Microsoft's Xbox facing crucial Xmas sales test

By Bernhard Warner

LONDON: Industry observers say that Microsoft's video game console Xbox needs to end its first year with a flourish. If it doesn't, they point out that, its prospects for turning a profit will be pushed back a few years, triggering some deep soul-searching at Microsoft headquarters in Redmond, Wash.

"If Microsoft has a disastrous Christmas, particularly in important markets like the UK and the U.S., then somebody in Redmond is bound to say, 'Wait a minute guys. This doesn't look good," said Toby Scott, editor of video game trade publication 'Games Analyst.'

Industry experts are quick to point out the $30 billion video game market has never supported three consoles, noting that Dreamcast maker Sega Corp. of Japan, gave up the console business when it couldn't compete. While the market is now bigger than ever, rivaling music and film box office sales, one elemental truth remains. Without a large installed base, developers are less inclined to create exclusive games for a machine, making profits elusive.

A poor Christmas won't sway Microsoft's commitment immediately, but with estimated losses of anywhere from $76 to $150 on each Xbox, its prospects for being able to stay in the market long-term will look a lot murkier if it fails to capitalise on what could be the industry's biggest sales periods ever.

Red-faced in Redmond

Early Xbox sales sagged below expectations, forcing Microsoft into embarrassing back-to-back price cuts within a four month span, the last of which was last month. By many accounts, European demand for the Xbox has rebounded in line with rivals, but it still trails market leader Sony Corp's PlayStation 2 and Nintendo's GameCube in what's becoming an increasingly important region.

Market research firm ScreenDigest reported last month that Sony, Nintendo and Microsoft would sell 14.2 million units in the Europe, Middle East and African regions this year, 28 percent above the industry's previous best year of 1998. Of those, Microsoft will sell 1.5 million Xbox machines, ScreenDigest is forecasting.

Click here for buzz

What Microsoft needs now is to generate some good old-fashioned buzz for Xbox, a machine that gamers say is as sophisticated as any ever put on the market.

To that end, top Xbox executives, including Xbox's General Director Jay Allard, will brief the media in Spain on its upcoming Christmas plans, discussing new game titles and other product launches. At the two-day event this week, Microsoft is expected to announce the European plans for Xbox Live, its online gaming service.

Though the market is minuscule at the moment, online gaming is seen as a crucial growth area as console makers and games publishers look to derive additional revenues by charging gamers subscriptions for multi-player action. Industry observers have speculated Microsoft's European Xbox Live launch would happen before Christmas.

With a built-in Ethernet card and hard drive, Xbox is the only one of three consoles to be Internet-ready "off-the-shelf." Microsoft is likely to pound this advertising message hard in the coming months, one analyst said. "They're going to want to capitalise on that. It's a way to differentiate themselves in the market," the analyst said.

However Microsoft will be trying to get its message out amid a blizzard of video game adverts this autumn. Sony has pledged to spend 100 million euros ($98.04 million) to plug the PlayStation 2 console and games in the second half of the year throughout the PAL-TV regions of Europe, Australia and the Middle East.

Got any games?

One glaring concern over the Xbox is its relative lack of exclusive game titles. Sony for one has buttoned up long-standing relationships with top games publishers such as Eidos and Electronic Arts, guaranteeing it a steady flow of exclusives.

As a result, Microsoft has been looking to buy independent game developers to more quickly build up its catalogue of exclusive games, industry sources familiar with Microsoft's plans have said. The sources have said Microsoft is on the brink of acquiring British games maker Rare Ltd, a deal that has been held up for weeks while Rare unwinds its ties with Nintendo, a longtime customer and investor in Rare. Officials from Microsoft, Nintendo and Rare have declined to comment on the matter.

Industry observers, meanwhile, note that the competition to secure exclusive ties with developers and games publishers has pushed up their potential sales prices to unprecedented levels. Reports have put a Rare sale price at over $400 million, several times what similar sized developers fetched in previous years, creating large potential costs for Microsoft.

"If the only way Microsoft can get a big exclusive title is by buying the developer, that's not a viable business model," said Scott.

(C) Reuters Ltd.