The battle for the title of “#1 selling next-gen console” has already begun, and Microsoft faces a huge challenge from Sony. Yes, both companies can be successful with new consoles even without being the sales leader in either the US or worldwide. But there's always bragging rights to consider, and game company employees tend to be more competitive than most. We're going to see companies keeping score over the number of consoles sold this holiday season, and telling the world about it.
Both Sony and Microsoft are, of course, already well into their strategies for success. Both companies have finalized the engineering of their consoles and are in manufacturing right now. Game development has been under way for years, and the development schedule is pretty much set for the next year or so. Marketing plans have been drawn up, materials created, and marketing is already rolling out. Given all of that, what can Microsoft do over the next year to improve the Xbox One's chance to be the #1 console?
Here are some strategic ideas that Microsoft could implement over the next year in order to boost the numbers of Xbox One consoles getting into the hands of consumers. While some of these ideas might be difficult or unlikely, keep in mind that Microsoft has already displayed unusual speed and flexibility this year in changing policy for the Xbox One on more than one occasion.
Reduce the price
Microsoft has already conceded a major advantage to Sony with the pricing of the Xbox One at $499 compared to the PlayStation 4 at $399. Yes, Microsoft made a carefully considered decision that the inclusion of the new Kinect was worth the higher price, and there will be a great deal of marketing effort to convince consumers of that. Still, for the consumer who comes in without much knowledge, the lower price will be more attractive. Surveys and relative pre-order numbers have borne out the logical supposition that at least so far, the PS 4 is running ahead of the Xbox in units pre-ordered.
It's time for Microsoft to unlimber the enormous weapon it has that Sony lacks: the $77 billion cash stockpile Microsoft has sitting in the bank gathering interest. One way to do this is a straight price drop, and just plan on losing $50 or more per unit sold until manufacturing costs drop enough to put the console back in the profit column. This, after all, has traditionally been the way the business worked. Granted, Microsoft lost billions of the Xbox division, but the sweet profits generated eventually are making up for it.
Of course, this could impact Microsoft's share price, but is that really a problem? For the past four years Microsoft stock has traded in a narrow band from about $25 to $35 per share. Note, too, that with the Surface RT Microsoft just took a $900 million write-down over unsold hardware. Wouldnt the company have been better off setting a lower initial price for the Surface RT, and perhaps losing the same amount of money but getting millions of tablets into people's hands? Microsoft's not going to have piles of unsold Xbox Ones to contend with, but there's no denying having more consoles out there would boost the profits from software sales.
There's more than one way to drop the price, too. Analyst Michael Pachter has suggested Microsoft might team with an ISP to offer a discount on the hardware if you sign a service contract, similar to the way smartphones are discounted. Perhaps an ad-supported version of the hardware could be sold at a reduced price, similar to the Kindle Paperwhite. Or offer a reduced cost Xbox One with a multi-year Xbox Live contract agreement. Even if some of these reduced price options aren't all that popular, it still allows you to market the Xbox One as “starts at $399” instead of just plain $499.
Drive the Kinect advantage
Microsoft has already announced a brilliant service with Xbox Fitness that requires the new Kinect in order to offer some strong advantages to regular fitness programs. It's a program that Sony can't offer to all PS 4 users (because they won't all have PlayStation Move, and it won't do some of the things Kinect will) – and it's free, at least through 2014. Microsoft should be looking for more such services or games that Sony can't match, and offering them for free if possible – that drives up the value of the Xbox One and makes that $100 price difference less important.
Microsoft was quick to scotch rumors that the Xbox One with Kinect would be tracking consumer responses for the benefit of advertisers. Clearly, though, marketers salivate at the idea of comprehensive information about how consumers respond to advertising and marketing, down to measuring their heart rate. Consumers wouldn't want that to happen automatically, which is why Microsoft made it clear nothing like that is planned.
Here's the thing, though: Why not offer this service with a consumer opt-in? Of course, you'd need to give consumers something in return... Perhaps advertisers would underwrite the cost of Xbox Live as long as you allow them access to your personal marketing data. Or just give you credits to use in buying games/ This could even be a way to reduce the cost of the hardware to consumers. If consumers get to do this as a choice, there should be no concerns about privacy.
Race to the future
Microsoft already tried to move ahead into the future of digital distribution by offering a way for friends to share games, but at the cost of preventing the sale of used games. Backlash caused Microsoft to change course on that policy and go back to the current Xbox 360 policies about used games, which is similar to Sony's stance. Yet there were people who liked the idea of sharing games, and even calls to bring that policy back. Microsoft should be thinking about the possibilities of the digitally distributed games, and craft policies around that.
Microsoft could gain an advantage over Sony by being the policy leader concerning game sharing, resale of games, and similar issues. It may require some complex policies, but there's a large potential payoff for Microsoft. Being there first with the right policy is also an advantage.
More than just policy, Microsoft should strive to be ahead of Sony when it comes to things like VR, cloud computing, game streaming, and the like. Make the Illumiroom available even if it's expensive, it will be a cool differentiator. Push the voice controls, home automation, integration with mobile devices. Why let Valve be the company that brings keyboard and mouse gaming to the living room? Microsoft has a massive R&D budget, and perhaps there's a way to do much of what Valve's new controller does with an ordinary smartphone or tablet.
Microsoft shouldn't slow down at all as this next-gen console battle continues. The competition is more than just Sony, it's Apple, Google, and Amazon as well, and probably others. Introduce innovation when you can, even if there are flaws. Fix things fast and keep moving. Empower the Entertainment division to move at the speed of mobile. Go for the top achievement, and keep Microsoft #1 in console sales.