Microsoft’s Surface Blunder Is Nothing Like the Xbox

Microsoft's (NASDAQ: MSFT  ) Julie Larson-Green has attempted to downplay the company's failure with the Surface RT by likening it to the Xbox video game console.

The original Xbox was, in many ways, a failure -- it lost money, it had few great games, and its share of the video game market was small. However, Microsoft's follow-up to the Xbox, the Xbox 360, sold exceptionally well.

Larson-Green argues that, like the Xbox, Microsoft can still find its way with mobile computing. It has learned from its mistakes, and going forward, the Surface RT can bounce back -- just like the Xbox brand. Unfortunately, that simply isn't the case: There are some fundamental differences between the two product lines.

Consoles are closed platforms
The video game industry has seen some wild shifts over its history. Atari was replaced by Nintendo, which shared the market with Sega for about a decade, before Sony's (NYSE: SNE  ) PlayStation brand came to dominate. Microsoft's original Xbox was far behind Sony's PlayStation 2, but the follow-up Xbox 360 outsold the PlayStation 3 worldwide for most of its history.

Now, based on some polls of gamers, it looks like Sony is set to regain the lead with its PlayStation 4. The Entertainment Retailers' Association said more adults in the UK are likely to buy a PlayStation 4 than Microsoft's rival Xbox One. That may be due to the fact that Sony's device is $100 less expensive, not to mention the fact that Sony eagerly capitalized on the PR mistakes of Microsoft earlier this year.

Why, in video games, can a console maker rise and fall so rapidly? Because unlike computing, every new console generation represents an entirely new system.

A console, over its lifetime, doesn't change. While there may be minor tweaks, a console bought on the day of launch is capable of playing the same games as a console bought five years later. However, when that next generation of consoles comes along, suddenly the old generation is rendered completely obsolete. New hardware, new controllers, and new games must be purchased. There is little consumer loyalty. Just because you bought an Xbox 360, doesn't mean that you'll buy the Xbox One -- you have no incentive to do so because all that money you invested in your old console doesn't carry over.

Mobile platforms have switching costs
In contrast, mobile platforms may evolve over time, but the platform itself doesn't change. Consumers who purchased Apple's (NASDAQ: AAPL  ) iPhone 4 don't need to rebuy all their apps, music, and movies when they upgrade to the iPhone 5s.

In fact, because of this, they are heavily incentivized not to switch. Some big Apple bulls, including hedge fund manager David Einhorn, have argued for Apple on this basis. Over time, Apple's ecosystem should allow the company to retain its customers.

A given consumer who has owned an iPhone for years may have invested hundreds (or even thousands) of dollars into the Apple ecosystem through purchases of apps and media, not to mention accessories and other related Apple products. Should this consumer decide that he likes Samsung's new phone better, he's discouraged from switching -- all that money spent on the Apple ecosystem would go to waste.

Microsoft was late to the game
When it introduced Windows RT late last year, Microsoft was late to the game. Apple's iOS had been around for about five years, capturing millions of customers over that time, while Google's Android picked up many of the rest.

These loyal Apple and Google fans had no reason to adopt Microsoft's mobile platform -- in fact, they were heavily discouraged from doing so. In addition to losing out on whatever money they invested into the existing mobile platforms, developer support for Windows RT was weak, an unfortunate trend that continues to this day.

Microsoft has aggressively discounted its Surface RT: It now retails for $150 less than Apple's full-size iPad. Still, with many consumers already locked into existing ecosystems, and key apps still missing from the Windows RT platform, it seems unlikely that Microsoft's position in the market will improve.

A faulty analogy
Comparing Microsoft's Xbox with its Surface RT is a fundamentally flawed analogy. Unlike the market for consoles, the market for mobile devices involves heavy switching costs. A consumer who owned the PlayStation 2 had no reason not to buy the Xbox 360 -- but a consumer who owns an iPad 2 has many reasons not to buy a Surface RT.

For now, Microsoft's mobile strategy seems hopeless.

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Read/Post Comments (14) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 20, 2013, at 5:24 PM, GameBot wrote:

    Mobile have switching costs is completely wrong.

    Firstly if a user buys a new console the old one does not fall in a hole. (small point)

    It turns out the "moat" people thought apps would provide, the "walled garden" is completely wrong.

    All the data shows people are happy to walk away from the few bucks worth of apps they care about in order to go to a new phone etc.

    In fact it also turns out people will switch OS faster than switch carrier!

    You talking heads all think you know mobile because you own a phone, but most of you have no idea where the market is going or why it is going that direction.

    BTW I bet you will not fess up 5 years from now when Windows RT is on a 100 million machines a year....

  • Report this Comment On September 20, 2013, at 5:25 PM, Plimeter wrote:

    Interesting article. Makes a lot of sense.

  • Report this Comment On September 20, 2013, at 5:29 PM, Plimeter wrote:

    Interesting article. Makes a lot of sense.

  • Report this Comment On September 20, 2013, at 5:30 PM, opticash wrote:

    You mention only Surface RT. What about the Surface Pro which has the added advantage of being able to run all Windows apps.

  • Report this Comment On September 20, 2013, at 5:43 PM, JaanS wrote:

    Gamebot makes some sense but not entirely.

    In particular people will switch from Android who have little invested in apps (they hate to pay for them.) Also, the music is more easily ported.

    For iOS, however, people have more invested in apps - although this is still usually not a great amount. The move of music is a bit more effort. It is not difficult to move purchased music from iTunes - but is not a trivial task.

    Most people who have tried both systems prefer the iOS as it has the greatest loyalty.

  • Report this Comment On September 20, 2013, at 5:45 PM, JaanS wrote:

    Still, I think WP8 will slowly bring in users. That appears to be more popular.

    See also:

    http://seekingalpha.com/article/1338021-android-dead-part-10...

  • Report this Comment On September 20, 2013, at 6:19 PM, stockwoodie wrote:

    I love my 360, but I will not buy and XBone if I HAVE to purchase another stupid kinect. I don't want one. I'd rather save $100 and buy a couple of games. MS should not be forcing the Kinect peripheral down the consumers throat. For that reason alone, I may be switching to PS (for the first time ever). I also bought my first "i" product ever (an iPad mini) because the RT was over priced at release, especially for unproven hardare with little to no "Apps". If it would have been priced at $329 or so (with a keyboard) at release, I surely would have purchased one. MS has been making a LOT of poor decisions lately.

  • Report this Comment On September 20, 2013, at 6:30 PM, gearsofwarking wrote:

    I wonder if they actually believe the Xbox 360 sold well or if they are ignoring the fact many customers went out and bought new systems because of hardware failure?

    I mean, I had a warranty at Best Buy and I replaced the console 5 times in the first two years it was out, do they count those replacements as sales? I bet they probably do

  • Report this Comment On September 20, 2013, at 6:38 PM, brookings2013 wrote:

    A good argument in regards to switching costs. Makes the lack of launch-day backwards compatibility all the more confusing for the new Xbox and PS - offering consumers the ability to play old games would sway some to stay brand loyal, in addition to actually purchasing a next generation console. Instead, you'll have a segment of the population who's going to wait until they actually implement the 'compatibility via cloud'.

  • Report this Comment On September 20, 2013, at 6:42 PM, GameBot wrote:

    Ref Kinect, it is not a "peripheral" device. It was on 360, but for ONE, it is central to the platform. So, no they will not be letting you buy half of an Xbox One.

    @ Hardware failure and numbers purchased.

    Of course Microsoft know exactly how many units were activated and idle. Don't forget about your live ID.

    Ref moats, it is not my data that says the moat is not big. The proof is in the pudding as they say...

  • Report this Comment On September 20, 2013, at 6:51 PM, stockwoodie wrote:

    @GameBot - Microsoft has stated that Kinect is NOT required to use XBone, so yes, it's a peripheral and it's being force on consumers. Why not offer an XBone without Kinect if it's not required. Why should I spend my hard earned money on a brick that I do not want.

  • Report this Comment On September 20, 2013, at 7:15 PM, cabhanlistis wrote:

    "However, when that next generation of consoles comes along, suddenly the old generation is rendered completely obsolete."

    -That's not really true. Obsolescence isn't just hardware-based; it's also software-side. It took many developers a decade to get a grip on how to fully exploit the hardware of the PS3. That's why the latest games for the PS3 look so good. It's just now starting to bloom. So you can't say rightfully that the previous version is obsolete just because a new, more powerful piece of equipment has been released. Look at what developers have accomplished with "The Last of Us" and "Grand Theft Auto V", for example, in way of performance, quality, and sales. Heck, GTA5, released 17 Sept, cost over 250 million to produce and market and made over $800,000,000 on the first day and over a billion in three! I wouldn't dare call the PS3 obsolete any time soon.

  • Report this Comment On September 20, 2013, at 7:17 PM, cabhanlistis wrote:

    Well, not quite a decade. But still.

  • Report this Comment On September 21, 2013, at 1:39 AM, chrismireya wrote:

    @ stockwoodie:

    You're not fooling anyone by claiming to be an impartial consumer. You are a Sony fanboy. Anyone with an IQ larger than his shoe size realizes this.

    That's okay. I guess that it is good to have fanboys so fanatically loyal that they flood message boards with misinformation and "I like the 360 but I am switching to the greatness of Sony" nonsense.

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