Microsoft Corporation’s Console Strategy Could Spell the End for Xbox (MSFT)

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New video game consoles are typically released in seven-year cycles, more or less, but Microsoft Corporation ( MSFT ) has announced it's going to blow that up with the release of the new Xbox One S this fall, followed by the all new Project Scorpio in 2017.

Microsoft, MSFT, Xbox One S

Source: Microsoft

The strategy is ambitious, aggressive and risky; because rather regain Microsoft's console lead, it could mark the end of the Xbox One …

Microsoft's New Console Strategy

The traditional seven-year console release cycle ensured manufacturers recouped their development costs, gave game publishers time to adapt and make the most of the new hardware and kept console buyers happy. Even if a new console is an expensive proposition, only having to dig deep every seven years or so was tolerable.

Microsoft itself followed this pattern when it entered the console fray. The original Xbox was released in 2001, the Xbox 360 was released nearly four years later in 2005 and the Xbox One was released more than eight years later in 2013. Using that roadmap, the follow-up to the Xbox One would be expected sometime around 2020 - give or take a year.

At E3 2016 the company announced it will release a new Xbox One S in August. This is an updated version of the Xbox One, that's 40% smaller, offers the option for double the onboard storage, plays 4K streaming video and Blu-Ray, and has a processing bump to support high dynamic range gaming.

Microsoft also confirmed that Project Scorpio , its next generation game console is real and will be released for the holiday season 2017. Microsoft says Project Scorpio is the most powerful video game console ever made, packing six teraflops of processing power. It will be able to run 4K games natively and offer full support for virtual reality.

Oh, and Microsoft says that all of these consoles are actually Xbox Ones and that all Xbox One consoles will be able to play the same library of games - the newer models will just offer a better experience because of their more powerful hardware and graphics capabilities.

The Burden Falls on Game Developers

Announcing that games released when three different Xbox consoles are on the market in 2017 will be compatible with all three variations relieves some of the anxiety for console owners. That Xbox One you just bought will still be able to play next year's blockbuster games.

However, the move makes life much more difficult for game studios. It's tough enough developing a game for the Xbox One without having a second version that supports HDR graphics and a third version whose buyers not only expect native 4K graphics, but also other benefits of the monster CPU, such as smarter artificial intelligence. That's more design work, more code and much more testing.

Microsoft is bringing some benefits of PC gaming to consoles, but also the problems, specifically a different playing experience depending on your hardware. Given that a big selling point of consoles is that they avoid these PC issues - everyone is on a level playing field with the same console - that could be a mistake.

But the biggest risk MSFT is taking is of actually killing its Xbox business.

The Risk of Consumer Revolt

Right now, the company is trying desperately to overcome the big lead rival Sony Corp (ADR) ( SNE ) built with its Playstation 4. Despite ditching the Kinect sensor and slashing Xbox One prices, the PS4 has been outselling Microsoft's console by a nearly two-to-one margin .

Here's the problem, though: The Xbox One S is more than just a slimmer version of the original Xbox One. It's not a huge upgrade, but 4K video playback support and HDR gaming make it much more than a mere cosmetic upgrade. While the flagship 2TB version is $400, the 500GB Xbox One S is reportedly priced at $300 - that's just $20 more than the now reduced Xbox One with the same storage.

Who in their right mind would buy the original Xbox One now?

And with Project Scorpio confirmed to be arriving next fall and blowing away both the Xbox One and Xbox One S in power (plus being able to play any Xbox One game) why would anyone buy an Xbox One S?

Rather than boost Xbox sales, this new strategy could backfire and see Microsoft console sales hobbled for the year-and-half between now and the Project Scorpio launch.

Fewer consoles being sold can kill off game developer interest and fewer games can further erode buyer interest in a platform, leading to a death spiral. The Nintendo Co., Ltd (ADR) ( NTDOY ) Wii U is a classic example of this loop in action.

So good luck to Microsoft with Xbox One sales through the summer.

Sony is also working on an upgraded version of its Playstation 4 (the VR-capable Playstation Neo) and is reported to be following a similar strategy of having games be cross-compatible between the standard PS4 and PS4 Neo. However, the difference is that Sony appears to be going with one upgrade, not two and is keeping quiet about its plans. PS4 fans are less spooked.

Microsoft chose transparency. It's upending the console upgrade cycle and trying to turn the Xbox One into something that hardcore gamers might replace every year instead of every seven. Besides the risks inherent in this new strategy, broadcasting its plans could have the effect of slamming Xbox One sales, hard.

Ultimately, the move might have the opposite of the intended effect, turning gamers and developers off the Xbox One platform altogether.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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