Don Mattrick, president of Microsoft Corp.’s Interactive Entertainment Business.

MAY 21, 2013 • Microsoft Corp. pulled back the curtain on its third console, officially named Xbox One, chosen to suggest an all-in-one experience. Although a release later this year was promised, no specific date or price for the system were disclosed. With a new garment box case design that is reminiscent of a 1980’s VCR, Microsoft’s latest video game system packs significant hardware upgrades, as well as a slew of new features to control media inside the living room. The Xbox One comes with a redesigned Kinect input device that sports a new 1080p high-definition camera and enhanced voice recognition capabilities. These allow the system to recognize different family members by voice and physical profile. By voice command users can tell the console to turn itself on, and switch between games, TV, music, movies or web inputs without having to use a remote control. What’s more, switching between different media takes place almost instantly. The Xbox One is able to do this because in addition to the console operating system, the device integrates the Windows kernal for added functionality. New functions include multitasking features that permit users to open windows on the main screen to display extra information and options. To better integrate with video content, the new Guide feature not only can pull up what is available to view from the user’s content provider on voice command, it can also add a social aspect by showing trends on what other Xbox Live members are watching. Gesture recognition input is also improved via Kinect as the system now works from a more detailed model of the human body. Microsoft has also integrated Skpye calls into console, and thanks to the Kinect’s new HD sensor, these calls are now displayed in HD so group calls are possible now. The SmartGlass option that allows users to turn their smartphones into a system controller has also been built into Xbox One.

On the technology side, the console eight-core CPU with a 64-bit architecture, 8GB of RAM, a 500GB hard drive, a Blu-ray disc drive, USB 3.0, HDMI ports in and out, and 802.11n wireless with Wi-Fi Direct. The Xbox One will use it network connection to access significantly beefed up cloud services. Microsoft says it want to make its new system some akin to a game DVR, with personal and entertainment content is seamlessly stored and available via cloud storage. Benefits the company claims will ensue include dynamic achievements, as well as more realistic online worlds where features are updated on the fly. To make these cloud features possible, Microsoft says it has to field more than 300,000 servers supporting Xbox Live. By comparison, the service launched back in 2002 with 500 servers. How much the development environment has changed to adapt to the Xbox One was not discussed. Both Electronic Arts and Activision Blizzard disclosed they have new engines to code for the system. Both publishers said they would deliver exclusive content for Xbox One, including the FIFA and Call of Duty franchises, respectively. Microsoft also announced that its in-house television studio launched last September has a live-action Halo series in production directed by Steven Spielberg.

Impact: With the collapse of Nintendo Microsoft and Sony both have a huge opportunity for their new game systems.  Based on recent track record Microsoft has an advantage in North America and Sony has an edge in the rest of the world.  However, as Nintendo showed with the surprising success of the Wii, the game industry is always up for grabs.  Right now we are in the early stages of positioning so a great deal could change.  Nevertheless it is clear where these companies are heading.

Just the name Xbox One says a lot.  Microsoft desperately wants to have their system be the centerpiece of living room entertainment – not only in name, but also in functionality.  Sony also wants that position in the home but they seem to be going in a much more game centric direction. In terms of which strategy will win we would put our bets on targeting gamers. The concern with Microsoft is that they are going after a forward-looking need that isn’t really there.  Yes it is convenient to have your game system play video but there are all kinds of devices that do that. We admit that Microsoft has improved significantly on the form and function of a home entertainment hub, but is that what will sell consoles? Neither did Microsoft say how much all this connectivity will cost us. If a consumer is putting that kind of money down they want the system that plays the best games.

That being said exclusive content deals like with the NFL could help get the ball rolling.  There are a lot of NFL fans that play video games but are not necessarily wedded to any one device.  Now if Microsoft could do something similar for soccer they may be really onto something.  Other deals like a Halo TV show directed by Steven Spielberg are examples of exclusive content that will help tip the scales for certain consumers.

One evolution from Xbox 360 would be to support true plug and play USB 3.0 external hard drives.  The playback of digital recordings will require huge hard drive space, not to mention the the DVR capability which is obviously a big, big feature for an “all in one set-top box vision.” So HD space will be a big deal.  Storage, whether in the cloud or in the box, is critical in the future of retail versus digital download of full games.  How many 20GB-plus games do people want to buy digital only?  Even a terabyte of space would fill up your drive real fast. Retail might come out looking very sweet to gamers, cloud or no cloud. Also, how does the Xbox One handle households dependent on more than one set-top box? The current data says that the majority of U.S. households have two set-top boxes. The system may be a great one-room solution that works great for the core gamer demographic, but what about everyone else? Like the Xbox 360, the Xbox One seems more like a multi-purpose entertainment device for single males.

Overall there has to be some concern that Microsoft is biting off more than they can chew.  With no backward compatibility the Xbox One is starting from scratch. Microsoft had a huge success with the Kinect and that could be their downfall. The Kinect helped draw in a significant number of mainstream consumers. However, the Xbox brand resonated primarily with a core gaming group. Microsoft shouldn’t assume they that group will automatically stay around as they try and target the elusive mass market..  Sony learned that lesson the hard way in the transition from the PlayStation 2 to the PlayStation 3.  In the U.S. Microsoft has a major advantage but they could easily screw that up very quickly.  We only need to look at Nintendo’s disastrous recent product launches for a lesson. This will be a marketing game and right now Sony seems to be winning.

Pricing is likely to be a key issue and that has not been addressed at all. Not the hardware price, nor the price of Xbox Live. The latter is a mandatory subscription that includes bundles with entertainment providers and other cost issues which will be the real key.  We expect a lot of great exclusive content from both Sony and Microsoft but how they package and market it will be what matters at the end of the day.  It is still too early to make any major calls.