Xbox One-80: Behind Microsoft's multiple about-faces
Strategies for video game console are typically planned years in advance, but the course has been anything but clear for the Xbox One. In the months since Microsoft introduced the next-generation system, the company has made four major policy reversals—and there's no telling if it's done yet.
At stake is Microsoft's leadership position in the $70 billion video game industry. For the past 30 months, the Xbox 360 has topped console hardware sales, but Sony's PlayStation 4 is resonating with gamers as the next generation looms. And investors are trying to determine whether the Xbox team is scrambling to catch up or is simply showing a willingness to preemptively respond to market feedback.
The series of 180 turns started in June, when Microsoft went back on its "always-on" Internet and used-game policies (after vigorously defending them the previous week at the E3 trade show). In July, the company announced plans to let independent game makers self-publish titles on Xbox One after initially saying it would not allow that.
Earlier this month, Microsoft slid on earlier claims that the system would ship without a bundled chat headset. And this week it said that the Kinect sensor, which enabled audible and gesture commands, will not have to be plugged into the Xbox One for the console to operate after all. In May, it had virtually declared that the heart of the system.
The company has cited "feedback from the Xbox community" for most of the changes, but Sony deserves some of the credit, too. The company has been needling the Xbox One since E3, with a sharp eye on the issues that consumers have complained about.
"Moves like these are kind of unprecedented—especially from Microsoft," said John Taylor, managing director of Arcadia Investment. "My guess is when they unveiled the [Xbox One] in late May, it was their hope and belief that people would be impressed enough with the features it offered that there would not be a ton of pushback. I think Sony has played the PR game masterfully. Much of this comes from the direct response from Sony at E3 and subsequently."
Microsoft did not respond to a request for comment, but analysts note that the policy changes indicate that it is being extra cautious about ensuring that the Xbox One has a successful launch—something that's critical, as the product has been classified as the company's most important for the next decade.
"They can't afford to whiff on this launch," said P.J. McNealy, founder of Digital World Research. "This holiday season and ... 2014 are critical for the next 10 years of the business. They clearly had some early missteps, but the good news is they haven't launched yet, so things can still be corrected. It has been, by no means, an ideal past few months for them, though."
The Xbox One shifts come amid several other disruptions at Microsoft. Its stock has been relatively flat this year. Activist investor ValueAct Capital took a $2 billion stake in April, and an executive reshuffling saw the departure of the head of the Interactive Entertainment division, which oversees Xbox.
So what happened? Did Microsoft, in its initial planning, severely misjudge what the public wants in a next-generation gaming system?
Industry observers say no, adding that the Xbox One may be more forward-looking than its competitors. Some of the features Microsoft touted don't seem necessary or especially beneficial today, however, which may have confused a number of potential buyers.
In the short term, Microsoft want to create the perception of fanatical demand for the Xbox One, which will hit shelves this holiday for $499—and avoid any comparisons with Nintendo's Wii U, which has languished on store shelves since its introduction last year.
Just as important, it doesn't want to cede its leadership position to Sony as the new generation begins. Analysts say the changes should help with that.
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"We are confident that with six months of focused messaging, Microsoft can fully level the playing field with Sony, and we expect the Xbox One to sell as many units as the PS4," said Wedbush's Michael Pachter after the first policy changes.
The revisions don't cost the company any money at this point, and by making them in the pre-launch period, there's a better chance that gamers will have forgotten them once the Xbox One is available.
"My sense is that this is one [Microsoft] division showing some flexibility and demonstrating that they are listening to what the market is saying in terms of feedback," Taylor said. "Not a lot of big companies typically do that."
—By Chris Morris, Special to CNBC.com