Xbox 360 dilemma

The Xbox 360 removeable hard drive.

It appears that Microsoft is indeed releasing two Xbox 360 systems. The base system is $300 and the deluxe system is $400.

The addition that drives me nuts is the 20GB hard drive.1 I’ve been saying this for a while now, but I think that this is a bad idea.

A little background. Microsoft is unbundling the hard drive because this part does not get cheaper with scale. You may be thinking, “Huh? Hard drives are always getting cheaper,” and you’d be slightly off. Hard drives don’t get cheaper, they get a higher capacity for the same price. In the PC market this is just semantics; in the embedded market, this is life and death. When you work with embedded devices, every part matters. A hard drive is an especially expensive part in this market because it never gets any cheaper once it reaches a price point.

How was this bad for Microsoft’s Xbox? Because the Xbox had a part that could not get any cheaper than the Playstation 2. You can merge chips together, but you can’t design out a hard drive. Since the Xbox was made with commodity parts, this meant that Sony could sit there with a spreadsheet predicting Microsoft’s prices. When it appeared that Microsoft would go break-even with their console, Sony could simply lower prices on the Playstation 2 and force Microsoft back into the red.

Which is exactly what happened. Before the Xbox, Microsoft’s game division was making a tidy profit. After the Xbox, even with the success of Halo 2, they have yet to turn a profit.

I think, Microsoft learned the wrong lesson with the original Xbox. Sure, by unbundling the hard drive with the Xbox 360, they hit a price point that Sony will be hard pressed to match with the Playstation 3, but it is a consumer and developer-unfriendly move.

Think of the PC game market. I imagine that in a large company like Vivendi Interactive when they decide to come out with a new version of Warcraft they have a spreadsheet out there that tells them how much sales they will lose for based on the minimum system requirement. Consoles work because unlike a PC you know the game you buy will just work. Why? Because everyone has the same console.

This is just an ignorant opinion of someone who barely plays any video games, but it seems to me that as a consumer I don’t know which to buy and as a developer I wouldn’t know which Xbox to target.

Look, It is unlikely that the sales will be evenly split between $300 and $400 Xboxes—either the $300 Xbox or the $400 Xbox will sell well. If it is the former, then the developer will kill sales by requiring a the hard drive.2 If it the latter, then why come out with a $300 Xbox? The price of admission for the consumer is $400 and everyone will know it.

Microsoft has an edge over Sony in the robust Xbox Live! and development experience in hard drives. It’s a shame to see them effectively squander both just because they learned the wrong lessons.

1 Yes there are other things in the package, but if you look at them, the only one that creates a dilemma for the developer/consumer is the hard drive. This is an important thing to note. It isn’t the fact that there is tiered pricing in the Xbox that is the problem (when I go to Costco I see deluxe bundles all the time), it is what is in the tiers that is.
2 An Xbox fanboy might point out here that the user can always upgrade their $300 Xbox by buying an external hard drive. But at what cost? $100 according to Microsoft. Do you think the consumer will be happy being forced to upgrade for the cost of a $400 system when they give up a wireless control, headset, remote control, high definition cables, and a removable faceplate? If that happened to me, I’d feel I’ve just been a victim of bait-and-switch.

11 thoughts on “Xbox 360 dilemma

  1. One thing I didn’t consider was that the dual launch may have due to overpromising and underdelivering. Apparently Microsoft promised that they would have wireless controllers standard, hard drive standard, high definition standard and a $300 price point. (They just didn’t say that those were all together.)

    It seems tough to hate Microsoft for this, at least until we know how much the Playstation 3 is going to cost. I think it is very hard to hit the $300 price point with anything remotely useable. I’m impressed that Microsoft managed the $400 price point with what they bundled. (The notable thing missing from that is wireless networking which will cost $100 more.)

    (But since I don’t have an Xbox, I’m not exactly the market that Microsoft should be trying to please. An Xbox loyalist, who was aware of Microsoft’s statements at E3, who is used to the HDD for XBox Live!, who may have recommended the Xbox 360 to their friends will not feel the same way. I wonder what their reaction is?)

  2. I corrected a part where I incorrectly said that Sony is biting the bullet and bundling the hard drive. This is incorrect because Sony may be unbundling it due to price considerations.

    In general, I like the idea of a removable/upgradable hard drive and I think the hard drive size might be a nice way to segment the market, but I think Microsoft is really squandering an advantage of the Xbox by not levering a hard drive with the 360.

    George mentioned that he doesn’t think that the hard drive is a deal killer for the developer since it only affects Xbox Live and remote upgrades and some people who like MMORPGs. I guess we beg to differ since I feel as a consumer, hearing two prices (coupled with a lack of backward compatibility) makes me want to adopt a “wait-and-see” about which one the market is actually going to buy and I think a developer who is going to require a hard drive is going to be quite put out that they are taking on unnecessary risk: We can take it as given that Microsoft will find a way for the Xbox 360 to sell, even if that means losing a lot of money on it, but what if HD capable Xbox 360s don’t sell?

  3. PS3 released for the same price as the Xbox base model? Seems a bit low to me, but I guess $300 is the most people are willing to pay for a console (though they seem to have no trouble forking over $70/game).

    I would think that Sony would have to unbundle the hard drive. I wonder if the WiFi/Bluetooth is going to go to? Unlike Microsoft, Sony can merge chips again for increased cost savings down the road so maybe they don’t taking a loss on things like that as dangerous to their long-term prospects.

    This reinforces my belief that there are two Xboxes. The first one at $300 and another Xbox at $400 + $250/5 years for online and multiplayer gaming.

    Sony’s strategy seems to be to $300 for a core non-online multiplayer gaming experience + ?? for online/multiplayer games + ?? for a larger hard disk for convergence features. It makes sense because their MMO experience on consoles is record is pretty bad (despite having Square in the stable, despite having the #1 all-time title Everquest).

    It seems that the Xbox 360 has too small/expensive hard drive for convergence and the Playstation 3 has relegated the hard drive to a high-end niche. Wow! that must suck for all the people who have sunk 10 years in that idea based on books like Innovator’s Dilemma.

    Winner: Tivo?

  4. Major Nelson has an interview with J. Allard about the XBox. The relevant part is:

    the thing to remember that while we designed a no compromises game system, a huge percentage of our customers are not like the folks in this chat room. recognize that more than 75% of the folks on xbox have not played halo. by introducing the core system we are sending a signal to the market that we are committed to this part of the market just like with the xbox 360 premium bundle that we are committed to you.

    Ignoring the irony of designing a “no compromises game system” and then compromising it on price. It sounds that Microsoft thinks market segmentation in the console market is a Good Thing. I wonder how their “Developers, Developers, Developers” feel about that? I’ll give Microsoft credit for having the cojones to go for two markets with one box.

    Personally, I think 75% of the Xbox market has not played Halo because 50% of the population is female. I also wonder what the #1 selling title for the Playstation 2 or the Nintendo GameCube was. Methinks they sold less much less than 25% of the total installed base. If that is the case, then shouldn’t Microsoft be spending development efforts on making games that aren’t first person shooters and sports sims? It seems only one demographic would buy those. Granted that’s a coveted demographic, but those people also blow $3k on a tricked out PC for gaming, they probably will be buying a Microsoft Xbox 360, Sony Playstation 3, and a Nintendo Revolution without thinking.

    (Finally, wouldn’t a “no compromises game system” at this point include built-in WiFi?)

  5. Is this for real? If so, then how would games work?

    If games are DVD-only then the content is still limited relative to the PlayStation 3’s BD-ROM. Also it would only have value as a home entertainment console and Microsoft’s Xbox 360 home entertainment play sounds like something that will only work on paper.

    If games will be available on HD-DVD then it fragments the market further and punishes heavily punishes the early adopters (something you don’t want to do—they are your fanatical base). Also, Sony should rethink Windows Media support in Blue-Ray. Plus it doesn’t deal with the fact that XBox doesn’t support the most useful thing to dump on an HD-DVD: 1080p video.

    In any case, a comment like this, if true, means you should definitely not go buy an Xbox 360 until 6 months after launch.

  6. Microsoft and Intel have revealed their cards. Intel is irrelevant, but this pronouncement from Microsoft is interesting. They were pretending to have it both ways with the intent of pulling the rug under Blue-Ray when they switched to HD-DVD with an iteration of the Xbox 306. Guess nobody is buying it and they are attempting to FUD the sales of BD-ROM before sales of Playstation 3 makes it a defacto standard.

    The article is a riot. Did you know that Intel has a director of optical media standards and technologies? Neither did the optical media industry. And check out the analyst the quoted: who the fuck is “In-Stat”?

  7. Well it looks like I was right. What is interesting about this article was that Windows Media was adopted on Blu-Ray in exchange for neutrality—I totally missed that one.

    It looks like Microsoft tried to do to Sony Blu-Ray what they did to IBM OS/2. This time they didn’t fall for it. Fallout for this will definitely be that Windows Media’s VC1 will be an unused part of the Blu-Ray standard. I predict everyone will be encoding on H.264 instead. Ouch!

    One thing I hate about the article. Everyone portrays this as a reprise of Sony BetaMax vs. JVC VHS while ignoring the most salient fact: BetaMax tapes were limited to 60 minutes at the time: not enough for a full length movie.

  8. Nielsen/VideoScan is reporting that this month (January 2007), Blu-Ray discs outsold HD-DVD 2 to 1. It’s way to early to know if this is a commanding lead, but personalluy I’d think that HD-DVD has the better titles.

    Obviously it’s too early to declare the PS3-Blu-Ray bundle a winner over the XBox 360 + $200 HD-DVD one. But I will point out that the former strategy is clearly designed to get more BDROM into the home, the latter strategy is designed to sell more consoles.

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