Huddled with dozens of other young men around television screens in New York's trendy Metronome nightclub and restaurant on Nov. 1, Keith D. Thomas II had neither dinner nor dancing on his mind. The Detroit game-arcade employee punched and kicked his way through a fighting game as he put Microsoft Corp.'s new Xbox game console through its paces during a demo event just two weeks before its official launch. The verdict? "It's intense. Beautiful," Thomas gushed, calling it better than anything on the market. "I was skeptical. I thought Microsoft just did PCs."
Not anymore. With its Nov. 15 launch of Xbox, the PC-industry powerhouse is looking for a piece of the action in the booming video game business. But to achieve its five-year goal of capturing 40% of the $20 billion console market, Microsoft (MSFT
) will need to use every penny of the $500 million it has earmarked for its initial sales campaign--and then plenty more. This time around, the PC industry's 800-pound gorilla is the underdog in a fight with gaming champs Sony Corp. (SNE
) and Nintendo Co. (NTDOY
). Microsoft Chief Xbox Officer Robert J. Bach isn't worried about the software giant's lack of experience in the market. "Five years ago, Sony didn't know games either, and they became No. 1," Bach says.
UGLY RECORD. Problem is, Microsoft isn't Sony. The Japanese company has spent decades building an entertainment empire that includes cutting-edge electronics, music, and film. Whenever Microsoft strays into consumer-electronics markets, it often bombs.
That hasn't kept it from trying again. Xbox is a key piece in Microsoft's long-term connected-home strategy, one in which the software giant moves from the home office into the living room. Xbox, along with Microsoft's interactive-TV software and Windows XP networking technology, could provide the foundation for a digital-entertainment empire. In another boost to that strategy, Microsoft on Nov. 7 inked a deal with cable operator Charter Communications Inc. to provide software for 1 million set-top boxes.
Xbox, though, has gotten off to a rocky start. Some demo units installed in stores around the country developed embarrassing glitches in October, though Xbox execs say these problems have been resolved. Retailers already are fretting that Microsoft has made firm commitments to ship at launch only half of the 600,000 to 800,000 consoles promised months ago. If potential customers can't get the consoles, early word-of-mouth endorsements may never come. "Now they have to deliver. It's a double-edged sword," says Jeffrey Griffiths, CEO of the gaming retailer Electronics Boutique PLC.
SLAYING DRAGONS. For all its whizzy technology, it's the games that could make or break Xbox. Developers will have completed 15 to 20 Xbox games by the time the holiday season hits, compared with 144 games that will be available for PlayStation 2 and eight for Nintendo's GameCube, which goes on sale Nov. 18. In a counterstrike that week, Sony will release the hotly awaited sequel to its shoot-'em-up Metal Gear Solid 2. "You can't buy love and loyalty in this market. You're only as good as your last hit," says Sony Computer Entertainment America Inc. President Kazuo Hirai.
Microsoft also will have to slay dragons at a time when the economy is in the dungeon. Unless gamers spot a blockbuster exclusive Xbox software title, the console's $299 sticker may prove a hard sell over the $199 GameCube and the $299 PlayStation 2's wide game selection. That's why Gerard Klauer Mattison Co. analyst Edward Williams expects Xbox to capture only about 10% of the market by 2006.
Of course, Microsoft has one big advantage: a $36 billion mountain of cash and all the time it can buy. Microsoft stands to lose as much as $100 for every console sold. Although hit software--at $50 a pop--can offset some of that, Microsoft could lose as much as $1 billion by June, 2004, on hardware, estimates Morgan Stanley Dean Witter & Co. analyst Mary Meeker. With Microsoft's patience and its record for beating the competition, though, execs say let the games begin.
By Steve Hamm in New York and Jay Greene in Seattle
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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