In this video, Fool.com analyst Eric Bleeker looks at Microsoft's (Nasdaq: MSFT ) new Kinect motion controller. Just weeks into its release, Kinect is already proving to be a hit. This week, Microsoft announced that it had sold 1 million Kinects in just 10 days. Thanks to initial demand, the company upped its sales expectations from 3 million units in 2010 to more than 5 million.
That's a tremendous success story, because selling add-on hardware like Kinect is a challenging field. As has been seen by past failures in the industry (cough … Super Scope), market acceptance has been hampered by poor hardware and poor games. Because they're selling to a smaller market of buyers, game developers often ship rushed games with smaller budgets. Alternatively, because of poor game selection, consumers don't pick up the add-on hardware, creating a situation in which devices such as Kinect are doomed to fail.
However, in the case of Kinect, Microsoft offered a product sufficiently unique enough to spur high levels of interest. Unlike Sony's (NYSE: SNE ) Move, which looks like a derivative of the Wii's controller, Kinect's motion-sensing technology appealed as a true advancement in a video-game field that's fighting against declining sales as cheaper alternatives on Apple's (Nasdaq: AAPL ) App Store and Google's (Nasdaq: GOOG ) Android Market increasingly suck up customers' time and gaming spending.
Best of all for the company, Kinect gives Microsoft a jolt in a fairly mature phase of this console cycle. The original Xbox was on the market for only four years, but the Xbox 360 is now entering its fifth Christmas season. That'd normally mean rapidly slowing sales, but Kinect should key a strong holiday season for Microsoft.
Finally, Kinect also positions Microsoft well for the next wave of consoles. If it can propel Xbox sales forward through the later stages of this cycle, that should give Microsoft momentum when the third generation of the Xbox gets ready to launch. That's important, because while sales of video-game software might be sagging, the potential of game systems as the center of home entertainment only grows. As seen by Google's aggressive Google TV launch and Apple's refresh of Apple TV, the big players in technology understand the value of extending their reach in to the living room. This generation's inclusion of the Netflix (Nasdaq: NFLX ) streaming service is just a preview of how consoles can offer media and become the center of home entertainment.
Advertisers drool at the engagement level of smartphone users with their apps, but that's nothing compared with the engagement Microsoft sees with its Xbox Live users. The average Xbox Live user spends 40 hours a month in the platform, dwarfing reports of iPhone users spending 30 minutes a day engaged with apps. As the next generation of systems rolls out, companies should be able to find more ways to profit from the consoles through advertising and selling digital entertainment. Simply put, while software companies such as Activision Blizzard (Nasdaq: ATVI ) and Electronic Arts (Nasdaq: ERTS ) continue facing a difficult selling environment, they're unlocking new revenue streams for manufacturers such as Microsoft.
Eric says it's time to give Microsoft's much-maligned efforts at selling to consumers some credit. Kinect's a hit, and it should propel Microsoft into the pole position in the video-game industry.
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