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The unscheduled convergence between high-def games and high-def discs

Can Xbox 360 succeed as a mainstream consumer electronics gadget?
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As TG Daily has pointed out on multiple occasions - but most often in reference to the development of Vista, not Xbox - Microsoft is a platform company. It foresees, and to some extent engineers, the convergence of all transactions on the Internet on a grand scale. By contrast, there may be some very innovative and popular networks for community building around certain Sony PlayStation titles, but Sony's primary investments to date have centered around content, not platforms. Blu-ray's current dependence upon BD-J may do little to promote Java as a platform, even if Blu-ray ends up being the dominant, or even the only, high-def disc format. The reason is because Java is a cross-platform standard that supports processors on the receiving end of communications; whereas XML is an Internet standard that's centered upon distribution. Java has considerable strengths as a cross-platform development language, which XML is not; but you can't build a network around Java the way you can around XML. And if Microsoft can distribute iHD in Vista, IPTV, Media Center PCs, and Xbox 360 as the way to interact with network-distributed content, it could be perceived in the market as the company that achieves convergence. Whereas its competitors would be deemed "incompatible" - which is an all-too-familiar situation for competitors to Microsoft.

Despite this impressive game plan, there remain too many ways in which Microsoft can still fumble the ball. In fact, some believe, the company may have already done so. As we reported yesterday, there were way too few Xbox 360 units to go around, with nearly all major retail outlets selling out in the first day of release. Many pre-ordering customers have been told not to even expect their orders shipped before the end of this year. As a result, Crotty noted, some enterprising capitalists have been reselling Xbox 360 units on eBay for thousands of dollars, and getting hits. "So the first thing that might leap to mind," he remarked, "is to say, 'Wow, did somebody at Microsoft really screw up pricing here?' If the demand is that high, why couldn't Microsoft have priced this box at $800?" If Xbox 360 suddenly appears underpriced, potential partners may come to appreciate the PS3's projected premium.

The other possibility is that one of the objectives of Microsoft's platform play may fizzle. Consumer demand for either next-generation video disc format may not culminate, especially in the wake of public squabbles among both formats' supporters, and recent criticism of highly aggressive copy protection schemes - which both formats will reportedly embrace. "Maybe it'll turn out that it doesn't matter. Maybe the fact that Blu-ray and HD DVD will be fighting so much that supporting, or trying to add, next-generation DVD might be a bad thing," said Crotty. As a result, he added, "Maybe not having it will turn out to be a blessing."

In either scenario, there remains the question of which end of the stick Microsoft ends up with. The company may be planning to leverage its platform-building capability to seize market share, and perhaps leadership, from Sony. But if HD DVD fails, and customer interest in IPTV remains low, even Vista's likely success may not be enough to sustain iHD as a standard unto itself. In which case, the question of Microsoft's gaming leadership will rest once again on whether it has wrested the long end of the stick, or retained the short end it currently has. In no other consumer electronics market throughout the last two decades have customers openly embraced dual competing formats. They openly reject the notion of competing high-def disc standards; how long will they support two competing game consoles?

Did I say "two?" I meant "three." "I don't foresee Nintendo faring well in this next-generation battle," stated iSuppli's Crotty. "I just don't think that the market will continue to support three major players, because it's so expensive to develop content now for these consoles, and to be developing the content for three consoles, I'm not sure that that's viable going forward. And I think, from a global brand standpoint, Sony and Microsoft have a much stronger position."

So a shakeout already appears under way. The arguments justifying this shakeout are strikingly similar to the argument entertainment content providers and movie studios use to justify not producing products for two major players. It seems their arguments, like their technologies, are converging after all. If that's the case, then Microsoft's window of opportunity is narrowing. It might not have time to wait for costs of production to even out. If it's going to make a platform play, it had better make sense, and it had better be quick. Judging from yesterday's performance, it might have a lot of ground to recover.