Customer Focused strategy for Microsoft's Xbox
...ndence on Microsoft in the PC business. In-house manufacturing of crucial parts at Sony and Nintendo mitigates interdependence and standard, non-key parts can be purchased from different, competing sources thus decreasing supplier power. Complements and substitutes The most important complements for game consoles are games. Although current consoles have somewhat different technical characteristics they have more or less the same perceived performance from the customer¡¦s point of view. Since with technical development consoles became commodities, the games associated with the brands turned out to be the differentiating factor. Game consoles cannot be successful without a wide choice of strong games. All the platforms have most of the basic game types but the most popular game characters (like Mario or Parappa) are proprietary to one platform. Add-ons, accessories (like adaptors, storage or control devices) are important complements as well because they constitute a high margin business and console producers can lock in customers by using proprietary design. Theme films, collectibles and other accessories can mutually increase console, game and complement sales and leverage the existing brand equity of the strongest element. For example Pokemons started as a Nintendo game but their success inititated a series of films, toys and other accessories largely increasing Nintendo¡¦s sales. On the other hand in the case of Shrek the films popularity helped to sell the game. Console producers and game developers are interdependent but the control is in the console producers¡¦ hands. They are more concentrated, financially stronger and they can control the value chain through sales and distribution channels. Console producers can secure their power over game developers by relying on their in-house game development capabilities and their investments in game development companies. Exclusive partnerships however are not easy to build since software companies worry about the dominance of one manufacturer. The closest substitutes to console games are PC games. Console games however are easier to optimize for the underlying infrastructure because of the uniformity and relative stability of the platforms they are written for and therefore give superior results in their game categories. Other leisure activities are more distant substitutes but their substituting power rises as customers¡¦ age increases. The most addicted gamers are in the age group between 14 to 35 years. The design of the Xbox is very similar to that of other consoles in that it is completely specified and cannot be expanded by the final user (no expansion slots or add-in cards). This guarantees stability and robustness to software developers, ensuring efficiency and reliability while developing and testing new software. But, for Microsoft, this solution has additional benefits: the PC components used in the Xbox will continue to evolve (at no cost) and potentially provide Microsoft with a low development cost new, higher performing version of Xbox in due time. MICROSOFT¡¦S MARKETING STRATEGY Marketing mix The move to the game console market is a key part of Microsoft¡¦s strategy to ¡§steer the digital entertainment revolution¡¨. The launch of the Xbox was strongly backed up by its technological superiority, and a financially strong marketing strategy. In the effort to build its brand awareness and induce first trial, Microsoft was willing to commit a marketing spending of AU1 billion including an integrated distribution drive, a promotion and communication campaign clearly targeting teenagers and young adults. The Australian launch before the 2002 Christmas season was characterized by: ¡P a bundled product offering: a console with 19 games including the path breaking ¡§Halo¡¨ and ¡§ Project Gotham Racing¡¨, ¡P matching pricing: console is set at AU 499$, parity to Sony PS2; ¡P extensive distribution policy: first product release to over a thousand retailer, including Toys ¡¥R¡¦ Us, electronic distributors, etc. ¡P promotion/communication by Microsoft ¡P teamed up with Taco Bell to promote Xbox on a TV commercial and set up displays in 750 restaurants in Australia; ¡P launched a road show teamed up with Coca Cola visiting outdoor music festivals and street fairs where people could test the Xbox system; ¡P joined as sponsor of Van Triple crown series (other sponsors are PepsiCo and Rolling Stone magazine targeting younger customers as well); ¡P replaced Sony in a contract with skateboard outfitter Vans to promote Xbox among young people; ¡P some in-store setups enabled customers to test the system, and detect the superior image quality compared to PS2. Xbox¡¦s Japanese and European launches started in the Spring of 2002, following the initial positive sales results in the US. The following price cut (Dec, 2002), following lower than expected sales in these markets, demonstrated the effort that Xbox is seeking to broaden its consumer base by targeting more price sensitive customers. The AU price was cut from $599 to $399. Introduced one year ahead of Xbox, Sony PS2 have sold more than 30 million consoles compared to Xbox¡¦s 4 million. The larger installation base means a bigger market potential for game developers standing for a well-established game player community who share game software and exchange game playing experience as well. Xbox is facing the challenge to get adopted by a gaming community by reaching critical mass in a short period of time. Expected market response We anticipate that the market will evolve along with the key player¡¦s effort in managing market expectation and building customer perception on their own products. Customer expectations and console perception over time In the video game industry, customer expectation is shaped by the communication and marketing efforts of the different players. Given the very similar characteristics of previous generation consoles (PS1 and Nintendo 64), marketing had a very big impact on customer expectation, actually shaping this expectation to match the performance level of existing hardware and software. The perception of the consoles is S shaped to reflect the learning curve of game developers who take advantage of enhanced console features over time. Customer expectations show an upward trend due to the impact of the PC gaming market acting as a moving target for the console market. The short life cycle and fast performance improvement in PCs translates into improved gaming experience and thus influence the expectations of the console gamers. The launch of the PS2 by Sony has been a real marketing stunt: the hype around the console was tremendous and players¡¦ expectations were constantly teased. Sony¡¦s strategy may have been to increase the slope of the customer expectations to kill the previous generation consoles already at the end of their life cycle. Sony¡¦s advertising revolved around a parallel universe, no screenshots of games were displayed to emphasize the immersion in the universe and make customer demand as high as possible. We believe that the result of the launch of the PS2 was to shift the customer expectations upward. The rush on the console and its initial scarcity emphasized this aspect and pushed the curve during the first year further upward. As more people were able to test the console, it¡¦s perception improved with respect to its exclusive touch and not only the gaming experience delivered. This point explains the inverted bell shape of the PS2 perception curve. Microsoft tried to approach the console market from the high-end. The attributes of the Xbox made it the top performer in the console market; its initial price point above the PS2 was in line with its technical superiority. Xbox¡¦s one-year time lag after PS2 allowed Microsoft to play on the belief that ¡§the newer the better¡¨. The commitment of Microsoft in developing games and the particular software architecture of the Xbox reducing lead-time in game development explains the shorter time required to reach peak perception. Comparative surveys among young video game players about their perception of the PS2 and the Xbox gives controversial results: for the moment, players see no difference in the console itself (excluding the price tag), they have no particular expectation in term of console but are waiting for the forthcoming releases of a new games that are expected to yield superior gaming experience. As for the perception or gaming experience of currently available games, replies are very unclear and seem to depend on a community based consensus largely shaped by a strong opinion leader. In conclusion, players¡¦ expectations are still raising, maybe at a slightly higher speed than previously, due to the combined effect of the communication campaign from Sony, Microsoft and Nintendo. Despite the increasing trend, it is very unclear if this expectation curve is above the perceived performance delivered by PS2 or Xbox. An evidence of this would be the success of the GameCube from Nintendo targeting the lower end of the console market, which sold 400,000 units during the first week of its commercialization. Microsoft marketing needs to make sure that customer expectations are very quickly rising. To succeed, the Xbox will have to demonstrate superior game play and pos...