Microsoft doesn't care if you buy the next-generation Xbox — and it's a brilliant strategy

MicrosoftThe next-generation Xbox console from Microsoft, the Xbox Series X.
  • This holiday season, both Microsoft and Sony are planning to launch next-generation game consoles: the Xbox Series X and the PlayStation 5, respectively.
  • Though the two companies compete directly in the video game business, Microsoft is going in a new direction: Instead of focusing on the new Xbox console as a replacement for the current one, Microsoft has spent the last several years turning “Xbox” into a digital ecosystem.
  • Whether you’re playing on Xbox 360, Xbox One, Xbox Series X, on computer or a smartphone, Microsoft has created a digital game library that works across everything.
  • Microsoft of course wants people to buy its new Xbox console, but the primary focus of Xbox now is being a digital platform. Instead of depdending on people to buy Xbox hardware, Microsoft has massively diversified Xbox revenue streams – a brilliant strategy that fundamentally changes its fight with Sony’s PlayStation.
  • Visit Business Insider’s homepage for more stories.

This holiday season, both Sony and Microsoft plan to launch new, so-called next-generation versions of the PlayStation and the Xbox.

Goodbye, PlayStation 4 and Xbox One! Hello, PlayStation 5 and Xbox Series X!

It marks the fourth game console “generation” that Microsoft and Sony consoles have gone head-to-head, starting with the PlayStation 2 and the original Xbox around the turn of the century. Nintendo exited direct competition on hardware with both companies years ago, starting with the wildly successful launch of the Nintendo Wii in 2006.

These days, the “console wars” are a head-to-head between Sony’s PlayStation and Microsoft’s Xbox.

But, increasingly across the last few years, Microsoft has shifted its Xbox strategy away from directly competing with Sony’s PlayStation console – and it’s a brilliant strategy that could end the console wars for good.


Microsoft doesn’t mind if you don’t buy its new Xbox console — as long as you buy its games and/or services.

Microsoft

Do you want to play games on an Xbox? A computer? Your phone? Microsoft wants to reach you wherever you are – ideally across all three.

To that end, Xbox has major initiatives across all three platforms: a new game console (Xbox Series X), a cloud gaming service (Project xCloud), and a Netflix-like gaming service (Game Pass).

“That remains core to what we’re trying to do,” Xbox leader Phil Spencer told Business Insider in an interview last June. “To allow creators to reach the customers that they want, allow players to play the games that they want with the people they want to play with, anywhere they want. And it fits right into the opportunity ahead.”

It’s part of a broader effort at Microsoft to bring Xbox games to as many people as possible – even if those people don’t buy a new Xbox console. To that end, all first-party Xbox games across the next two years will also head to Xbox One.

“As our content comes out over the next year, two years, all of our games, sort of like PC, will play up and down that family of devices,” the Xbox Game Studios director Matt Booty told MCV in an interview earlier this year.

When the big new “Halo” game arrives alongside the Xbox Series X this holiday, it will also arrive on Xbox One and PC.


The target market for the new Xbox probably isn’t you.

MicrosoftIf you don’t know what ‘teraflops’ means, you probably don’t need to buy an Xbox Series X at launch this holiday.

Do you own an iPhone 11 Pro? Are you building a PC to take advantage of the latest in ray tracing tech?

If you answered no to both of those questions, chances are you’re not in the target demographic for the Xbox Series X just yet. Though Microsoft has yet to put a specific price tag on its next console, it’s unlikely to be low.

“We designed the system with a price point in mind,” Xbox Series X development lead Jason Ronald told Eurogamer in a recent interview. “We’re confident in the system we’ve designed, but at the same time, we’re going to be agile on price.”

Historically speaking, home video game consoles have a price ceiling on a successful launch: $US400.

If a console maker launches a game console for over$US400, they’re unlikely to “win” that console generation. Sony’s PlayStation 3, which started at $US500, struggled for years against Microsoft’s Xbox 360. Microsoft’s Xbox One, which started at $US500, continues to trail Sony’s huge lead with the PlayStation 4. How much did the PS4 cost at launch? $US400.

Microsoft is attempting to circumvent that historical precedent and set a new one: The Xbox Series X, at launch, is for the kind of early adopters who are willing to splash out on high-end electronics. Over time, the features that make Xbox Series X so expensive now will make their way into standard Xbox models (with more standard price tags).

And in the interim, Microsoft has indicated that the existing Xbox One models – including the entry-level $US300 Xbox One S and the pricier, 4K gaming-enabled $US400 Xbox One X – will stick around for a while. Meanwhile, rumours persist that Microsoft is prepping a brand new, lower-end version of the Xbox Series X codenamed “Lockhart,” aimed at winning over consumers who aren’t necessarily interested in shelling out for a super high-end game console.


The new competition: Google and Amazon.

Getty ImagesAlphabet and Google CEO Sundar Pichai announced Google Stadia on stage in San Francisco at GDC 2019.

“When you talk about Nintendo and Sony, we have a ton of respect for them,” Phil Spencer told Protocol in an interview published this past February. “But we see Amazon and Google as the main competitors going forward.”

Why would Microsoft’s Xbox division, which makes the Xbox game console line, be focused on Google and Amazon?

One word: streaming.

In the case of Google, the service is named Stadia – a Netflix-like game service that streams games to a variety of devices, no game console required. In the case of Amazon, there’s no service just yet; one is said to be in the works, codenamed “Project Tempo.” And Amazon already has a robust cloud infrastructure in Amazon Web Services (AWS) to compete with Microsoft’s similarly robust Azure cloud infrastructure.

Both companies are positioned to compete directly with Microsoft’s Xbox when it comes to what Spencer sees as the next great expansion in gaming.

“Amazon and Google are focusing on how to get gaming to 7 billion people around the world,” Spencer said. “Ultimately, that’s the goal.”


A small, subtle name change with big implications.

Microsoft/The Game Awards

The “Xbox Series X” is part of the fourth generation of Xbox consoles from Microsoft, following the original Xbox, the Xbox 360, and the Xbox One generations. It’s a real murderer’s row of bizarre names.

The Series X, however, isn’t a whole new line of Xbox consoles – it’s just the name of the latest in the Xbox console brand. “The name we’re carrying forward to the next generation is simply Xbox,” a Microsoft representative told Business Insider in December.

It’s a subtle branding change with big implications: You can expect your Xbox digital library to work on Xbox devices, similar to Apple’s approach with the iPhone.

You might get an iPhone 11 Pro, or you might get an iPhone 8 – they all run the same stuff, albeit in varying degrees of fidelity. Such is the case with the Xbox brand going forward.


The birth of the Xbox “ecosystem.”

MicrosoftAll your Xbox games — from the first Xbox to the Xbox 360, Xbox One, and Xbox Series X — in one place.

The next Xbox console plays next-gen Series X games, and Xbox One games. It also plays all the original Xbox and Xbox 360 games that already work on the Xbox One. It also works with all the current Xbox One accessories, from gamepads to fight sticks.

“The original Xbox games and Xbox 360 games that are backward-compatible now on your Xbox One, those will play. Your Xbox One games will play, your accessories will play,” Spencer said last June.

This is an important precedent that was set with the Xbox One, and it’s continuing with the next generation of Xbox consoles: Your digital game library carries forward, like app purchases on smartphones or movie purchases on Amazon Prime.

It establishes your Xbox library as a continuing digital platform – an “ecosystem” – something no game console maker has done thus far.


A new precedent with “smart delivery” — you buy the game once, and you can play it on every Xbox platform.

Microsoft

If you buy the next “Assassin’s Creed” game on Xbox One, and then you get an Xbox Series X, you already own the game.

You don’t have to buy it again, or pay an “upgrade” fee – you can just download the game when you sign in with your Xbox Live login. It’s a new system called “Smart Delivery,” which Microsoft describes as intended to “ensure you always play the best version of the games you own for your console, across generations.”

Every game that Microsoft produces will use Smart Delivery, and the option is also available to all third-party Xbox game developers.

The system benefits Xbox owners for sure, but it also benefits Microsoft in a huge way: Even if you don’t upgrade to the Xbox Series X, continuing to buy games on the Xbox One isn’t a risk. As long as the game has Smart Delivery, you’ll be able to play the upgraded version of that game if you do decide to get the next-gen Xbox.

By itself, Smart Delivery is a neat bonus and a bit of reassurance for potential buyers – but paired with full backwards compatibility, and the Xbox as a platform becomes much more appealing.


Reaching everyone with Xbox — whether they have a game console or not.

Microsoft

“There are 2 billion people who play video games on the planet today. We’re not gonna sell 2 billion consoles,” Spencer told me in an interview in June 2018. “Many of those people don’t own a television, many have never owned a PC. For many people on the planet, the phone is their compute device. It’s really about reaching a customer wherever they are, on the devices that they have.”

That’s where Microsoft’s Project xCloud comes in: A Netflix-like video game streaming service that enables Xbox games to run on whatever device, as long as you have a strong and stable internet connection. It’s Microsoft’s answer to Google’s Stadia and Amazon’s yet-to-be announced game streaming initative.

But Microsoft has an ace up its sleeve: An already very successful service named Xbox Game Pass.

The service offers a curated library of over 100 games, and it cost just $US10 per month. Moreover, every major Xbox game published by Microsoft, from “Halo” to “Gears of War” to “Forza Motorsport,” is published to the service at launch as part of the library.

It’s widely regarded as one of the best, if not the best, deals in gaming. Those games must be downloaded, but Microsoft has repeatedly indicated that it will pair Game Pass with xCloud.

“Later this year our cloud game streaming technology, Project xCloud, will come to Game Pass – so you and your friends can stream and play the games you love together on your devices,”Spencer wrote on the Xbox blog in late April.

That combination could create a true “Netflix of gaming” service that could propel Microsoft’s Xbox platform to many, many more people – maybe even billions.


Microsoft is taking a page from Apple’s iPhone strategy with Xbox, and it’s a brilliant move.

Christian Petersen/Getty Images

In terms of sales, Apple is primarily a smartphone maker – the vast majority of its revenue comes from people buying smartphones.

Beyond the fact that Apple makes very nice phones, the company has an insidious way of keeping iPhone users loyal to the iPhone: the Apple ecosystem. If you’re using Apple Mail, and Apple Music, and Apple Podcasts, and Apple News on your iPhone, chances are you’re not switching to an Android phone anytime soon.

Microsoft is creating a video game version of that ecosystem with Xbox, which includes Xbox Game Pass for a game library, Project xCloud for streaming that library to whatever device, Xbox Live for online multiplayer, Mixer for watching game streams, and a robust system for bringing all your digital games forward from previous consoles.

It’s a brilliant move that makes a strong argument for the Xbox platform – whether you buy the new Xbox console this holiday or not. And if you don’t want the Xbox Series X, Microsoft still has an Xbox for you: The company doesn’t care, as long as you’re using some or all of those services.

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