Microsoft’s Surface Blunder Is Nothing Like the Xbox

Microsoft's (MSFT -0.66%) 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 (SONY -1.68%) 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 (AAPL -0.81%) 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.