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Is Microsoft's Xbox Faltering?

3 May, 2002 By: David Ward

It took a little while, but Microsoft has finally begun to realize what the experts have been saying all along — that video games are a unique and often difficult business.

The software giant turned console maker suffered a blow last month when Xbox co-creator Seamus Blackley resigned. The decision came only a few days after the company lowered its estimated Xbox global sales for the seven months ending this June down to 3.5 million to 4 million, from its original projection of 4.5 million to 6 million.

Blackley's announcement stunned many in the game industry. “It certainly came as a surprise to me,” said Vincent Bitetti, CEO of TDK Mediactive, which released Shrek for the Xbox last year.

Blackley said he was leaving to form a new Seattle-based game company and insisted his decision wasn't related to the console's performance. “I've really poured my entire soul into XBox,” he said in a release. “There's no way I would leave if there was something wrong.”

There's no doubt many in the industry — as well as some consumers — have cooled on the Xbox following a strong launch last November. Deutsche Bank analyst Chris Whitmore recently said Xbox North American sales for the 2002 first quarter were a lackluster 300,000 units, down significantly from the 1.5 million consoles Microsoft sold during the 2001 holidays. Whitmore added he expected second quarter North American Xbox sales to also be around 300,000 units.

But what's really hurting Xbox has been its performance in Europe and Japan (see story, page 16). Microsoft was always going to face an uphill battle in Japan, but its odds of success were made much longer by the discovery of a glitch that damaged software discs shortly after its launch in February. The European launch was then marred by complaints that Microsoft had priced the Xbox far too high on the continent. Indeed the company tacitly admitted its error when it re-priced two weeks ago to 299 euros ($268) from 479 euros ($428).

“What happened in Japan you really couldn't blame them for, but setting the price that high in Europe was sheer arrogance on their part,” said a software executive who requested anonymity.

One thing that most experts aren't blaming for Xbox's slow performance thus far is the lack of DVD movie playback right out of the box. With the PlayStation 2 ($299), consumers can play DVDs as well as games right away, but Xbox owners who want to watch movies have to purchase a separate $30 accessory.

“I don't really think that's a major factor,” said Bitetti, a comment that was privately echoed by several other industry observers.

Despite these short-term struggles, no ones is close to writing off Xbox for the long haul, or doubting Microsoft's commitment to spend what it takes to succeed in the competitive game industry.

Microsoft just last week announced a multipartner promotional initiative with such game-demographic entities as the Pop Disaster Tour, featuring the bands Blink-182 and Green Day; Pepsi's new SoBe soft drink; Vans extreme sports; and Xumiez, a youth-oriented chain of apparel stores.

Indeed the most popular activity among video game executives right now is predicting when Microsoft — and to a lesser extent, Sony and Nintendo — are planning to cut their hardware prices and how much lower will they go. Speculation is that both PlayStation 2 and Xbox will be dropped $100 to $199 sometime between May and September, with Nintendo GameCube likely to be dropped to $149 from its current $199 in the same time period.

“If I had to guess I would say Xbox will probably be first, because they have the need to jumpstart sales as the well as the supply,” Bitetti said. “Sony really doesn't have the need and Nintendo doesn't have the supply right now.”

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