xbox-one-official-images-1Social media went postal on Tuesday as Microsoft officially revealed its next console (note that I didn’t call it a game console; more on that in a second), what they are calling the Xbox One.  While not as roundly mocked as the Wii was when its name was unveiled, most game developers and casual gamers I know think the name is weak because so many of us refer to the original Xbox as “the first Xbox” and even as Xbox 1.

At a minimum, you certainly can’t deny the potential for awkwardness with the choice in name, and if I’m managing a multi-billion dollar product launch, I’m probably seeking to avoid awkward wherever possible, but that’s just me.

Moving on — the biggest topic of discussion is, what else?  The games.  Or rather, the lack of them.  Sure, we got the requisite EA Sports sizzle reel: 

I can’t really complain about this too much as a Redskins fan, since our “franchise savior”, RG3 is embarrassing the Dallas Cowboys in the video, but if anyone is actually excited about this video thinking that this represents the production quality and overall fidelity of ‘next generation games’, I urge you to compare it with this one:

  Yes, this was the first Madden 2006 “trailer” video, an Xbox 360 launch title, and which was obviously not in-game footage.  Also, it was a poor simulation; McNabb’s pass should have gone directly into the dirt.  But I digress.  Where was I?

It’s the Games, Stupid?

Oh yes, the games!  After all, what do you do with a game console?  Play games!   Just like 2005, we were treated to a teaser of an exciting, cutting edge project from Finland’s Remedy Entertainment.  Back then, Alan Wake was the title; this one is called Quantum Break.   (In the interests of full disclosure: I am friendly with a couple of Remedy folks and I love their games.)  I enjoyed Alan Wake immensely and thought the “TV-style” presentation of the game was clever and refreshing.  But I also remember seeing the trailer at E3 2005.  I was there demoing a game we had just published on the… wait for it… original Xbox.

“Ziggy says there’s a 3% chance we’re a launch title”

The point I’m making here is that, while Alan Wake was awesome, it also took 5 years to land on the Xbox 360.   So Quantum Break (I can’t be the only one to whom this name conveys a Quantum Leap / Prison Break mashup) may indeed be for sci-fi what Alan Wake was for horror, but it may also be something we see in 2018.  In any event, it’s highly unlikely to be a launch title that moves systems.  So what else?

Halo?  Check.  Call of Duty?  Check.   And that’s basically it for games.   EA Sports, the obligatory shooter franchises, and one original title which we think will probably rock but likely isn’t going to be ready for the console’s launch.  So what DID they spend their time talking about?

See If You Can Pick Up On Our Messaging

A cursory scan of the net confirms that every major media outlet got the same message, and that message is all about media consumption:

“On the whole, it looks more like a TiVo than any gaming console I’ve ever known.” — Peter Rubin, WIRED

“With Xbox One, Microsoft Emphasizes TV over Games” — Matt Peckham, TIME 

“Steve Jobs’ Dream Device Has Arrived.  And it’s made by Microsoft.” — Farhad Manjoo, Slate

With all due respect to these writers, this is not deep journalistic insight — this is reporters picking up the core messaging of a very well-crafted PR event designed to reposition the Xbox brand.  By all accounts, it worked and worked masterfully, considering the near-uniformity in the coverage.  Make no mistake — this is no longer a games console.  It’s a cable box that runs games.  Those games happen to be eye-bleedingly beautiful AAA twitch games instead of bad match-3 games like your current cable box, but this is not really a device for gamers and certainly not one for game developers.   This is a device for the Netflix generation.

This Is Not the One You’re Looking For

To make matters worse, Microsoft announced a handful of business/policy decisions that are going to cause heartburn with their core gamer demographic:

  • The Xbox One would not be backwards compatible with Xbox 360 games, INCLUDING digital titles purchased on Xbox Live Arcade.  Making all the virtual bits players owned on the XBLA network obsolete. (But what about the new Xbox Live Arcade, you ask? Read on.)
  • Xbox One games will be installed to the system’s internal HDD on first play, and any subsequent attempts to play an installed game on another console will trigger an activation fee.
  • The Xbox One will require the Kinect sensor to remain connected and that sensor will always be listening.  And watching you scratch yourself on the couch.
  • You may or may not need an “always on” internet connection to run Xbox One games.

MSFT’s presentation gives SNE’s stock an 8% boost almost immediately. I’m no Nate Silver, but I’m going to categorize this as “bad”.

Each of these decisions has different motivations and impacts to consumers and developers.  Forcing games to be “installed” and then assessing a fee for subsequent installations is a variation on the kind of DRM policy that Microsoft has often utilized in its OS businesses, and may help curb used game sales (which should increase developer revenues).   In theory, developers should appreciate this.

But taken as a whole, it’s pretty clear that gamers are going to hate all of these changes.

But Wait, There’s Less!

The final bomb dropped yesterday was the news that Microsoft had not only decided not to allow indies to self-publish on the platform, but they are killing Xbox Live Arcade entirely.  Let that sink in for a moment — Microsoft, the company that all but created this market with its early commitment to Xbox Live and the Arcade platform, have now punted to Sony and Nintendo, two hardware manufacturers once known for their draconian licensing rackets.  Both of whom have, by the way, acquiesced and now allow indies to self-publish on their platforms.

If one didn’t know better, one might even think that Microsoft, a.k.a. “the folks who were crazy enough to put Xbox Live Indie Games into living rooms everywhere”, were actively trying to drive indie game developers away.   So what happened?  Why would Microsoft completely bail on indie developers, at a time when big publishers are failing at an accelerated rate and indies are sprouting up faster than ever (with better tools than ever?)

It’s Not You. It’s Me the Insanely Lucrative Digital Content Business.

About 4 and a half years ago, the Xbox platform development team’s focus seemed to shift fairly noticeably.   Whereas early dashboard updates focused on things like background downloads, parental controls, and marketplace UI and advertising, by 2008, the “New Xbox Experience”, or NXE, introduced customizable user avatars in direct response to Nintendo’s Mii system.  This was the birth of the virtual goods market for the Xbox, and also introduced Netflix to millions of Xbox owners.  Shortly thereafter, the (poorly branded) Zune Marketplace, which was essentially Xbox’s answer to iTunes, debuted.  These were the seeds of profit that would eventually grow to threaten game developers’ hegemony over the platform.

As early as 2010, analysts were taking note of just how much essentially free money Microsoft was making from sales of these digital goods.  Forbes astutely noted then that Microsoft was probably raking in over $500 million annually in Gold subscription fees alone, and Microsoft themselves confirmed that virtual goods sales — games, avatar items, wallpapers, movie and music downloads — had exceeded membership revenue, with many estimates putting XBL revenues at $1.2BN.

If Microsoft had bailed on XBLA in the 360 era, we’d never have met this guy.

We don’t know what percentage of those revenues were game sales and what percentage were other media.  However, we do know that the peak of the platform’s success was around 2008-2009, when Castle Crashers, Trials HD, Shadow Complex, Battlefield 1943 and Braid were all legitimate hits.  But even as the install base of Xbox 360’s grew over the years and increasing numbers of digital games hit the platform, the hit rate plummeted.  Despite reports of increasing XBLA revenue each year, few new hits emerged, and in fact, average unit sales among the top ten XBLA titles was dropping (until Minecraft hit in 2012, shattering all records).  Highly anticipated indie games like Fez seemed to fall flat and stalwarts like Castle Crashers and Trials HD showed up in the top ten every year after they launched.

In fact, conservative estimates suggest that just three games (Castle Crashers, Trials HD, Minecraft) are responsible for over $100M in XBLA revenues over the past four years.

xbla crunching

Clearly, despite a huge critical mass of customers and increasing revenues, the XBLA market wasn’t really growing the way developers expected.   (While 2012 looks great, note that Minecraft, already a global phenomenon, shattered sales records and moved 5 million units, driving the vast majority of the gains).  Whether this stagnation was due to Steam’s increasing success, problems with dashboard discoverability, or the rise of the App Store and the $0.99 (or F2P) pricepoints isn’t clear.

What is clear, however, was that movies and music were way more lucrative: Xbox division revenues were up 55% in 2011, despite the fact that industry-wide sales were down 8%.  In 2012, the same pattern repeats: Xbox division revenue up 15% (and analysts remark at the possibility of the Xbox division beating the Windows division for the first time ever), meanwhile industry-wide sales were down 9% for the year.  While the chart I posted above clearly shows marked gains in XBLA revenue in both of these years, scale is important: even in 2012, XBLA’s best year, it contributed “only” $290M to the division, out of $4.2B for the division as a whole.

And remember, we know that as much as half a billion is coming in from Gold memberships and that “Xbox Live’s transactions business — including its sales of virtual goods like movies and music on the Zune Marketplace, and clothes and accessories for players’ avatars” had surpassed the subscriptions business back in 2010.

“MEDIA LICENSORS, MEDIA LICENSORS, MEDIA LICENSORS!!!”

It stands to reason that the fuel that is powering the “Entertainment and Devices” group’s growth is not, in fact gaming so much as it is digital media sales, XBL memberships, and other virtual items.  With virtually no overhead support costs (a stark contrast to XBLA games, which require certification testing teams and added support personnel), renting streams of “The Avengers” to Xbox owners is a far more lucrative proposition that trying to sell them the latest indie game, especially if it’s not already a phenomenon like Minecraft.

Of course, Microsoft knows that hardcore gamers are GOING to buy new systems — after all, enough people bought the Wii U, inexplicably, at launch — so there will have to be anchor titles to sell boxes and get them into the living room.  And it needs those hardcore gamers to help get its new box into the living room.

And thus, the Cable Box that Runs Call of Duty.

What does this mean for game developers in the next generation of devices?  It means that if you aren’t working for a large publisher on AAA games and you want to put your game in the living rooms of players, for now at least, Sony is probably your only viable choice.   Microsoft insists that indie developers will still have plenty of ways to get their games onto the Xbox One, but the old publishing model is a loser’s bet for indies and ultimately comes down to focusing resources on the most profitable areas, which won’t be your unknown game.

It also means that already fierce competition on Steam just got more intense.   It means that your internal marketing budget is going to need a big increase (you DO have a marketing budget, right?).  It means you probably ought to be utilizing a Lean Startup approach to ensure you have enough customers ready to buy your offering before you start plowing time and money into it.  It means that “just build a great game and the rest will follow” is even more wrong than it was last week.

And it means that you probably should have listened to your mother and become an intellectual property lawyer instead of a game developer.

Cheer up, though!  There’s always the Ouya, right?