What to do with Xbox?

Regarding my last post about carving up Microsoft, here’s a Twitter conversation with a good friend that merits some elaboration:

I believe that Xbox is not immune from the please-your-best-customer plague that afflicts the rest of Microsoft and kills off disruptive innovation. Here’s why:

One of the coolest things that happened during my tenure at Microsoft was the development and launch of the Kinect sensor for Xbox. Using Kinect for the first time — playing a modded version of Forza 3 at the house of a friend who was on the dev team long before the product had a name — was a frighteningly cool experience. It was instantly clear to me that the technology had immense potential to broaden the reach of gaming beyond the traditional target market that skews young, male, and geeky.

My kids were even invited to be Kinect testers before launch. One afternoon we worked our way through a labyrinthine warehouse near the old company store until we found a mocked-up living room. The kids got some snacks and played a pre-release build of Kinect Adventures. They were absolutely mesmerized. The testers were gathering data on the performance of the sensor, and about a week later they called me up and asked me to bring my then-3-year-old back for a second round. “We just fixed a bug that affects only short skinny kids with long hair, and she’s our ideal test case.”

I had high expectations for the product based on these experiences, and the Kinect launch just blew them away. The product was a runaway success, a proud moment for Microsoft when we really needed a hit.

A few months after the launch I got a call from an executive on the Kinect team who wanted to meet to discuss the healthcare market. I paired up with a colleague and we headed over to the side of campus where all the cool kids work.

At the meeting we learned that their phone had started ringing off the hook as soon as the product launched, customers and partners were calling with all sorts of ideas about how to use Kinect in different verticals. Not being a group particularly concerned about customer intimacy, Xbox just told them all “No.” The phone calls soon became frequent enough that the team hired a guy just to answer the phone and tell everyone “No,” which he dutifully did. But being a smart guy, he started keeping a record of who was calling, what industry they were from, and what their idea was before he gave them the obligatory “No.”

After a few months the smart guy found this job pretty depressing. So he created a report for his bosses that showed the distribution of all the people he had said “No” to by industry, to illustrate that maybe they should be paying attention to what these customers were saying. And healthcare was far and away the top industry in his dataset, having 3x more inbound calls than any other vertical.

So the Kinect team had called a meeting with me and my colleague to learn more about what they could do to address the healthcare market.

We took to the whiteboard and started with the forces that are acting on the healthcare system: An aging population, the obesity epidemic, increasing incidence of chronic diseases like diabetes and congestive heart failure, heath reform, business model changes due to the rise of accountable care organizations, population health management, etc.

“We think you should consider that the management of chronic diseases in the elderly is a market that is worth in excess of $100B per year, and it will likely require technology similar to Kinect in order to engage with these patients at home, where caring for them will be least expensive,” we said.

“So… make a game for old sick people?”

“Not a game per se, more like a set of apps that use the Xbox + Kinect hardware to allow healthcare providers and payers to manage expensive chronic conditions at a lower cost.”

“Guys, we’re Xbox. We don’t do old people.”

“Why not?”

“It would ruin our brand.”

“What do you mean?”

“Well, our customers are hard-core gamers. You know, young, male…”

“Wouldn’t a set of chronic disease management apps for a different market segment enable you to increase the install base of your platform rather dramatically and then monetize other content, like TV and movies?”

“I think we’re going to make a fitness game for kids who are hard-core gamers.”

“Why is that?”

“Because the kids who play games the most probably need some exercise. And they already know our brand, so we think they’ll buy our fitness game.”

“So your games made these kids fat, and now you’re going to make another game to help them get in shape?”

“Yeah. Pretty cool, isn’t it?”

Well, no, not really. Taking a magnificent technology like Kinect that has the ability to change the world in seriously meaningful ways and offering it only to your best customers within the context of how you make money today is not cool. It’s picking the low-hanging fruit.

My colleague and I left the meeting disappointed that we couldn’t convince these guys to elevate their vision and accomplish anything more than attempting to undo some of the damage that their product has inflicted on a generation of sedentary kids. We were frustrated that they called and asked for our advice when they already seemed to have made up their minds about what they were going to do.

We soon found out why. As we followed up with the Kinect guys a few weeks later, we learned that the exec who led the discussion had been given a nice promotion to lead a new game studio focused on — you guessed it — fitness games for fat kids.

I’m sure it has been a good career move for him, a low-risk way to get to the next level by offering something novel to his best customers. I just regret that he’ll never get measured against the massive value that he could have created if he had been more willing to pursue disruptive rather than sustaining innovation.

So I believe that Xbox has tremendous potential. They have some great technology and some fantastically talented people. They could reinvent the way we experience media in the living room by combining TV, movies, music, gaming, and web content in innovative ways. They could leverage other consumer technology assets in Microsoft’s portfolio and do some great things. And they could go far beyond that if they are willing to think differently about who their best customers might be in the future.

But I think that they are just as risk-averse as the rest of Microsoft when it comes to business model innovation. Odds are that young, male, flabby geeks will continue to occupy the attention of the people running the business in the foreseeable future,. And if Xbox can’t focus beyond their current customers, they would be better off on their own than as part of Microsoft’s broader consumer strategy.

6 thoughts on “What to do with Xbox?

  1. Yeah, but…

    I don’t think spinning XBox out of Microsoft changes this conversation. It would be like talking to a Hip-Hop exec or Tesla’s Elon Musk about a creating an album/building a product for old, sick people. In this case, MSFT did the right thing by creating drivers and an SDK for the accessory. And game developers who want to focus on fitness or performance (Nike+ or Zumba anyone?) can do so.

    I would not spin XBox off from Microsoft, there actually exists the most innovative culture within the mothership and they are very important for the consumer market. I just think Microsoft needs to think in different terms about their markets. Their shift to devices and services is ignorant…ignorant for one reason: They are a software company! That’s what they are good at, that’s how they became the largest software company in the world. They need to focus on business model innovation around their sweet spot, software. Not Hardware and Not Services. Those statements deserve a blog all to itself (which I will likely not write).

    1. You make a couple of really good points, I’ll try to be brief:

      First, the hidden tax on a business inside a big company is that they need to stay inside the box, so to speak. All the business groups will vigorously defend their turf, and these battles suck up valuable management bandwidth. So the Nash equilibrium to this prisoner’s dilemma is that everyone cooperates by sticking to the status quo, which makes everyone better off in the short run.

      So what if there was a market, like healthcare, for the Xbox + Kinect technology that had the potential of being 10x the size of the current market? The shareholders would be better off in the long run if management would pursue that market, but the short-run equilibrium won’t let it happen. It would be too “randomizing”. Spinning out a business with solid technology that is locked into a too-small market and held there by a set of internal constraints could unlock a lot of shareholder value.

      Second, there’s the question of whether Microsoft should continue to be a software company or should focus on devices + services. As you said, this deserves a proper treatment in its own series of articles. My thinking is that the answer lies in understanding how markets evolve over time. In any given value chain there is usually only one player who is making “monopoly” profits. Microsoft was that player for many years in the PC value chain, they held the operating system that everyone needed. But there are forces acting on markets over time that can disrupt that equilibrium. For example, early on when a technology or business model is not very mature, the most-integrated players tend to win (e.g. Apple with its integrated iPhone hardware + iOS + iTunes), Christensen proposes that this happens because the solution is not yet “good enough” and more-integrated offerings are a little bit better than disintegrated ones. But as the solution becomes more mature, loose integration offers customers more choice and flexibility than they can possibly get from tight integration (e.g. Samsung/HTC/LG/Sony phones + Android + Google Play).

      So it may be wrong to say that a disintegrated value chain (like the Windows ecosystem) is always right for Microsoft, or that the company is making a mistake by trying to get into the hardware and services businesses because that’s not in its DNA. I think it’s more likely that the devices + services shift is the right thing, only 5 years too late. Microsoft may be buying that strategy at the top of the market just as the tide starts to turn and the market begins to favor its genetically-predisposed disintegrated value chain strategy, for which Android is very well positioned.

  2. Nice write up Z. Though I don’t know if the problem with Xbox lies within the structure of Microsoft.

    There’s an interesting tension within the traditional gaming market (“young, male, and geeky.” which I fall into) ever since the introduction of the Wii and the rise of smartphone games. The ‘hardcore’ gamers vehemently (and very verbally) oppose any features or functionality they perceive caters to the more ‘casual’ gaming market. This was on full display when the Xbox One (now fondly referred to as the X-bone) was unveiled. The vast majority of the hardcore market roared over the new features that Xbox highlighted during the weeks following the reveal (see http://www.youtube.com/watch?v=KbWgUO-Rqcw), they felt they were being ignored as the target audience and that this was tyranny of the highest order.

    While I didn’t agree with the stances that Xbox took with regard to gaming, there were some incredibly cool new features that were mocked into the deepest corners of the internet. They actually highlighted the medical applications for the new Kinect, showing how it could accurately estimate your body temperature, heart rate, or the stress on your skeletal system depending on your activities (http://thenextweb.com/microsoft/2013/05/22/the-new-xbox-one-kinect-tracks-your-heart-rate-happiness-hands-and-hollers/).

    The really unfortunate part about this is that they made design decisions that they knew full well were in conflict with the desires of their hardcore market base, and they were brutally punished for it. Instead of sticking to their guns (oh the irony) and pushing the market in the direction it is clearly headed (see Steam on PC), they were crushed by the gaming community and media and driven to an about face on a number of their innovative product decisions.

    You could argue that the decision to cave to the demands of a very vocal minority came from Microsoft in order to satiate their market base, and it would be a very valid point. But I think most organizations would have withered in the same way Xbox did. After the PS4 reveal at E3, the Xbox One was outsold in pre-orders by almost a 3 to 1 margin. Since reversing position on most of their ‘controversial’ policies that has come down to less than a 2 to 1 margin (600k vs 350k).

    So while I agree that Xbox could benefit from being spun off in many senses, I think the real problem with the lack of forward thinking in that market and industry lies in the hornets nest that is their small, virulent core consumer.

    1. Great insights, and that video edit of the product launch event is priceless!

      Part of the problem here is great technology saddled with poor customer segmentation. The company could have solved this dilemma quite easily by creating two products on a common technology architecture, one positioned for hard-core gamers and one for casual gamers. The hard-core Xbox could even have the same TV, sports, and dog(!) capabilities as the watered-down version, they just didn’t need to talk about these features so much to an audience that obviously didn’t appreciate them. And the watered-down Xbox wouldn’t even need to be a Microsoft device. It could be bundled directly into Blu-Ray players, TVs, or an OEM hockey-puck that would compete against Roku.

      Again, a lot of these problems stem from trying to keep too many stakeholders happy. The end result is a compromise that neither hard-core nor casual gamers are satisfied with, to say nothing of potential players in the healthcare ecosystem.

      1. I definitely agree that they should have split the product. I think they were drunk on their own success of the 360 as a multimedia device that they forgot that few individuals buy a game console with the intention of using it foremost as a media consumption device.

        The good news is that the tech from the Kinect (one?) will have an official SDK and come in a Windows flavor for $399 (http://www.theverge.com/2013/6/26/4465758/kinect-for-windows-developer-kit-pre-order-price-sdk-features). At least I hope they expand the distribution beyond the initial, hand selected dev group. The first thing I thought of when I saw the newest Kinect stuff was its possible application to the home care and remote medicine industries. I think there is a tremendous potential there, as long as MSFT gives developers an easy development path and toolkit.

      2. Yes, it’s good to see a Windows SDK for Kinect. Some hackers reverse-engineered the device and wrote Windows drivers for it shortly after it was launched, but those efforts were not supported by the company, who instead created a dedicated team to come up with an official PC strategy for Kinect.

        So the remote patient monitoring/patient engagement apps could bundle Kinect with a small PC like those from Xi3 in lieu of an Xbox.

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