2/8/2013 12:16:03 PM , Rating: 2
Sorry, that Wii generation should have read PS3/360, and the numbers are right even if the name isn't.

RE: 3rd generation curse
By Ammohunt on 2/8/2013 11:54:34 AM , Rating: 3
If Microsoft would liberate the Xbox 360 from the requirement of having a paid Xbox live account for basic services such as Netflix, i would use my Xbox much more. There is little add value for the older crowd that would sooner use the Xbox like an HTPC rather then a dedicated Halo machine that come with an Xbox live membership. If they want to expand their market they really need to invest in some market research because right now they are missing out on a huge section of the market.

RE: 3rd generation curse
By Guspaz on 2/8/2013 12:03:06 PM , Rating: 2
A correction, the Genesis/Megadrive was SEGA's third console (after the SG-1000 and Master System), not the Saturn.

Xbox division earnings
By augiem on 2/7/2013 5:54:09 PM , Rating: 2
"They’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft."

Revenue: $ 9,593 m
Operating Income: $364 m

I wouldn't exactly say that's barely breaking even, but yeah, in terms of MS's overall bottom line, it's pretty small.

What's interesting to note is in the past 3 years revenues have grown substantially each year while operating income has dropped, especially in 2012.

RE: Xbox division earnings
By TakinYourPoints on 2/7/2013 6:45:26 PM , Rating: 4
It is pretty small. Take the last decade and it is break-even at best. It is slightly in the red or slightly in the black depending on the quarter.

The important thing at this point isn't the entertainment division's income, Windows and Office pays for the whole party. What's important is consumer mindshare. As badly as Microsoft has flubbed numerous consumer products, they hit a home run with the XBox. They should be leveraging the brand even farther, tying it in more with WP and Surface and such.

As for income, that's pretty standard for the "Sony" loss-leader style of selling consoles. All the profit is in the latter part of a console's lifecycle. Microsoft took a bigger hit than was expected because the XBox was such a monumentally defective piece of hardware.

RE: Xbox division earnings
By augiem on 2/8/2013 12:27:11 AM , Rating: 4
It is pretty small. Take the last decade and it is break-even at best. It is slightly in the red or slightly in the black depending on the quarter.

Just for the sake of killing boredom, I found figures from the last 10 years of Microsoft's annual reports. It's a little complicated because for some years MSN, Windows Mobile, Zune, embedded systems, and some other services were lumped in with the Xbox. Anyway...

Home and Entertainment
Operating Income
2002: -1,135m
2003: -1,191m
2004: -1,220m
2005: -391m
2006: -1339m
2007: -1969m
2008: 426m
2009: 351m
2010: 517m
2011: 1,257m
2012: 364m

Total: -4,328m

The total is probably dragged down significantly by the other things included in the "Home and Entertainment", but, yeah, guess it's not really a money maker.

RE: Xbox division earnings
By Strunf on 2/8/2013 7:30:02 AM , Rating: 2
It's normal for companies that jump into a new market (for them) to not really make money the first years, the xbox by itself wasn't so bad the problem was that SONY already had established a HUGE fanbase with the Playstation and they also had many Playstation only titles, MS eventually realized they had to fight fire with fire and started having exclusive titles too.

The Playstation 2 also had many hardware problems, between the Xbox and the PS2 the PS2 only had a slightly higher reliability.

RE: Xbox division earnings
By eagle470 on 2/8/13, Rating: 0
By BifurcatedBoat on 2/7/2013 6:39:15 PM , Rating: 2
MS knew they had dominant control of the PC software market, and so they took a distributed approach to attempting to head off whatever the next potential threat might be.

If somebody makes a web browser, MS makes a web browser. If somebody makes a game console, MS makes a game console. Anything that they thought could be a potential avenue of attack, they would try to nip in the bud.

And so, MS was probably a bit surprised when the attack came in the form of phones and tablets. After all, they'd already gone there. MS was into smartphones and tablet PCs long before Apple or Google. The hardware just wasn't ready to make the devices small enough or responsive enough at the time, and combined with not having the right marketing, MS's phones and tablet computers never really caught on.

So they probably figured, "Well, we tried that. Doesn't look like there's anything there." Then a half-decade later, suddenly they find themselves behind and frantically trying to catch up.

By TakinYourPoints on 2/7/2013 7:10:35 PM , Rating: 4
MS knew they had dominant control of the PC software market, and so they took a distributed approach to attempting to head off whatever the next potential threat might be.

What burns me is that Microsoft threw the PC under the bus at the expense of the XBox. They either shut down their PC game developers (ACES, FASA, Ensemble) or had them go XBox exclusive (Bungie).

It makes sense from their perspective, they most likely have a gamer locked down with a Windows license anyway. They're not going to make any more money from them unless they happen to buy an MS published game (Age Of Empires, etc). Why not sell that same gamer a closed-platform where Microsoft gets license fees from every game and hardware accessory sold? Makes sense even though it sucked for PC gamers.

Its funny how Valve outsmarted them with Steam though, now they're the gatekeepers to gamer profits on the PC. I'm not sure that Microsoft could have gotten away with it though. Aside from being surprisingly bad at making software (GFWL is a complete disaster), screams of "anti-trust" from people over MS making a digital storefront in the Windows XP era would have been insane. And of course Valve has made Steam cross-platform, also working on OS X, the PS3 (very limited), and now Linux.

Anything that they thought could be a potential avenue of attack, they would try to nip in the bud.

And so, MS was probably a bit surprised when the attack came in the form of phones and tablets. After all, they'd already gone there.

+1 for insight

By rdhood on 2/8/2013 10:34:54 AM , Rating: 3
If somebody makes a web browser, MS makes a web browser. If somebody makes a game console, MS makes a game console. Anything that they thought could be a potential avenue of attack, they would try to nip in the bud.

I don't think so. Microsoft made the XBox in response to Sony Playstation because (at the time) thought around these consoles is that they were going to become the new "family" computing platform that would replace the PC in many homes.

That never panned out. In fact, it is the phone/tablet and not the game console that have started replacing the PC as the computing platform.

By sprockkets on 2/7/2013 5:47:34 PM , Rating: 1
And the playstation was made when Nintendo shut out Sony from making an optical disc drive for the SNES.

One of Nintendo's stupidest moves it ever made IMO. It's an apple-esk move.

RE: .
By Mitch101 on 2/7/2013 6:17:39 PM , Rating: 5
Nintendo is profitable company while Sony is not.

Sony Mobile gaming devices compared to Nintendo Mobile gaming?

Kinect gaming technology apparently went to Apple first, but the creator of the technology found them difficult to work with.

Pretty soon we will have the PS4 vs XBox 720 which is more powerful fanbois arguments. The systems will be close in performance like the 360 vs the PS3. Even if one is more powerful the games will be written to work on the most systems and have little to no difference between the consoles worth noting or caring. The difference between the consoles will come down to eco systems, controller preference, and backwards compatibility for some but all will be fun and each have their exclusive titles. Just enjoy your gaming console. Im a PC gamer anyhow. :)

RE: .
By inperfectdarkness on 2/8/2013 1:48:15 AM , Rating: 2
I agree. The "underpowered" argument won't differentiate between consoles in this generation.

Besides, say what you want about Nintendo, but they've been #1 in 1st party games for decades running. I also smirk at the irony of fanboi arguments about "too many mario/zelda" sequels. Funny...each new Mario/Zelda game I play tends to be substantially different in gameplay; Unlike Madden/COD/BF.

By gscindian on 2/8/2013 9:37:49 AM , Rating: 1
Once Microsoft releases the new XBOX and it is verified that used games can not be bought for the system, a lot of fans will switch to the Playstation... better yet IOS or Android... if they become serious. I personally don't want to be held down to only buying new games if I don't feel like it. If it's a blockbuster title like Battlefield, Call of Duty, Halo, Gods of War, etc... I'm getting it brand new soon as it ships out the door, but if it's a game I want to try out but don't feel like I'll really get into it, I'll probably buy it used. Its not like it didn't get bought before, someone just didn't appreciate it, and who know's maybe I will.

Happy Tony
By Pirks on 2/7/13, Rating: -1
RE: Happy Tony
By Master Kenobi on 2/7/2013 6:00:59 PM , Rating: 2
Office rakes in far more than Windows.

RE: Happy Tony
By Mitch101 on 2/7/2013 6:02:57 PM , Rating: 2
Server, Client, Office = 3

I count about 50+ products they make money on and there is one this list doesn't seem to include LICENSING.

Windows and Windows Live
Revenue: $19,024,000,000
Operating Income: $12,281,000,000

Business (Office, Exchange, SharePoint)
Revenue: $22,186,000,000
Operating income: $14,124,000,000

Server and Tools (Windows Server, Microsoft SQL, Visual Studio)
Revenue: $17,096,000,000
Operating Income: $6,608,000,000

Entertainment and Devices (XBox 360/LIVE, Windows Phone)
Revenue: $8,913,000,000
Operating income: $1,324,000,000

Online Services (Bing, MSN, Hotmail)
Revenue: $2,528,000,000
Operating income: $-2,557,000,000

Microsoft products (and earnings) are divided into five divisions: Windows & Windows Live, Microsoft Business, Server and Tools, Entertainment and Devices, and Online Services. The types of products and services provided by each segment are summarized below:

Windows and Windows Live – Windows operating system, Windows Live applications and web services, Microsoft PC hardware products.

Microsoft Business – Microsoft Office (including Office Web Apps and Office 365), Microsoft Exchange, Microsoft SharePoint, Microsoft Lync, and Microsoft Dynamics ERP and CRM.

Server and Tools – Windows Server operating system, Windows Azure, Microsoft SQL Server, SQL Azure, Visual Studio, Silverlight, Windows Intune, Windows Embedded, System Center products, Microsoft Consulting Services, and Premier product support services.

Entertainment and Devices – Xbox 360 console, games, and accessories (e.g. Kinect), Xbox LIVE, Windows Phone.

Online Services – Bing, Microsoft adCenter, MSN, and Atlas online tools for advertisers.

RE: Happy Tony
By Pirks on 2/7/13, Rating: 0
RE: Happy Tony
By BifurcatedBoat on 2/7/2013 6:42:37 PM , Rating: 2
I'm surprised you would buy anything but Apple. Why a Surface instead of an iPad?

RE: Happy Tony
By Pirks on 2/7/2013 6:59:03 PM , Rating: 3
No, I'm not against buying Apple devices because they are Apple, I just avoided Macs because of high price for not enough return for the buck and also weird preinstalled OS X instead of much more convenient Windows, also Mac has really lousy GPUs that are bad for gaming which also turns me off. Then I avoided iPhone just because the screen is way too tiny, Galaxy Note is so much more convenient and better for web and games (my mostly used kind of software on the phone), also I keep my music on 32GB MicroSD which is super convenient but works only with BB and Android phones hence I mostly used to buy BB7 and Android hardware in the past. With tablets right now Apple has close to the best tablet in iPad but still... I wanted SD card and I wanted widescreen tablets since I love my Walking Dead on a wide screen, this show looks lousy on 4:3 screen of iPad, and other movies too. Hence I went for Surface but then later I realized that Surface RT was a bad choice, I should have gone for Clover Trail Win8 tablet - all the advantages of Surface plus all my Windows software like MPC-HC and all sorts of nice Windows games like Plants vs Zombies, so right now I think Samsung Android phones are the best (with WP8 very close but still lacking a few important things like nice big screens) and Clover Trail Win8 tablets are the best for home tablet stuff. It's all about better screens and expandability/USB/SD support in case of tablets. If only Apple were making iPad with SD card, USB and 16:10 screen without moronic battery-devouring Cretina :(

RE: Happy Tony
By Tony Swash on 2/7/13, Rating: -1
RE: Happy Tony
By Pirks on 2/7/2013 7:03:49 PM , Rating: 2
Microsoft desperately needing every ounce of carrier goodwill to enable them to kick start Windows 8 phone as a viable phone platform
Apple kickstarted iPhone without any carrier support or carrier promotion whatsoever, so why MS can't do the same?

RE: Happy Tony
By Tony Swash on 2/7/13, Rating: -1
RE: Happy Tony
By Pirks on 2/7/2013 8:57:59 PM , Rating: 2
Huge iPhone demand? Really? Then why they sold only 270,000 in the first quarter of its availability, huh? Are you just fantasizing about "huge demand" or what?

Skype is an actual disincentive to carriers, and FaceTime is not? How so? I can see through your double standard Tony :P Don't even try to push your BS on me man, won't work.

RE: Happy Tony
By SPOOFE on 2/8/2013 5:10:37 PM , Rating: 2
Then why they sold only 270,000 in the first quarter of its availability, huh?


RE: Happy Tony
By tayb on 2/7/2013 7:27:27 PM , Rating: 2
Interesting that you mentioned Skype because one reason cited for the lack of carrier support for Windows 8 is Skype, for obvious reasons carriers don't want voice over IP, they hate it.

Carriers hated VOIP a few years ago but not anymore. Verizon and AT&T charge by the GB for data and throw in voice and texting for free. Their biggest moneymaker by far is data. With the new data plans offered by Verizon and AT&T they would probably actually prefer that you talk on Skype and buy more data.

The real reason Microsoft is having trouble getting carrier support from Verizon (AT&T isn't an issue) is because Microsoft is refusing to allow Verizon to pre-install spyware as they do on every Android phone.

Also, Skype is available as a free download on every available smartphone so I don't know what makes you believe bundling it with Windows Phone would make carriers angry.

RE: Happy Tony
By sprockkets on 2/7/2013 6:59:25 PM , Rating: 2
Where you pull that from, last quarter? You do know they redid their divisions years ago just to hide their money losing products by reporting them with ones that actually make money?

But hey, I love the Online services part, only lost 2.5 BILLION that round.

RE: Happy Tony
By Mitch101 on 2/7/2013 7:57:53 PM , Rating: 2
Doesn't really matter it shows Microsoft is far from a one trick pony. I could even break out how many companies they partially own as well which are also money makers. Heck they have a 10% stake in Dell now. The are the largest charity as well. I don't see Apple or Google trying to put an end to malaria.

Every company has money losing divisions but when you add it all up Microsoft makes tons of money. They can afford to lose 2.5 billion. They probably made more than that on Android licensing. If you look at the big picture over time if Microsoft can corner the home media market there is a ton of money to be made there.

Microsoft is starting to chip away at the Phone market, the tablet market is questionable but Microsoft has deep pockets and they can play for plenty of years trying to establish one, and Google search will fall someday because Bing is actually really good or something better will eventually come along. Some things take a few years to establish. Im amazed at the people who think its easy to enter an established market base and expect a company to make tons of cash on year one.

RE: Happy Tony
By sprockkets on 2/8/2013 12:47:45 PM , Rating: 2
They make money on windows and office. That's it. Lucky for them the xbox is finally making money after bleeding for so many years.

And this?

The are the largest charity as well. I don't see Apple or Google trying to put an end to malaria.

What are you talking about? The Gates Foundation isn't Microsoft.

RE: Happy Tony
By Tony Swash on 2/7/13, Rating: 0
RE: Happy Tony
By Pirks on 2/7/2013 6:40:20 PM , Rating: 1
(in five years consoles will be dead
This is pure bullshit because both Sony and MS disagree with you, and I think they know stuff better than you.

RE: Happy Tony
By Netscorer on 2/11/2013 2:29:25 PM , Rating: 2
I think there is a golden medium between your two opinions. In 5 years consoles would be dead from technology curve perspective. Mobile gaming platforms would reach the necessary power levels to provide the most immersible gaming experience. Online gaming where actual processing is done in the cloud and devices only need to provide streaming and user feedback would also become more widespread. Both of these trends will collide and kill the need for consoles. This does not mean that consoles can not enjoy at least another generation of successful ride. They will just be shifted into niches where they will be more popular in certain geographies and with certain consumers. Just like PS2 has enjoyed a strong sales years after PS3 and XBOX 360 were introduced.

RE: Happy Tony
By ritualm on 2/7/2013 9:17:22 PM , Rating: 2
Your favorite iPhones and iPads have absolutely ZERO tactile feedback. Secret of Mana on iOS pales in comparison with the button mashfest on the Super Nintendo version, and that's just for starters.

Your predictions are flat out wrong, and your man, Horace Deliu, loves talking out of his butt. You, then, are no more different than a politician, where the butt and the mouth are 100% interchangeable.

RE: Happy Tony
By inperfectdarkness on 2/8/2013 1:44:17 AM , Rating: 1
...but if Apple made a gaming console, it would cost $999 and 50% of them would suffer catastrophic failure in the first year.

RE: Happy Tony
By Donkey2008 on 2/8/2013 2:48:18 AM , Rating: 2
If it were Apple they would make it stupid simple to use and bank a couple of billion dollars in profits.

Although I am confused about the reliability portion of your comment. Does Apple have a bad track record with reliability that the general public does not know about? I still have an Apple IIc in my closet that boots up and plays Bards Tale and Hard Hat Mack. My iPhone 3G still cranks out tunes when I am at work almost 5 years after I bought it. Did I miss something?

RE: Happy Tony
By menting on 2/8/2013 9:12:05 AM , Rating: 2
he means the brains of the people using it will suffer catastrophic failure.

As far as hardware goes, you're either very lucky, or most of the people I know around me that use Apple hardware are all very unlucky. All of them have had some sort of hardware failure on their iphones (3, 4, 4s) soon after the warranty was up, and a couple had problems with their macbooks. None of them have the iPad, so don't have any information on that.

RE: Happy Tony
By jabber on 2/10/2013 10:02:47 AM , Rating: 2

I have two friends I know that run Apple repair businesses and they are plenty busy. Plenty of failed Macbooks and tablets going out there. The issue is that they do fail just as much if not more than standard Windows kit.

Remember the cases may be bespoke but the guts are pure generic Foxconn quality. Just like all the rest.

However, the parts (with the Apple part no. tag on them) and disassembly are just far more costly and complicated. Spill a coffee over you Macbook and its a $1000 fix. In fact one of my friends said to me in about two years he'll have to shut down his business as Apple gear is becoming un-servicable. Basically if it fails outside of the years warranty it just gets thrown away.

Not very green is it?

"We’re Apple. We don’t wear suits. We don’t even own suits." -- Apple CEO Steve Jobs

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