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Xbox One: Where it all went wrong, and how Microsoft ignored the warning signs.

Before February 21st 2013, most commentators would have pitched Microsoft to lead the next generation console battle. Xbox had been the number one selling HD console in the USA for nearly three years straight and Microsoft had been secretly touring publishers and developers, selling a strategic vision that would unify all of the entertainment experiences in the average household (music, streaming video, TV and games).  But even as early as late 2012, the signs were there that gamers would reject that vision – Microsoft arrogantly chose to ignore those the signs, leading to some stunning strategic blunders that could cost them a market they’ve invested billions in.


Fast forward to today and Sony ended 2013 with 1.3 million more console sales (over a third more than Xbox One) and – perhaps more embarrassingly – Microsoft had over 900,000 Xbox Ones sitting unsold in the retail channel. That’s nearly $450 million in stock at the recommended selling price, an astonishing figure. Worse yet, January’s NPD sales figures showed Xbox One had fallen off a cliff – sales tumbled to 140,000 units despite good stock availability at retail. By contrast, PlayStation 4 sold 271,000 consoles, nearly twice as many as Microsoft, in the same month while being largely sold out at retailers across the USA. Consumers arriving in stores to buy a PS4 clearly didn’t consider Xbox One a viable alternative.

Worse yet, a raft of games have looked better on PS4 – top gaming franchises like Call of Duty, Tomb Raider, Assassin’s Creed and Battlefield all run with a perceptible performance advantage on PlayStation 4.

So, what went wrong? The truth is, Sony’s now-infamous reveal event shook Microsoft and the wider industry – rumours were rife that the Xbox One reveal was pushed back after that event and that Microsoft scrambled to assemble their response. But in reality, the current console war may have been won before a single game was played or any of the now-customary console press conferences even had a script. Sometime just before February 21st 2013, the game may already have been over. A battle lost on something as simple as RAM chips, with Microsoft subsequently alienating it’s customers to bang the nails into Xbox One’s coffin in the months that followed. The miss-reading of their customer base has been, in short, staggering.

But it might not has been this way – had Microsoft‘s execs had their ear to the ground (or even some of the web’s bigger gaming communities and forums) they would have seen signs trouble was brewing before Sony played a single card in their deck. In 2012 a hacker called Superdae managed to insert his own details into a Microsoft developer portal – as a result he received an early Xbox One development kit and revealed some facts from the associated documentation that caused alarm throughout the hardcore gaming community. Three themes were common in the reaction of gamers:

  •  They didn’t like the fact the console would ‘require’ an internet connection to function
  • The inclusion of a Kinect sensor in every box was seen unnecessary – Kinect had never proven itself useful to the majority of gamers
  • The system seemed less powerful on paper than many were expecting – but included customisations that made it hard to be categorical on this point.

Amazingly, despite what amounted to a huge ‘free’ focus test, Microsoft chose to ignore this early feedback (lets not pretend they don’t invest in the social media analytics available to all big brands). In May they revealed a console that required an online connection at all times to function, came with a Kinect sensor and they deftly avoided being specific on technical features like the console’s power. Worse yet, the console would use its online connection to prevent the resale of games. This ultimately led to an amazing about-face after one of the most embarrassing E3’s in living memory. All of that could have been prevented had Microsoft simply dialled into the audience that made Xbox a viable console to begin with – the core gamer. 

Microsoft gambled for a broader audience with Xbox One, in the process forgetting that the early adopters (and most vocal advocates) in the console market were the people who played games, not the wider audience that might use the system to watch Netflix on the TV.

Ironically, it may simply have been that Microsoft’s vision was indeed grander, but ultimately that cost them dearly.

In the early days of planning for Xbox One (or Durango as it was known in early tech document leaks) Microsoft had several key objectives – the console would have to run games and apps and connect these experiences. It would need to multi-task and multi-tasking meant memory and lots of it. So an early design goal was 8GB of ram. This would be enough to run games and apps side by side. Needing this much memory meant DDR3, commonly used as the system memory in personal computers, was chosen – it was affordable but didn’t offer fast bandwidth to feed a next generation graphics processor with the information it needed to run next generation games. The solution to this issue was something called ESRAM. ESRAM would be placed on the same silicon die as the graphics processor (GPU) and main processor (CPU) – all of these would be combined into one chip.

ESRAM was, on paper, a sensible choice. It offered a fast ‘scratch pad’ of memory to keep the graphic processor fed – and a similar approach had been used on Xbox 360. Crucially though, the ESRAM would take up valuable room on the chip – leaving less room for the graphics processor.

Keep in mind here that both Sony and Microsoft had some basic restrictions – they both wanted to launch in a similar time-frame and both wanted to launch at less than $500. This meant that the chip vendor both console manufacturers had chosen (AMD) couldn’t simply make the Xbox One chip bigger – the silicon budgets both consoles had would be the same (and indeed, the physical size of the chip in both consoles is similar).  Xbox One simply had less room on the chip for graphics processing elements and the dual-memory set up was something developers would need to spend time learning and optimising.

This was strike one in the battle. Strike two came in the form in Kinect. The first Kinect had opened up a new market for Xbox – while the core gamers that flocked to Halo and Call of Duty bought a lot of games and console, the Nintendo Wii proved that if you could tap into the wider family audience then there was a lucrative market to be had.

Kinect was Microsoft’s answer to Wii – and Wii was an answer to the complexity of modern video game controllers which Nintendo argued were a barrier to the non-gamer audience.

Kinect was a hit with the family audience Microsoft craved and so became essential to its vision for Xbox One. The problem was, the first Kinect wasn’t very accurate – limiting its use to a few gaming genres and ‘neato’ experiences.  Microsoft retooled the sensor for Xbox One, resulting in a device that is undeniably better – but still not 100% reliable in use. Unfortunately the new sensor adds significantly to cost of Xbox One and consumers have no choice as to whether they buy it – its included in the box.

The outcome of these decisions? In comparison to PS4, the Xbox One has a weaker graphics processor, is more complicated to program for and costs more to produce and sell.

By contrast, Sony’s console – in early rumours at least – was going to be fast but with less memory, leading many to believe that the system might lag behind Xbox One in the performance stakes. All that changed in a moment that shook the industry during Sony’s PS4 reveal event. just a few words must have struck Microsoft’s Redmond HQ like a lightening bolt when Mark Cerny (PlayStation 4’s lead system architect) uttered them on February 20th 2013. “8 Gigabytes of GDDR5.”

GDDR5 is very fast ram. Until Mark Cerny announced the final amount in the console, most developers had been told to expect 4GB of system memory. However Sony, in essence, lucked out.

When higher density GDDR5 chips became available, all the console maker had to do was swap one set of chips for another in its design – instantly giving PS4 a large, single pool of high speed memory to feed its graphics processor.  This set up is easier to program than Xbox One – meaning developers can spend more time on things that make a difference to the ‘feel’ of a game rather than simply getting it running to begin with.

This advantage is compounded by the PS4’s GDDR5 memory not taking up space on the graphics chip – meaning for a similar silicon die size and cost, Sony can dedicate more real estate to graphics.

The upshot of this is that developers have broadly praised the console, gamers have championed Sony and the box costs $100 less than Xbox. The proof of this pudding is being seen by over 4 million PS4 owners on their own TV’s all around the globe.

Microsoft are between a rock and a hard place – their console is simply not as good at running games and costs more. Even the much-hyped Titanfall – a game that has had the full force of Microsoft’s marketing machine thrown at it, doesn’t run at 1080p resolution.  The options are stark…

Even if the price of the Xbox is cut to match PS4’s $399, the console is simply not as powerful. PS4 has a qualitative advantage that the most vocal parts of the audience are very warm to. Even with this change, Sony still has the option of selling at a higher price due to the tangible advantage it can point to in the gaming space, or simply stomaching a much smaller cut and still being both cheaper and more powerful.  If Microsoft take out the Kinect Sensor (which has yet to prove it’s worth to gamers) then it loses the only point of differentiation beyond what’s under the hood.

The lesson is simple – and one that gets taught to pretty much every business student attending Marketing 101. Know your audience, understand their needs and identify the opinion leaders and formers that will evangelise your product. Microsoft, if the situation doesn’t change, will have no choice but to discount heavily, thus further alienating investors that question the validity of Xbox and the entire entertainment and devices division of which it is a part.

The questions this author is left with though:  How is the senior team at Xbox still sitting in their plush glass offices after making so many strategic blunders and ignoring such a vital part of the market for their product?  It’s hard not to find the “We’re all about the gamers” message belatedly trotted out in the second half of 2013 as face-saving rhetoric, aimed at clawing back mindshare from Sony.

And who at Microsoft will bank roll this device out of being steamrollered in the market?

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