Xbox Launch

The Xbox was launched in the U.S. on November 15, 2001, selling 1.5 million units by the end of the year. The selling price was $299, the same as the price of Sony ís PS2.

On May 14, 2002, Sony reduced the price of the PS2 console from $299 to $199. Microsoft matched Sony ís price the next day, and also reduced price in other markets.20 Even with a price of $299, analysts estimated that Microsoft was losing about $100 on each unit sold at launch.21 That same month, Flextronics announced it was moving production from its industrial park in Hungary to its industrial park in Doumen, China, in order to reduce costs.22

On September 2, 2002, Microsoft announced that Wistron Corp. would become its second producer of Xboxes. Wistron was the manufacturing arm of Acer Inc, a Taiwanese computer company. Wistron would build Xboxes in its Zhongshan, China plant, providing incremental volume and helping support the Xbox rollout into additional countries.23 In October 2001, shortly before the Xbox launch, Microsoft announced that Solectron, then the largest EMS company would provide after-sales service and support for the Xbox.

In addition to playing games, the Xbox could be used to play DVDs and as an Internet access device. A web service, Xbox Live which customers could use to download games, which was launched by Microsoft in October 2002.

The Xbox established Microsoft ís presence in the videogame market, but by the time of the announcement of the Xbox 360, it had lost a substantial amount of money. One analyst estimated that from the time of the original Xbox launch in November 2001 to the time of the announcement of the Xbox 360 in May 2005, the product had accounted for $6.1 billion in revenues and generated $4.4 billion in operating losses.24 Others estimated that annual losses were about $1.2 billion. Game sales had not yet reached sufficient volume to generate margins that overcame the losses incurred on console sales.

Third Generation Video Game Consoles: Xbox 360 and PS3

The new generation of video game consoles represented a dramatic technical advance. These consoles would have dramatically increased processing power and speed, allowing games to be presented in very high definition. They also incorporated a substantial amount of memory, which would be required due to the high data content of new games that would take advantage of the enhanced processing and graphics speed. These systems would provide a greatly enhanced experience for gamers, but to take advantage of this power would require a much greater effort on the part of game developers.

The Xbox 360 central processing unit used three separate core processors, each running at 3.2 GHz, compared to the single 733-MHz processor of the original Xbox. For graphics, the Xboх 360 used a custom designed processor, running at 500 MHz. For gamers, this meant that the console could create high definition graphics that were nearly lifelike. The new system was designed to work with high definition televisions.

Sonyís PS3 would have even more power than the Xbox 360, using more advanced technology, which was also riskier. In particular, it would incorporate the cell microprocessor, which Sony had developed together with IBM and Toshiba, and the Blu-ray optical disc which it developed in partnership with Panasonic and other companies. Sony had invested about $2 billion into the cell technology, which promised to be 35 times as powerful as the CPU in the PS2, with 2 teraflops of computing performance (compared to the fastest IBM supercomputer at the time, with 36 teraflops). The graphics processor in the PS3 would also provide higher resolution than the Xbox 360.25

Blu-ray was one of two competing formats for high-definition DVD. Sony hoped that including Blu-ray in its PS3 consoles would seed the market, and help establish the technology as the standard.26 However, Blu-ray was complex and expensive, with first generation units expected to cost $1,000, forcing Sony to heavily subsidize the cost in its PS3 sales. The other technology, HD-DVD, developed by Toshiba, was simpler and less expensive. Blu-ray discs would hold 25 gigabytes of data, compared to 15 gigabytes on the Toshiba format and 4.7 gigabytes on existing DVD discs. Microsoft initially did not take a position on high definition formats, but in September 2005 announced that it would support the Toshiba HD-DVD. This led a number of other major companies to either support HD-DVD or withdraw support for Blu-ray. Microsoft introduced the Xbox 360 with a standard DVD player, but planned to include HD-DVD players in the Xbox 360 by late 2006.27

Microsoft offered two versions of the Xbox 360. The core system, selling at $299 in the U.S., included the Xbox 360 console, a wired controller, cables, and an Xbox Live Silver membership.

The premium edition with a price of $399 in the U.S., consisted of an Xbox 360 console, wireless controller, detachable 20 GB hard drive, Xbox Live headset, Xbox Live Silver membership, and Ethernet cable.

Internet access had been an important part of the Microsoft gaming strategy beginning with the original Xbox, and was an area in which the company had a competitive advantage. The Xbox Live Silver membership allowed users to access online games, and to buy game add-ons, such as new game levels. For an annual subscription fee, users could purchase Xbox Live Gold membership for $50 per year, which allowed them to play multi-player games developed exclusively for Xbox Live Gold subscribers. At the time of the Xbox 360 launch, there were already 2 million subscribers to Xbox Live, at $50 per year.28 Peter Moore, the Microsoft vice president responsible for Xbox marketing, commented, We truly believe the future of gaming is online Ö bringing together massive communities from around the world to play or just hang out.î29