Microsoft Pulls A Wii U With XBX1

Phil Spencer, corporate VP, Microsoft Game Studios, introduces the Xbox One S.

Phil Spencer, corporate VP, Microsoft Game Studios, introduces the Xbox One S.

JUNE 20, 2016 • The biggest E3 surprise of 2016 was clearly Microsoft Corp. announcing a new console system for release in holiday 2017. It was no surprise that Microsoft was working on something like what is now officially known as Project Scorpio. Rumors about such new hardware are always floating in the air and are what drive excitement in the game category. The surprise was that Microsoft announced Project Scorpio at the same time they announced a fairly compelling new version of their existing Xbox One console, the Xbox Slim which will release August 2016.

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Formally announcing a new game system a year and a half before launch is not unprecedented. Most infamously it was done by Nintendo with the Wii U at E3 2011. Like what Microsoft is doing, Nintendo announced the Wii U a full year and a half before it launched in holiday 2012. Unfortunately for Nintendo it not only killed sales of its existing Wii system but it allowed for time to dampen enthusiasm for the Wii U and allowed the competition time to leapfrog Nintendo.

It is no secret that Xbox One sales are struggling and it doesn’t help that there is a great deal of inventory to clear out before the new Xbox One Slim is introduced. However, the bigger issue is like with Nintendo and the Wii U, Microsoft has extremely fuzzy messaging across the board. For many consumers there was confusion up to the time of the Wii U launch about whether the console was a new system or an upgrade. The same confusion is already manifesting itself with Project Scorpio.

On one hand Project Scorpio is touted as the most powerful console ever. On the other hand Xbox boss Phil Spencer said in an interview with Eurogamer that for the average game consumer without a 4K TV Scorpio does not provide any benefit…. Specifically Spencer said, “Scorpio is designed as a 4K console, and if you don’t have a 4K TV, the benefit we’ve designed for, you’re not going to see.”

Of course, a day later, Spencer changed tack somewhat in an interview with Giant Bomb:

“If you look at a game like Halo 5, it implements something called dynamic scaling, so as scenes get more complex, in order to maintain 60fps they will actually change the resolution that you’re running at. And that’s not the only game that does this. So then if you run that game on Project Scorpio you’re actually going to be at the max frame rate of that game more often. I’m not going to put that as a top-selling feature of Scorpio because not all games use dynamic scaling. I’m trying to be transparent with people about where we are in the design of Project Scorpio and what it was designed for. It was designed in order to enable these high-fidelity 4K experiences. So some of the existing games will actually run a little better if they’re using dynamic scaling, but I wouldn’t buy Scorpio to run your existing library of Xbox One games.”

PlayStation 3.

PlayStation 3.

This type of inconsistent messaging is also the problem Sony Computer Entertainment had with the PlayStation 3. In 2006, Sony was positioning the PS3 as a high-end system for a high-end home theater audience. At the time DFC was highly critical of Sony and our analysis proved to be correct. The number of gamers that are interested in and/or willing to pay for a high-end home theater experience is a subset of a subset. The problem Sony faced was that the larger number of gamers who just wanted a low cost gaming system bought a much cheaper Wii or Xbox 360. This clearly left Sony going from first to worst as DFC predicted.

The most immediate problem is Microsoft effectively killed the Xbox One Slim right out of the gate. If there were many Xbox 360, Wii U and even PlayStation 4 consumers interested in an Xbox One this holiday season they have now been told to wait until Scorpio arrives in 2017. Microsoft can only hope that the buzz around Project Scorpio goes away soon but with the cat out of the bag that is unlikely. Every 10-year old kid into games will hear about the cool new Project Scorpio and start saving up their money. Of course, by the time Scorpio actually launches they will have likely grown up and onto the next new thing. The one positive to note is that unlike Sony with the PlayStation 3, Microsoft did not yet announce a Project Scorpio price that would scare consumers away.

There are all kinds of other problems with Microsoft’s mixed messaging. Microsoft is changing its model where the console is becoming a subset upgradeable PC platform with little exclusivity in content or experience. The pricing on the original Xbox One is great, and the Slim is wonderful, but all the important new games will be on PC via the Play Anywhere program, so why invest in a console, just upgrade your PC. And if you do want a console why buy now when Scorpio will be here later. All of this is a net dampener on new hardware sales now and really opens the door wide open for Sony and even Nintendo for the NX.

To be fair, Sony Interactive Entertainment has a similar issue with the upcoming PlayStation 4 Neo. Yet by choosing not to promote details of this higher performance PS4 at E3, consumers are left guessing somewhat. Furthermore, Sony is not introducing a Slim model this fall that can be scuttled. The dynamics are also different since the PlayStation 4 is leading in market share this cycle by a large margin, which makes up for a lot in consumer demand. Lastly, many PS4 titles are published for the PC, but Sony is not embarking on a business model of console/PC content equality. There is no doubt that the PlayStation 4 retains exclusivity as a platform.

Xbox One S.

Xbox One S.

Of course the biggest issue is whether Microsoft will even have a game division by the time Project Scorpio launched. It is no small irony that the E3 events went on at the EXACT same time as Microsoft CEO Satya Nadella was announcing the $26 billion acquisition of LinkedIn. This was by far the largest Microsoft acquisition ever (three times the size of Skype in 2011) and has nothing to do with the game business.

When the PlayStation launched Sony was a more diverse company trying to use its game system to promote Blu-ray. Now Sony is a smaller company and the PlayStation brand is its most successful product line. PlayStation is now the tail that wags the dog and former games head Kaz Hirai now runs all of Sony. On the other hand, with Microsoft, the game business is the ugly step-child that somehow must integrate with the company’s operating system strategy.

The overall question now seems to be not if Microsoft will exit the game business, but when and how. Of course, that leads to many other questions such as how is exiting the game business handled? Is Xbox spun off? Does Microsoft find a buyer? Or does the company just shut Xbox down? DFC feels the latter option will most likely not occur but it is clear something must be done. Unfortunately the value of the Xbox brand is in serious flux with much of its advantage tied to the Microsoft Windows 10 operating system. How Microsoft looks to manage its position in the game industry will be interesting……stay tuned!