Microsoft Feeling Game for Console Battle

The company says its huge investment in the Xbox will pay off.
Author:
Publish date:

When it comes to competing in the video game business, you have to give

Microsoft

(MSFT) - Get Report

an "A" for effort.

The company has sunk billions into this part of its business and in the process has developed an innovative online multiplayer game service and the first high-definition game console.

But to date, the company has little to show for its efforts except billions in losses, distant runner-up status in market share to industry leader

Sony

(SNE) - Get Report

in the last generation of game machines, a supply-stumbling start to sales of its new machine, and, in the

Halo

series, just one true hit game franchise.

But Microsoft is keeping the faith. Despite the initial stumbles, the company has seen strong sales of its new Xbox 360 and is now ramping up production. It expects to have a 10 million units shipped by this fall.

But competition is coming with both Sony and

Nintendo

planning to launch rival consoles later this year. How the Xbox 360 fares in the head-to-head competition will determine whether Microsoft finally is able to turn around its struggling game division.

At the E3 conference last week, I talked about Microsoft's gaming efforts and the coming competition with Todd Holmdahl, corporate vice president of the company's Xbox and gaming division.

TheStreet.com: When do you start making money on the Xbox?

Todd Holmdahl

: We're not going to divulge that. But we've got a huge investment in it, and we have a plan. We're going to be making money commensurate with the investment that we've made. And I think the thing to really look at is just the momentum we have right now ... the fact that ... we're going to end up with 5 million units -- 5 to 5.5 -- by the end of this June, that we're going to have 10 million units before the competition even launches. We're going to have 160 games out there by this holiday. By next June, we're going to have 6 million

Xbox Live customers.

We've really demonstrated that Live is the next generation. And we're going to be in 40 countries shortly. If you take a look at all that momentum, and you take a look at the great games, the demand, the Live service and the different countries we're going into, the focus that we have on the finances, you can see that the investments that we've made are going to turn into a profitable business.

Are you expecting to turn things around this console cycle? Next console cycle?

This console cycle. I don't have a definitive time on it.

Game sales for the old Xbox have fallen off a cliff in recent months, which is hurting the publishers. What's going on there? It looks like you guys aren't giving it a lot of support.

Todd Holmdahl

We actually are giving it a lot of support. We try to create an ecosystem where everybody does well. Certainly we want the publishers to do well. So, we continue to work with them and continue to certify Xbox titles and work with their development support teams. I think, with respect to the market, every time you make a generational change, there are issues to deal with. That is primarily what you're seeing. But our support of Xbox and the publishing community is very high and will continue to be high.

Are you still making original Xboxes, and how long are you going to continue to make them?

We're still selling them.

You're still selling them, but are you still making them?

I can't comment on that.

As alluded to at Microsoft's E3 media event, you haven't done particularly well in Japan so far with the Xbox 360. How do you explain that? You made a big show this time around about launching globally and getting support from Japanese developers.

We're definitely committed to Japan. If you look at the games that are coming out ...

Blue Dragon

...

Ninety-Nine Nights

. We will continue to deliver content to that market and content will drive sales.

So, have you just not had the right content so far?

I think we continue to deliver great content, and sales will follow. It's a place where we're heavily invested in.

You think the investment will pay off eventually?

Yes.

Any sense on when that's going to happen?

No.

We'll talk about your competition for a second. To what extent do you think the price that Sony's putting on the PlayStation 3 helps or hurts the Xbox 360?

I think what you have to take a look at -- and this is a pretty good way to parse it -- are the Sony games really $100 to $300 better than the Microsoft games? That's really the question you're asking. And you go look at what we've delivered so far and go look at what we will deliver, and I think the answer's pretty easy.

You've announced an accessory for the Xbox 360 that will play-high definition DVD discs in the HD-DVD format. You haven't announced a price for the accessory, but if we're talking about an Xbox 360 with one of those drives and a hard drive, we're likely talking about a price comparable to that of the PlayStation 3. Doesn't that detract from the "bang for your buck" comparison you were just making?

I think the key there is to look at the choice aspect of it. The key there is we give the customer a choice of deciding whether they want to do HD-DVDs or high-definition DVDs. We give them a wonderful product at $299 and $399, compared to a $500 or $600 product -- a product that has amazing games, has this amazing Live service that their product doesn't have.

We have quality games, content games, we have the arcade games. We stand by the work that we've done, and we think that we're in a good position. And if you want to add the HD-DVD accessory, you can. I think you're going to find that it's going to be reasonable compared to whatever else is out there.

One of the things that gets analysts and investors excited about the new consoles is that they are designed to be easily connected to the Internet. The thought is this feature is going to allow publishers to supplement their packaged software sales with all kinds of ancillary revenue, whether it's from in-game advertising or selling additional episodic games or offering additional content such as maps or cars or weapons for use in particular titles. How far into the future will those types of things represent meaningful money to the publishers?

That's hard. The best way for me answer that is to say next year we're going to have 6 million Live connected customers. We've had 18 million

paid and unpaid transactions already. We're building a great product, and you start to see the numbers and the slope that we have right now. That turns into a very sustainable business and you just continue. You hit critical mass and you start to do very well.

Speaking of excitement, do you guys have a specific release date for

Halo 3

?

I think it's 2007.

That's a long year.

It's going to be an awesome product.

Microsoft has said it plans on being the market-share leader this time around, is that still the plan?

Yes.

What happens if you don't reach that goal?

We're going to hit our goal.