Why Xbox is poised to make the PlayStation a niche product

This new console generation is going to be much different than the previous one. To win the console war, the console must win in the overall entertainment experience, rather than primarily just gaming.

We are seeing this as Microsoft’s Xbox One and Sony’s PS4 are designed to be multi-tasking machines with a wide variety of entertainment on top of their gaming capabilities.

Last Generation with the Xbox 360 and the PlayStation 3 (PS3), we saw these systems sell about 80 million units each over the course of 8 years. Microsoft’s Xbox 360 launched in late 2005 and Sony’s machine followed to market one full year later. When comparing this market to other markets like tablets, which sold over 54 million units in the first quarter of 2014, 80 million units in 8 years seems relatively small. Of course gaming consoles aren’t as personal – they are shared with family, so it might not be the best comparison. However, it shows just how small this market is compared to other technology markets.

We have seen first-hand how getting the casual market right worked extremely well for the Nintendo’s Wii entertainment system last generation during its first few years in the market (before it fell apart in sales as the novelty wore off). However it still outsold Microsoft’s and Sony’s console by over 20million units, sitting comfortably at 100 million unit sales.

The Importance of Non-gaming aspects for Market share

With Microsoft’s recent statistics around Xbox Live, stating that over 50% of time on this service is spent consuming media and not playing games. That number is also rising since content seems to be key this generation as we are connected in more ways than ever before with social networking, on demand content, and through various devices.

These machines will evolve over time, but currently there is a major difference in how these two consoles are designed to entertain the consumer. Xbox One is taking a much bigger step towards catering to the mainstream consumer than its rival, the PS4. It aims to be the centre of your living room entertainment experience, a major differentiating advantage for Microsoft seems to be Xbox One’s TV centric approach.

Xbox One’s HDMI input provides the ability to piggy back off of an existing cable box and have a specialized TV guide operated not only with a controller but Kinect’s voice commands. The Xbox One is heavily built around this peripheral, which turns it into a completely unique experience using voice commands to do various things, such as telling it what to watch, launching and controlling apps, content browsing and offers a rich Skype experience. While Sony does offer a competitive device named “The PlayStation Eye,” it is not even in the same league in terms of capabilities – it is widely considered an afterthought and designed that way by Sony.

Microsoft recently announced that it will be producing its own big budget shows and content for its console. There are over 12 projects in the works and it seems as if Microsoft is taking this very seriously with ambitious original programming projects. Sony on the other hand seems to be concentrating primarily on the gamer and offer no signs of doing such things.

Although looking at current sales figures of these two consoles tells a more positive story for Sony at the moment, its sitting in a comfortable lead with over 7 million consoles sold compared to the Xbox One’s 5 million. This is a long battle and as these machines evolve over time with different SKU’s, price points and features, things can change drastically.

There are two major advantages Microsoft holds over its rival, which can change this console war significantly in Microsoft’s favor. In this generation of entertainment consoles they are more critical than ever.

The first advantage is the ecosystem Xbox One is tied to – it’s heavily reliant on the Microsoft Cloud and its many services, which integrate heavily with Windows 8 and Windows Phone. Not only that, but most of these services are also available on iOS and Android making it a more connected software experience than Sony’s PlayStation.

Microsoft did a smart thing by making Windows 8 Xbox One’s core operating system. This allows for universal app development across Microsoft’s platforms with the app API’s being very similar. Microsoft being a software company has this advantage over Sony, therefore we expect to see a much better offering of content on the Xbox One and integration with Windows and Microsoft services on other platforms. Sony is primarily a hardware company who doesn’t design and build its own OS, they will not will be able to duplicate this.

Sony’s deteriorating financial status

The second key advantage is Microsoft’s financial status – Sony has been financially weakened and hasn’t been able to turn a profit in many years. Sony’s CEO Kaz Hurai just recently slashed the company’s profit forecast for the business year-end in March from a previous estimate last May. They recently sold off their PC division and spun off their TV division, which in the last 10 years has lost a total of $7.8 billion.

There is increasing pressure from shareholders for Sony to sell, or spin off even more of the company’s assets. Sony’s PS4 is selling very successfully in the market, but development costs suggest it could take at least another year to turn a profit. With Sony’s troubling financial position, it will remain difficult to innovate and invest in a broader set of entertainment services on the PS4. Microsoft on the other hand doesn’t have these issues and is one of most profitable companies in the world.

There are rumors of Microsoft being in talks with Internet service providers and cable companies to sell the Xbox subsidized to their consumers. There are also rumors of a non-gaming Xbox made to compete with Apple TV, Roku and Amazon’s Fire TV, these can be game changers for the Xbox brand and Microsoft. The cloud promise of the Xbox One is a very interesting concept, although it hasn’t really showed off of its capabilities yet. The sheer scale of Microsoft’s Azure platform and what its powering today in enterprise, as well what Microsoft showed off at Build with cloud processing makes for one convincing possibility that it can provide the Xbox One significant cloud based rendering.

The gaming market is shrinking due to tablets and smartphones taking away casual gamers. In the past the only place to play games was the console. Today consoles seem to be the place for big budget games while mobile devices are for the everyday in and out gaming experience. Comparing console gaming to mobile gaming is like comparing the Movie theatre experience to YouTube – YouTube user numbers dwarf the number of movie theatre goers, but the quality of content is far better in the movie theatre – its where the consumer will spend money.

With consoles being sold at near break-even prices, a shrinking gaming market and development costs becoming significantly higher this generation, , there isn’t as much money to be made in just being primarily a gaming console. Exclusive content, interactivity with other devices around your home and apps will be this generation’s catalyst. The company that seems to have the right formula to win this, is Microsoft.

It’s hard to imagine what Sony can do to further enhance content creation without an app development community, and financial strength- while Microsoft is throwing millions of dollars at these very things.

These consoles are currently catering to the gamer with high price points and the mainstream consumer is not yet being exposed to these machines. However, two or three years from now when these consoles see lower price points, having a broader availability of entertainment services will be crucial for mainstream acceptance.

This is when the real battle for market share dominance begins, as acceptance of the mainstream market could take sales much higher than the 10 million units sold annually last generation. Having a console as a centralized hub for all your devices and integrating with core software services is essential in creating the ultimate living room entertainment system.

Looking at what both companies can offer, points to a decisive win for Microsoft and PlayStation becoming a niche device for the die-hard gamer, as this generation evolves.  Sony’s financial status will pose a large problem for investment in large data centres to compete in the cloud space, this is where Microsoft is already firmly established.  It is possibly however that as the cloud plays a very important role in gaming that Sony’s PlayStation may cease to exist.

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