Regarding my last post about carving up Microsoft, here’s a Twitter conversation with a good friend that merits some elaboration:
@zmortensen Oh, and spin out Xbox separate from consumer? Crazy talk.
— Jason Sherron (@cheapredwine) September 10, 2013
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.”
“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.