Get inside Xbox: A demo of the new consoleSeamus Blackley, Xbox technology officer,Microsoft November 14, 2001 Sony stands firm on U.S. PlayStation price September 26, 2001 Nintendo delays U.S. launch of GameCube August 23, 2001 Xbox to hit shelves Nov. 8 May 16, 2001 Xbox marks his spot March 28, 2001 Microsoft got game: Xbox unveiled January 6, 2001 Has Xbox transformed Microsoft? By David Becker Staff Writer, CNET News.com November 15, 2001, 4:00 am PT Microsoft obviously knows how to dominate new markets--just ask any company that used to sell Web browsers or e-mail programs. But the market the software giant will enter with Thursday's release of the Xbox video game console is different from any arena the company has played in before. After two decades of primarily relying on business customers, Microsoft is spending billions of dollars to break into the ruthless gaming business--and it's resorted to some un-Microsoft tactics. Instead of using hard-nosed business tactics and savvy product-positioning to maintain captive markets, it must outplay two experienced and sharp competitors to pull discretionary income from finicky entertainment consumers. Yet the signs are that Microsoft is making the right moves to establish a credible position against Sony, which rules the market with its PlayStation 2, and gaming veteran Nintendo, which will launch its new GameCube console Sunday. Though the Xbox is Microsoft's biggest venture away from the PC, the company has a lengthy and successful record with games, publishing PC hits such as the "Flight Simulator" and "Age of Empires" series. Instead of the top-down corporate thinking that has characterized previous Microsoft projects, such as Windows, the company is listening to outside parties and making design changes based on their input. Instead of reaping all the benefits should it become dominant, Redmond, Wash.-based Microsoft is relying on strong relationships with partners that will share in whatever success the Xbox enjoys. Instead of being bloated with questionable features, the Xbox remains focused solely on delivering good-looking games. Why does Microsoft want to be in gaming? Because as the PC market slowdown continues, it wants desperately to tap new consumers. And, the market for console games is larger and grows faster than the market for PC games, where Microsoft has had some success. "It could be bumpy at the start. But if they're committed to it, I think they can pull it off," MDR/Instat analyst Brian O'Rourke said. "Look at Windows, Word, Internet Explorer. When they came out, everyone said they were just a cheap knockoff of a superior product. But Microsoft was persistent, and now they're No. 1 in the market." Robert Kotick, CEO of games publisher Activision, said he is impressed with the way Microsoft handled its entry into the console business, especially considering his own company's sometimes difficult relations with the powerhouse in developing Windows-compatible PC software in the past. "It's not your father's Microsoft we're working with," Kotick said. "Being a PC developer, we've had frustrating experiences with Microsoft before. With Xbox, these guys have been incredibly cooperative and respectful. I haven't seen anything in the way of their behavior that would indicate that they're looking at this market the same way they have enterprise software." Activision's version of "Tony Hawk: Pro Skater" for the Xbox will come out at the console's launch. The game maker is also working on numerous other titles for the new console. How may we help you? Evidence of a new Microsoft began to accumulate well before the Xbox was first announced last year. Microsoft spent close to a year consulting with game developers before finalizing the design of the console. The goal was to have a powerful system that was easy for game creators to exploit. "The irony, I guess, is that sometimes Microsoft gets the rap in some of the markets it's in for being big and arrogant," said Ed Fries, Microsoft's vice president of games publishing. "But this was just the opposite. We were the new guys, and everybody was really anxious to tell us what was frustrating and limiting about the development process with the existing consoles. Then we went out and built the system they said they needed to make great games." Kotick said Microsoft delivered on its promises. "They are probably the best company in the world from a development tools standpoint," he said. "The original development tools we received for the hardware were exceptionally well done and really made it easy and pleasurable to get to work on making some great games." Matt Rosoff, an analyst at Directions on Microsoft, agreed that the company has been unusually solicitous of outside advice. "They're definitely starting from scratch in this market," he said. "I think they understand they need to work with people who really understand their markets." But Microsoft's friendly relations with game developers can't compensate for a flawed concept, said Trip Hawkins, CEO of game publisher 3DO, which has no plans to make Xbox software. Microsoft got into the business too late and for the wrong reasons, Hawkins said. "Microsoft saw the PS2 a couple of years ago, said, 'This thing is a serious computer without our operating system,' and decided they needed to take some kind of action," Hawkins said. "So they basically built a PC clone because that's what they could get to market quickly. Microsoft is basically taking a defensive strategy in a market where the only thing that works is offense." The outcome will be evident in less than a year, Hawkins said. "By spring, Microsoft will have worked their way through the couple million hard-core gamers who are going to be really jazzed by the Xbox hardware," he said. "Then they've got a situation where they have to expand their market either by taking kids away from Nintendo or taking casual gamers away from Sony. I don't think they have what it takes to do that because they came in too late for this cycle of the consoles. "It won't be until next spring or summer they're going to realize this is a little like the Russian front, and they'll start asking, 'Why are we doing this again?'...I will not be at all surprised if they pull the plug before the year is over." Gordon Haddrell, owner of the Gamer's Edge store in rural British Columbia, is equally skeptical, saying there's no way Microsoft can overcome Sony's huge early lead. "Microsoft is doing everything right to attract interest...selling 'We've got lots of games on the way' and 'Power, power, power,'" Haddrell said. "They are reinforcing the idea that the system is going to be around for a number of years." "However, the PS2 has the market interest. And people just won't buy an Xbox as long as they are thinking PS2. And due to the size of installed units, the PS2 will always have more software available." Marketing moxie If Xbox does fail, it won't be for lack of marketing moves. The company has shown even more willingness to depart from business as usual in that area, making strategic moves to distance Microsoft from its image as a fusty, hierarchical behemoth. Although Chairman Bill Gates has been on hand for the big announcements, most of Xbox's public face has been assumed by folks who actually look like they play games, especially skateboard-toting, funky-shoe-wearing Xbox Chief Technical Officer Seamus Blackley. And instead of going to its usual business buddies, Microsoft has gone far afield to sign on Xbox promotional partners, such as skateboard outfitter Vans and drink maker Sobe. Even the utility of the Microsoft name has been rethought. Although Microsoft is one of the most recognized names in the world, it is a name associated with PCs--machines whose complexity and cantankerousness are far removed from the one-button simplicity of game consoles. So it's probably no coincidence that the Xbox has largely stood alone in most promotional material. "It's being positioned as the Xbox, not the Microsoft Xbox, kind of like Sony did when they introduced the PlayStation," IDC analyst Schelley Olhava said. "Microsoft is known as being a PC company, so this is a big change for them. They've had to work really hard to say, 'This is not a PC; it doesn't act like a PC.'" Although the Microsoft name may carry some liabilities in the video game market, O'Rourke said, it's an overall plus for a company entering a new business. "Coming in as a new entry in this market, I think a big, recognizable name helps," he said. "It helps convince people they're a serious entrant. I think it connotes an idea of permanence to consumers--that they're not going to come and go overnight." Added Fries: "Microsoft's a great brand...and we're really proud to have it. But we are creating something new for the company, and we want it to have its own persona and focus. That's why you generally see a big 'Xbox' and little 'Microsoft' on anything we do." The inscrutable East One of the most dubious factors influencing Microsoft's chances for success is the fact that it's the first non-Japanese company in a decade to make a serious foray into video game hardware. That may help it a bit at home, even though some of the most successful games in America have come from Japanese studios. But it is likely to be a serious challenge in Japan, where game tastes are markedly different from those in the West. Major Japanese PlayStation hits include "Densha de Go!" (Let's Go by Train!), in which players pilot a virtual commuter train and earn points for on-time arrivals and proper signaling, and "Nitoshinden," a fighting game in which the main opponent is the fearsome Flying Lunch Boy. "Definitely, Japan has some gaming tastes that are very different," Olhava said. "It's not just a matter of changing languages to make a game work for a Japanese audience." 3DO was the last U.S. company to take a stab at the gaming hardware market with a console design it licensed to outside manufacturers. The machine flopped, in no small part because of the difficulty of making any headway in Japan, Hawkins said. "I think it's a waste of Microsoft's time to even launch the thing in Japan," Hawkins said. "The Japanese market is basically closed. Every barrier you can think of--cultural, tariffs, licensing--is there to work against them. Just read 'Shogun' if you want to know what they're up against." Signs of trouble overseas have mounted since the Xbox promotional team kicked into full swing early this year, with Microsoft delaying the Japanese launch of the console to Feb. 22, 2002, and several major Japanese developers expressing doubts or absolute disinterest in the console. Fries acknowledged the Xbox effort in Japan was a bit bumpy at first, but he said Microsoft has gotten back on track by treating the Japanese Xbox almost as a separate product. Microsoft hired away Sony's No. 2 game software executive and put him in charge of a separate Japanese Xbox division to develop games that for the most part will be specific to the Japanese audience. "I really feel like the momentum is going our way in Japan," Fries said. "We have a team of more than 100 people working on content in Japan, and these are all people who really know that market." Activision's Kotick agreed that Microsoft is on track in Japan. "This is a testament to Microsoft's willingness to listen to their partners," he said. "At first they were really going in there with the idea of taking a big chunk out of the (Japanese) market. Now that they've refocused their efforts to work with outside developers and set some realistic goals, I think they're in good shape." Even if Xbox doesn't catch on as more than a niche product in Japan, it may not be fatal to the project. Japan's status as the sole producer of game hardware and the main source of game software tends to exaggerate the country's importance to the industry. In reality, Japanese consumers account for about a quarter of the worldwide game market, which was estimated at $20 billion last year. "I think the general assumption for the gaming industry is that without success in Japan, you can't have a successful product. But I'm not convinced that's true," Olhava said. N64, Nintendo's most recent system, "never picked up that well in Japan, but it did great here and it did great in Europe. And that was enough to keep Nintendo in the console business...It depends on what Microsoft's expectations are for the product." Rosoff agreed. "From everything I've seen, Japan is a secondary market for Xbox. Microsoft is treating America as their primary market, and I think that's a reasonable decision," he said. "Sales of 4.5 (million) to 6 million units in a year is not insurmountable, with the majority of that coming from American sales. And I think those kind of numbers are enough to make them a major player in the market." Game selection key to Xbox's chances