AUG. 31, 2007 • In the console hardware battle one of the key distinguishing features is software that is exclusive to a particular platform. Therefore, DFC Intelligence is taking a close look at the software development efforts of Sony, Microsoft and Nintendo. This month we are focusing on the Microsoft Xbox 360 and titles being developed for the platform by Microsoft Game Studios.

When Microsoft entered the video game hardware market back in 2001, they made sure to have a major focus on developing software that was unique to the Xbox platform. Microsoft Game Studios was the in-house subsidiary formed to create games that could be exclusive to Microsoft platforms. In developing exclusive games for the original Xbox, Microsoft initially followed Sony’s strategy of focusing on a broad range of product genres. Instead of focusing on a handful of blockbuster hits like Nintendo, Microsoft tried to create a diversified lineup of games for all tastes.

For the initial Xbox, Microsoft was very successful in its diversity goal, but with a handful of notable exceptions, sales for most of its in-house titles were, at best, mediocre. Instead, Microsoft Game Studios found itself best known for one property that stood far above the rest: Halo. It’s hard to remember that this action title first saw light of day at the New York MacWorld convention in 1999. Back then Halo was slated for Mac and PC release. That was before Microsoft acquired Bungie Software in 2000 for about $50 million, and subsequently shifted Halo to the Xbox platform. No Xbox title came anywhere close to this best-selling launch title in terms of sales, until Halo 2 was released at the end of 2004. Halo 2 was backed by a massive marketing campaign and Microsoft claims that its first day sales of $125 million were higher then any entertainment product ever. Together the two Halo games sold nearly 15 million units on the original Xbox.

Therefore, it is no surprise that Microsoft has placed much of the Xbox 360’s fortunes on the shoulders of Halo 3. Microsoft is hailing the September 25th launch of Halo 3 as the “biggest entertainment event of the year.” The Halo franchise has helped make the Xbox platforms the system of choice for many fans of the first-person shooter (FPS) genre. This was further solidified with the success of the Microsoft Game Studios FPS Gears of War from Epic Games that was released in holiday 2006.

However, DFC Intelligence estimates that fans of FPS games make up less than 20% of the potential audience for a game system. For Microsoft to sell a game system at the levels of Sony or Nintendo they need a diversified product lineup that distinguishes itself from the competition. As increasing pressure has been put on Microsoft’s Entertainment divisions to turn a profit there have been some cutbacks in Microsoft’s internal game development, as well as funding of external projects. For example, Microsoft started a major Xbox sports game initiative in 2003 only to sell much of it off a year later. Something similar occurred a few years earlier with Microsoft’s PC sports initiative that included Microsoft NFL Fever 2000, Microsoft Baseball 2001, and Microsoft NBA Inside Drive 2000.

The strategy of Microsoft Game Studios today seems to have switched to the Nintendo strategy for the Nintendo 64 and GameCube where the focus was on massive hit franchises as opposed to product diversity. Right now Microsoft Game Studios has a big franchise in Halo and two potentially long-term franchises in Gears of War and Fable (both products which have yet to see a sequel). They also some smaller franchises that have fairly strong long-term potential in Project Gotham Racing, Forza Racing and Viva Pinata. In a final assessment, Microsoft’s first-party publishing, outside of the FPS genre, is clearly behind the internal development efforts of Sony and Nintendo. Nevertheless, when third-party software is also taken into account, the Xbox 360 clearly has a very competitive product lineup through at least holiday 2008.

DFC Intelligence has always said that there will tend to be a tendency towards releasing multiple versions of a game platform as hardware manufacturers try to make their game systems about more than just games. We have also said if a multiple SKU approach is not done carefully it has the potential to be disastrously confusing to consumers.

Microsoft has definitely decided to take the multi-SKU approach with the Xbox 360, and we must say: we are a little confused. Compared to the PlayStation 3, the original Xbox 360 came with a small hard drive, no built-in Wi-Fi and no HDMI connection for advanced high definition display. Even worse, the Xbox 360 has suffered from some major over heating problems that caused Microsoft to take a $1 billion plus write-off. Future Xbox 360 versions will have the new Zephyr circuit board, use a 65 nm manufacturing process and have other features that may help solve the meltdown issue.

To try and help sort things out in our mind we created the below chart to summarize the different versions of the Xbox 360. Unfortunately we are still a little confused. This is especially true because we are not sure when the current SKUs may be replaced by a SKU that solves some of the heating issues. This is an ongoing process and involves clearing out existing Xbox 360 inventory. In other words: buyer beware.

To summarize some of the more complicated issues:

1) The Xbox 360 Zephyr circuit board comes with HDMI.

2) The Elite SKU was first with the Zephyr board.

3) The new Xbox 360 Pro w/ HDMI comes with Zephyr and will be first with extra passive cooling.

4) The only way to distinguish the new Xbox 360 Pro SKU is by the HDMI sticker on box.

5) The original Elite Zephyr boards did not ship with extra cooling.

6) It may be assumed that the new Xbox 360 Halo 360 SKU will include extra cooling as it will follow the new Xbox 360 Pro w/ HDMI.

7) We are not sure whether there will be new production of Elite that will add the cooling fix.