Microsoft (NASDAQ:MSFT) recently made two bold moves addressing two common complaints about the Xbox One -- its high price tag and the Xbox Live Gold requirement to access popular apps like Netflix (NASDAQ:NFLX) and ESPN.
Desperate times call for desperate measures
Microsoft has lowered the price of the Xbox One from $499 to $399, matching the price of its primary competitor, Sony's (NYSE:SNE) PlayStation 4. Microsoft accomplished this by unbundling the Kinect motion sensor, which costs an extra $75 to manufacture, from the console.
The Xbox costs $396 to manufacture without the Kinect, according to a teardown report from IHS. IHS also claimed that the PS4, which retails for $399, costs $381 to manufacture. Meanwhile, CNN reported that Nintendo's (OTC:NTDOY) Wii U Basic Set, which sells for $299.99, has a production cost of $228.
However, all three teardowns don't fully account for past research and development expenses and packaging costs, meaning that Microsoft, Sony, and Nintendo could still be selling their consoles at slight losses. Yet investors should remember their intention was never to make a profit through hardware sales, but rather to sell enough consoles to claim a slice of software sales.
Microsoft's removal of the Xbox Live Gold ($60 per year) requirement to watch Netflix and other services is clearly a response to Amazon, which mocked Microsoft's "double billing" strategy during the launch of its Amazon Fire TV set top box in April. Amazon's Fire TV, Sony's PS4, and other popular streaming devices like Roku and Google Chromecast don't require additional paid memberships to access Netflix content.
Both moves indicate that Microsoft is willing to do whatever it takes to get Xbox One sales back on track. The Xbox One is currently in last place in the eighth generation console race, shipping approximately 5 million units, compared to 7.5 million PS4s and 6.1 million Wii Us. In terms of sales growth, however, Microsoft is still faring better than Nintendo, which launched the Wii U a full year before the Xbox One or PS4 hit the market last November.
Microsoft's new tradition of backtracking
Microsoft has backtracked a few times already regarding the Xbox One.
Prior to its launch, Microsoft dropped a controversial requirement for Xbox One owners to constantly maintain an Internet connection to play games. It also decided to allow used games to be played, reversing an earlier plan to completely drop support for used titles. Both plans were intended to prevent gamers from sharing titles and buying used games, since they don't generate any revenue for major publishers like Activision and Electronic Arts.
However, Microsoft's new tradition of caving in to demands extends beyond the Xbox One. After finally dropping support for Windows XP on April 8, the company backtracked and threw stubborn XP diehards a lifeline after a dangerous exploit hit all versions of Internet Explorer earlier this month. Microsoft did the same with the Windows 8.1 update, extending its original upgrade deadline from May 13 to June 10.
These examples illustrate how far Microsoft has fallen since the days of Bill Gates, when the tech giant was stubborn, unapologetic, and willing to battle antitrust regulators across the globe to dominate the PC market. Today, Microsoft readily bows to consumer demands and inadvertently encourages users to never take its policies seriously.
A look back at Microsoft's Xbox One blunders
Microsoft clearly should have made smarter decisions to begin with, so it wouldn't have needed to backtrack and reverse unpopular decisions.
Microsoft simply didn't think things through with the Xbox One. The Xbox One's predecessor, the Xbox 360, originally launched for $399 -- $100 less than Sony's PS3. However, the pricier PS3 still eventually outsold the Xbox 360 (82.8 million units versus 81.3 million units). Considering that Sony outsold Microsoft with a more expensive console during the seventh generation, it's impossible to understand why Microsoft decided to sell the Xbox One for $100 more than Sony's PS4.
Meanwhile, Microsoft became obsessed with the idea that the Xbox One would take over the living room with Kinect, Skype, and Internet Explorer. Therefore, Microsoft decided that making the Kinect a required part of the Xbox experience was worth the extra cost. It turned out that people simply wanted an affordable, powerful console to play games -- and the PS4 fit the bill perfectly.
The unpopular Xbox Live Gold requirement for Netflix could easily have been avoided with simple market research. Microsoft obviously wanted to reclaim the living room from streaming devices like Roku and Chromecast. However, it got greedy and decided to charge customers for services that had long been offered for free on multiple platforms. Sony noticed that wasn't a line to be crossed, and assured customers last June that a PlayStation Plus account wouldn't be required to access Netflix, Hulu, or other popular services.
Much of this disorganization should be blamed on Xbox head Don Mattrick's abrupt departure last July. Microsoft then left the Xbox division without a single official leader for nearly nine months, before CEO Satya Nadella finally promoted Phil Spencer, the chief of Microsoft Studios, to lead the division in March.
The moral of Microsoft's story
There are valuable business lessons to be learned from Microsoft's blunders and backtracking.
First and foremost, properly assessing the market environment matters. Microsoft thoughtlessly launched a console that was $100 more expensive than a formidable competitor, then made the package even more unattractive with extra fees. Simply making the right choices to start with -- as Sony clearly did with the PS4 -- can save a company from embarrassing backtracking.
Last but not least, leaders matter -- Microsoft might have avoided all this grief if by simply appointing a dedicated leader to the Xbox division before the console launched last November.