Microsoft (NASDAQ:MSFT) unveiled a number of games this week at the 2014 Electronic Entertainment Expo, but offered little insight on its long-term game plan for the Xbox One, which trails Sony's (NYSE:SNE) PlayStation 4 and Nintendo's (NASDAQOTH:NTDOY) Wii U in overall sales.
Microsoft discussed exclusive titles including Halo: The Master Chief Collection (a compilation of all the previous Halo titles), Halo 5: Guardians, Sunset Overdrive, Fable Legends, and Forza Horizon 2, as well as oddball titles like Inside and Ori and the Blind Forest. Microsoft also announced plans to reboot two forgotten Xbox franchises -- Phantom Dust and Crackdown.
The rest of Microsoft's lineup consisted of cross-platform titles such as Electronic Arts' Dragon Age: Inquisition, Activision Blizzard's Call of Duty: Advanced Warfare, Square Enix's Rise of the Tomb Raider, and two big games from Ubisoft -- Assassin's Creed: Unity and The Division.
Meanwhile, Sony unveiled its streaming game service PS Now and the $99 PlayStation TV, discussed its Morpheus VR headset, and revealed major exclusive titles such as LittleBigPlanet 3, The Order: 1886, and Uncharted 4. Nintendo discussed an open-world Legend of Zelda, new entries in the Super Smash Bros. and Mario Party franchises, new solo titles for Toad and Yoshi, and Amiibo interactive figurines.
By comparison, Microsoft failed to offer gamers truly compelling reasons to buy the Xbox One. Therefore, let's take a look at the three critical questions Microsoft absolutely needs to answer to get the Xbox One out of its rut.
How is the Xbox One different from the PS4 or a Steam Machine?
The Xbox One's biggest problem is that it doesn't offer a unique gaming experience outside of its handful of exclusive games. Microsoft recently removed the Kinect, the one piece of hardware that made it different, to bring the console's price down to $399.
Once Halo, Fable, and Forza are removed from the equation, the Xbox One just doesn't have enough exceptional features.
One of Microsoft's core strengths in the past has been online play, but the PlayStation Network (for the PS3, PS4, PSP, and PS Vita) now has 110 million users, compared to 48 million Xbox Live users. Xbox Live has also been eclipsed by Valve's Steam, which reported 65 million users last October.
Meanwhile, Microsoft recklessly tried to sell the Xbox One as an all-in-one media center for the living room. It inked huge contracts, including a $400 million deal with the NFL, and started developing its own original content to compete against Netflix. However, many newer "smart TVs" already offer similar features, and cheap streaming devices such as Google's $35 Chromecast dongle can easily stream Web-based content to any TV.
Therefore, without the Kinect, better online play, or media superiority, Microsoft must now convince gamers that it is somehow preferable to the PS4, the Wii U, or Valve's Steam Machines.
Will Microsoft realize that games matter more than hype?
Microsoft's E3 2014 presentation thankfully nixed the awkward celebrity appearances of the past, which included Donald Trump ridiculing and "firing" Sony executives, Joe Montana playing Madden 13 with the Kinect, and Usher throwing a concert.
But throughout its 13-year history, Microsoft has constantly marketed the Xbox consoles as anything but gaming consoles. In 2005, the company launched the Xbox 360 with an MTV special hosted by Elijah Wood and featuring musical performances by The Killers. Last November, Microsoft launched the Xbox One with coast-to-coast star-studded celebrations and live concerts in Times Square.
Prior to that, it launched this 30-second Xbox One ad in North America that notably didn't feature any games. Instead, the promo focused on watching NFL games and taking Skype calls on the console.
All of these promos and ads indicate that Microsoft's Xbox marketing strategy is based on the misguided notion that "video games are not cool, but the Xbox is cool." The problem, as Microsoft has found out the hard way, is that alienating core gamers to capture a market that wasn't interested in gaming in the first place simply doesn't make any sense.
Should Microsoft unify the Xbox One and Windows gaming platforms?
Last but not least, if Microsoft combined its Xbox One and PC platforms into a unified Live ecosystem, it could theoretically strike a critical blow against Sony and Valve. This simply means that if a consumer purchases a cross-platform game on the PC, he or she could download it again on the Xbox One at no additional charge and vice versa. Publishers might initially resist this idea, since they generate unique sales from both platforms, but the fact is that gamers usually don't buy the same title twice on multiple platforms.
Although the vast majority of PC games are played on Windows machines, Microsoft's previous effort, Games for Windows Live, failed to dent the market and will be quietly discontinued on July 1. Meanwhile, Valve's Steam, EA's Origin, Ubisoft's UPlay, and Amazon Games remain the biggest players in PC gaming.
An IDC survey in 2012 revealed that 41% of 1,503 respondents were interested in the idea of "buy once, play anywhere" gaming. PC gamers sometimes avoid buying consoles because their games are registered for PCs. If Microsoft allows its cross-platform titles to be accessed from an Xbox One for no additional charge, it could boost Microsoft's console sales while properly combining the PC and Xbox "Live" ecosystems.
The Foolish takeaway
Microsoft needs to consider three strategies to get the Xbox One back on track -- offer better exclusive titles and unique ways to play them, reduce its focus on media consumption, and consider unifying its PC and console game ecosystems. Only then can Microsoft ensure that the Xbox One catches up to its rivals in the eighth-generation console wars.
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Leo Sun owns shares of Google (C shares). The Motley Fool recommends Activision Blizzard, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Activision Blizzard, Google (A shares), Google (C shares), Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.