Microsoft's plans for its Xbox game console -- due in October -- involve a lot of giddy component suppliers. Companies such as Flextronics, Western Digital, Nvidia, Applied Microsystems, and Ravisent Technologies smile at their good fortune. But Microsoft faces a battle with Sony's mega-hit PlayStation2. With the game consoles serving a loss-leading strategy to grab speculative future non-gaming revenues, it may be more profitable to supply the software giant, rather than be it.
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When Microsoft (Nasdaq: MSFT) announced game console Xbox supply contracts with testing maker Applied Microsystems (Nasdaq: APMC) and software company Ravisent Technologies (Nasdaq: RVST), it threw them a lifeline. Their penny stocks jumped -- Applied 65% yesterday and Ravisent over 100% so far today. Microsoft's blessing will mean riches if the Xbox sells anything like Sony's hugely successful PlayStation2, flying off the shelves and eBay (Nasdaq: EBAY) -- if you can find it. With hot contract manufacturer Flextronics (Nasdaq: FLEX), hard-drive maker Western Digital (NYSE: WDC), and graphics chipmaker Nvidia (Nasdaq: NVDA) also on board, Microsoft is determined to speed past Sony when it introduces the Xbox next fall. The suppliers -- not Sony or Microsoft -- may end up with the best deal. The game console scene Invited to the dance Xbox business comes just in time for Applied Microsystems, Ravisent, and Western Digital shareholders (I own Ravisent shares. Sigh.), whose stocks are all trading down in penny stock land. The companies now have 5-year deals for nights on the town with a dashing suitor, or savior. Though much more successful, the Xbox contract builder Flextronics and graphics chipmaker Nvidia are also dancing in the aisles. It's the console infrastructure, baby
Microsoft, like Sony, will likely lose or break even on the consoles, but both hope to place their infrastructure in homes and later sell higher-margin consumer services and nongaming content. Trying to establish a lead, Sony's PlayStation2 burst past Sega's DreamCast in Japan in March and then the U.S. in October, meeting more demand than it could satisfy. Nintendo's GameCube and Microsoft's Xbox are expected next October -- assuming no delays. According to David Marino-Nachison, who covers video game manufacturers in the Motley Fool Industry Focus 2001, industry observers believe that Microsoft's Xbox will become the leading console during a hardware cycle projected.
With PlayStation sales of over 70 million, and PlayStation2 on track for 10 million in Sony's FY 2001, chosen suppliers for Microsoft's Xbox are positively bug-eyed at their prospects if the Xbox is anything but a bomb. Applied will supply DVD emulators in Microsoft kits that aid over 200 companies to develop games for the Xbox. Ravisent's CineMaster software will work in an X-box optional expansion pack that will provide users with DVD playback capability. Ravisent boasts that its software provides a theater-quality experience and will be equivalent in the Xbox to a high-end set-top DVD player. Western Digital will build the Xbox's 8 gigabyte hard drives.
It's anybody's guess whether Sony or Microsoft can eventually leverage the loss-leading game consoles into future consumer revenue streams. And Microsoft these days is like the knight that jumped on his horse and road off in all directions: Going everywhere at once, unsure of its destination. Sony will have the first-mover advantage for high-powered game consoles, but there's no denying Redmond, Washington's biggest taxpayer's clout. For now, the best position might just be making the console's insides, leaving the high-stakes game of future revenues to others. And two small companies who will make the Xbox stuffing just got new leases on life in time for the holidays.
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