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WSJ on Xbox LIVE

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Posted by Jeremy on December 30, 2005 11:29 AM
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The Wall Street Journal today has an article discussing the huge gamble that Microsoft has undertaken with its Xbox LIVE service. The article cites two financial analysts, both of whom are pretty down on the long term prospects for profitability, especially taking into account that MS has invested about $1 billion into the Xbox LIVE service to date. What I find interesting is that the Wedbush Morgan Securities analyst, Michael Pachter, doesn't know what he's talking about, "At the end of the day, we don't play games for social interaction ? We play games to escape." Microsoft's strategy is "absolutely flawed," he said."

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This is another case of somebody who just doesn't get it. If you're reading, following, or investing with this guy, you may want to start listening to somebody else.

Let's break down online play, specifically on the Xbox/Xbox 360.

Xbox LIVE is a central source where, for an annual fee of $50 (the price of one game), you can play any of the hundreds of online capable games on the market. The most popular of these include Halo 2 Multiplayer, where you fight against players from around the world. Personally, I've been addicted to online play of Brothers in Arms and Star Wars: Battlefront.

New to Xbox LIVE is Xbox LIVE Arcade, which has classic parlor games and basic internet games that you've probably played, like billiards, bejewelled, trivia games, etc. This is an effort to attract soft core gamers.

Historically, Xbox LIVE attracted about 10% of Xbox purchasers. Keep in mind that Xbox LIVE launched a year after the console (LIVE launched on 11/15/2002) and that at the time, dial-up far exceeded broadband. Also, keep in mind that over the next few years, there were only a few "killer apps", if you will, regarding Xbox LIVE, essentially Halo 2. In other words, while Xbox LIVE was the best (and only) all inclusive gaming service, there were few titles that took advantage of the service and many were simply ineligible because of their dial-up connection.

Enter the Xbox 360. Microsoft hopes that 50% of 360 users will eventually go online. The analyst, Mr. Pachter, guesses 20%. The prevalence of broadband alone will make it far in exess of 20% adoption.

Also, MS now has two levels of Xbox LIVE service; the silver and the gold (que up Yukon Cornelius' "Silver and Gold"). The silver is FREE, and allows you to, "Create your gamer profile, Create and maintain a friends list, Access Xbox Live Marketplace including Xbox Live Arcade, demos, and trailers, Send and receive text and voice messages, Join in special Xbox Live Gold trial opportunities, [and] Access massively multiplayer games." The Gold level gives you all of that, plus the ability to play against other people...the reason most people want to play online.

Let's look at the free, Silver level, in a tad more detail. The ability to send and receive test and voice messages is essentially free VOIP (Vonage, Skype, etc.). Once people start to realize this, free long distance doesn't sound so bad. Also, the recent addition of allowing gamers to play MMORPGs (massively multiplayer games, essentially) for free is a huge boon to that genre. The Xbox missed out on that type of game, and RPGs in general (except for the spectacular KOTOR and KOTOR II and Elder Scrolls). A new, revitalized focus for the 360 is exactly that type of game, which is also very important to Japanese gamers. Remember, World of Warcraft (a PC game), just passed the 5 million gamer mark. That alone shows that there is money to be made and gamers wanting this kind of game.

Geez, after that detour I almost forgot my original anger with Mr. Pachter's statement, "At the end of the day, we don't play games for social interaction ? We play games to escape."

What a naive statement.

Many people do, actually, play games for social interaction. Be it college dudes gathering in a dorm room to play Madden (in my case, NHL '94), a fantasy player meeting up with his guild, or a lonely grandma playing internet games on Pogo.com, a large number of gamers do, indeed, play games for social interaction. Add in social/physcial games like DDR (Dance, Dance, Revolution) and it's hard to deny the impact of gaming as a social event.

In fact, escapism and social interaction go hand in hand. Why do we go out to bars with friends? As much for social interaction as to escape our jobs/homes/daily grind.

For Mr. Pachter to simply state that escapism and social interaction, when it comes to gaming, are mutually exclusive, and then to conclude that MS's strategy is "absolutely flawed" is simply misguided. In fact, judging from the prevalence of online gaming in all of its forms, MS would be stupid not to invest billions in Xbox LIVE.

Online gaming, and the inevitable TIVO-esque functions of the Xbox 360, will not only make Xbox LIVE successful, but as ubiquitous as MS Windows itself. MS is battling for your living room and there are few competitors. With a three year head start with Xbox LIVE, it's not the hardware that matters, it's the broadband connection.

Further Reading:
WaPo OpEd, "My Son and I, Game to Learn"
Bewildered by the frenzy over Microsoft's Xbox 360? A new book explains how videogames are coming to dominate pop culture and why 'cyberathletes' might be the new jocks.






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