The Xbox 360 vs. the Public Good
Is the Xbox 360 hurting the gaming industry?

by Nich Maragos 2.25.2006

It would be hard to get Peter Moore to admit it, try as you might, but it's pretty clear that the Xbox 360 launched a little bit before the system was ready. The certification process for 360 games came right down to the wire, in some cases leading to games being pressed before they had technically passed. Manufacturing rates for the actual consoles weren't at the level Microsoft had wanted, leading to shortages that are still in effect as of this writing. And depending on who you believe, the early launch means that the system's specs are below the PlayStation 3's -- although, given how long it takes for developers to get comfortable with a new hardware generation, whatever differences exist likely won't become apparent until well into each system's life span.

More important, though less remarked upon, is that the Xbox 360 was also launched before the industry was ready. If you pay attention to companies' end-of-year financial reports, which I'm sad to say my job requires me to do, one thing that stands out in the postholiday reckoning was the statement, again and again, that the Xbox 360 launch had hurt sales across the industry.

A few examples: Electronic Arts CFO Warren Jenson says he doesn't "see getting to the installed base numbers we expected & causing some people to stay on the sidelines."

Faster! Faster!

Atari chairman and CEO Bruno Bonnell notes, "As we anticipated, during the holiday season the industry felt a depressed demand for current-generation titles at retail and, as a result, publishers will need to strategically address the marketplace, balancing titles across multiple consoles as well as portable devices." NPD Group numbers for the year indicate that current-generation game sales were indeed down 12 percent, bearing out the executives' claims.

The clearest voice articulating the effect is Wedbush Morgan Securities analyst Michael Pachter, who went on a doom-tinged tear in January, claiming that 2006 game sales would be off by 3 percent in part due to Microsoft's lunge. "Most troubling to us was the fact that the rate of decline was especially acute, down 21.6 percent, during the September-to-November period, a time that coincided with the hype surrounding the launch of the Xbox 360," says Pachter. "We believe that sales may have been even worse in December had Microsoft continued its marketing push, and believe that sell-through was helped in part by deep discounting of new releases during the month."

So it's fair to say that Microsoft's early launch had a negative effect on the industry as a whole. Which raises a question: Was the rush to market irresponsible, or just good business? After all, the likes of J Allard, Peter Moore, Steve Ballmer, and other Microsoft/Xbox higher-ups have frequently said that the "first-to-market advantage" is a major piece of the company's arsenal against Sony in this round. Indeed, one reason the company was constantly playing catch-up during the current generation was because Microsoft's system wasn't even announced by the time the PlayStation 2 had wowed everyone with its Japanese launch -- so getting the jump on Sony and beating it at its own game was important in the establishment of the 360.

The question ties into the concept of "public good," an intangible that's balanced against "private good" in decision making. Writer David Foster Wallace explains it in his essay "Host," which is about right-wing talk radio, like so:

"Suppose that I am the conservative and rabidly capitalist owner of a radio company. I believe that free-market conservatism is Truth and that the U.S. would be better off in every way if everybody were conservative. This, for me, makes conservatism a 'public good' in the Intro Econ sense of the term -- i.e., a conservative electorate is a public good in the same way that a clean environment or a healthy populace is a public good.& In other words, I alone would have paid for a benefit that my competition could also enjoy, free. All of which plainly would not be good business & which is why it is actually in my company's best interests to 'underinvest' in promulgating ideology."

In this case, Microsoft is underinvesting in the public good of maintaining a stable and growing market in general -- something that its rivals Nintendo and Sony could also benefit from, resulting in resources spent to further its competitors' goals -- and putting its own interests first.

The move seems to have worked. Sony talked at E3 2004 about its desire to create a 10-year life span for the PlayStation 2, following the successful eight-year run of the PS1. After all, the PS1 was originally introduced in 1994 in Japan, and it wasn't until 2002 that the Official U.S. PlayStation Magazine proclaimed The Italian Job "the last great PS1 game." But Microsoft's eagerness to abandon the current generation in favor of getting everyone on board its next-generation console has short-circuited the natural life of the PS2, and already this month OPM is asking if Black is "the last great PS2 game?" a mere six years after the console's debut.

General Pyrrhus sez: Think carefully about winning at any cost.

You can't really fault Microsoft for that, because that's capitalism for you -- a deeper-seated issue than this essay has the scope for. But I submit that the rush to a new generation was a bad idea anyway, not so much because it weakened the market but because it weakened its own position. Microsoft, after all, was also a victim of the market -- those were Xbox titles suffering right alongside the PS2 and GameCube games on shelves. Furthermore, the 360 production issues caused by the rush to launch have impacted the one reason Microsoft had for going ahead with it in the first place: that key first-mover advantage.

As Michael Pachter says, "In our view, Microsoft did a phenomenal job of marketing the Xbox 360 and created unfulfilled demand for several million hardware units over the holidays. As we move into 2006, we think that consumers will begin to consider deferring purchases of Xbox 360 units once a launch date for the PS3 is announced (we expect an October launch)." In other words, the longer it takes for Microsoft to deliver more product onto shelves, the easier it'll be for all those consumers to just wait a little bit longer until Sony is ready.

The console war is an all-out fight, not an honorable duel at 10 paces, and Microsoft has to grab every advantage it can if it wants to win. But if it's going to change the rules and spin around after the seventh step, it had better make sure its powder is dry, because the element of surprise only lasts so long before Sony begins returning fire.