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OPER/061 ICMR Center for Management Research The Making of Xbox 360 This case was written by Indu P, under the direction of Vivek Gupta, ICMR Center for Management Research (ICMR). It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. License to use for the MBA class of 2011, IBS, Hyderabad. Course: Operations Management, Semester - II. 2007, ICMR. All ri
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    OPER/061   ICMR Center for Management Research The Making of Xbox 360 This case was written by  Indu P, under the direction of  Vivek Gupta, ICMR Center for Management Research (ICMR). It wascompiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. License to use for the MBA class of 2011, IBS, Hyderabad.Course: Operations Management, Semester - II.2007, ICMR. All rights reserved.To order copies, call 0091-40-2343-0462/63 or write to ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India or emailinfo@icmrindia.org. www.icmrindia.org  License to use for the MBA class of 2011, IBS, Hyderabad.Course: Operations Management, Semester - II. 1 OPER/061   The Making of Xbox 360 “The winner in the next  -generation console battle is likely to be the Xbox 360, which is the leader  in North America, the world’s biggest market.” 1    –  Yoshiyuki Kinoshita, Research Analyst at Merrill Lynch, in 2006. “This is not Xbox 2. This is not an incremental thing within an era, like PlayStation was thebeginning of the 3D era, and PlayStation 2 was the second half of the era. This is a new era. Thisis a big jump -- kinda like vinyl to CD to iPod.” 2    –  J Allard, Corporate Vice President, Design & Development,Entertainment and Devices Division, Microsoft, in 2005. INTRODUCTION In September 2006, Peter Jackson 3 (Jackson), Director of The Lord of the Rings 4 trilogy and KingKong 5 , announced that he planned to create two interactive games for Xbox 360, a game consolefrom Microsoft Corporation (Microsoft). The unique aspect of these new games was their episodicformat. Jackson planned to create a series based on the popular Halo 6 games. On his shift to games from movies, Jackson remarked, “ More and mor e I‟m looking forward to the release of games and not movies. I am more aware and excited about games. I do not have to keep delivering stories asmovies - there are other things I can do. Technology is at a point where we can blend a lot of filmstorytell ing with interactive entertainment.” 7  Xbox 360, which was launched in December 2005, attracted serious gamers and other audience,owing to its simple design and convergence features . It was a part of Microsoft‟s plan to move intothe consumer‟s living room , and comprised a gaming console with several additional features likemedia center, photo archive, music download, Internet access and other services. According to BillGates (Gates), Co-founder and Chairman, Microsoft, “You can‟t just sell it as a conver  gence device. You gotta get in there because certain members of the family (i.e. teenage boys) think it‟s a must-have type thing. But the way to cement it is as a family experience. And the way that it reallymakes sense for Microsoft, and we justify this sort of circuitous route that we went down, is  because of how it fits in the living room.” 8   1   Thomas Fredrickson, “Xbox and Wii to Break Playstation Domination: Analyst,” www.ibitimes.com, November  14, 2006. 2   Dan Shoe Hsu, “A Full Revolution,” Electronic Gaming Monthly, July 2005.   3 Peter Jackson is a New Zealand based film maker. 4 The Lord of the Rings is a fantasy novel written by JRR Tolkien. The film trilogy consisted of The Lord of theRings: Fellowship of the Ring, The Lord of the Ring: Two Towers, and The Lord of the Ring: Return of the King.The films were globally successful and won 17 academy awards. 5 Peter Jackson remade the 1933 classic King Kong in 2005. The film grossed more than US$ 500 million worldwide. 6 Halo Combat Evolved, popularly known as Halo is a first person shooter video game. The game developed byBungie Studios was released in November 2001along with Xbox. Subsequently Halo 2 and Halo 3 were released. 7   Darren Waters, “Director Jackson Signs Xbox Deal,” BBC News, September 27, 2006.   8   Lev Grossman, “Out of the Xbox,” Time South Pac ific, May 23, 2005.  The Making of Xbox 360 2 Microsoft‟s first foray into gaming was Xbox, which was launched in November  2001; more thana year after Sony 9 ‟s PlayStation2 10 was launched in the US. This gave Sony the edge to capture themarket and by the time Xbox was launched PlayStation 2 was well established in the market with loyal customers (Refer Exhibit I for the sales of Xbox and PlayStation 2 in 2002). After Xbox‟s lower than expected performance, Microsoft decided to launch Xbox 360, the next version of thegaming console, well before PlayStation 3 11 could hit the market. Xbox 360 was launched in May 2005 well ahead of Sony‟s PlayStation3, which was released in November 2006 in Japan and the US, and Nintendo 12 Wii 13 which was also launched in November2006. This gave Microsoft the advantage in capturing market share. In the quarter endingDecember 2005, Xbox 360 sold 1.5 million units (900,000 in North America, 500,000 in Europeand 100,000 in Japan). By June 2007, Microsoft expected to sell over 13 to 15 million Xboxconsoles in the market. According to Wagner James Au from GigaOM 14 , “Microsoft‟s lead seems unbeatable now, fueled by a one- year headstart, the raging success of Gears of War as 2006‟s killer app, and most recently, a blitzkrieg of promotion for Halo 3, scheduled for 2007.” 15   BACKGROUND NOTE Microsoft was founded in April 1975 as a partnership concern by William H Gates (Gates) andPaul Allen. At this time, the duo had developed an improved version of BASIC 16 , which wasdistributed by Micro Instrumentation and Telemetry Systems. In 1977, Microsoft introducedFORTRAN 17 and COBOL 18 languages for PCs. By the end of 1977, Microsoft had emerged as themarket leader in microcomputer languages, with sales exceeding $1,000,000.In 1980, Microsoft bought an operating system called Q-DOS from a Seattle-based programmerfor $50,000 and renamed it MS-DOS (Microsoft Disk Operating System). Soon, MS-DOS becamethe accepted standard for PCs. By 1983, 99% of the PC makers were using MS-DOS. In 1983,Microsoft introduced a word processing system called Word 1.0. In 1984, Microsoft introduced Multiplan, BASIC and Word 1.0 for Apple‟s Macintosh computer. 19 It also upgraded MS-DOS forIBM. In 1985, it introduced Windows 1.03, and the Excel spreadsheet for Macintosh. In 1986,Microsoft launched an initial public offering (IPO) and raised $61 million. 9 Japan based Sony Corporation is one of the largest media conglomerates in the world. The company is involved inseveral businesses including electronics, communications, video, media, and information technology. Sonygenerated revenues of US$ 63.98 billion in 2006, and net income of US$ 1.05 billion. The company entered thegaming console market through launch of PlayStation in 1994. The product was highly successful and Sonylaunched PlayStation 2 in 2000. 10   Sony‟s PlayStation 2 w as its second video gaming console after the successful launch of PlayStation. Sonyannounced development of PlayStation in March 1999 and it was launched in March 2000 in Japan and in October2000 in the US. Sony had sold more than 111 million units of PlayStation 2 by end of 2006. 11 PlayStation 3 was released in November 2006. It has Blu-ray drive, HDMI Port, Blue tooth controller etc. On thefirst day of its release, PlayStation 3 sold over 80,000 consoles. 12 Nintendo was founded in Japan in 1889 as a maker of Japanese playing cards. The company entered into several other businesses but emerged as one of the leading video game console manufacturers. The company‟s revenues in 2006 were at US$ 4.5 billion. 13 Wii is the fifth game console from Nintendo. The company announced the development of Wii in 2004 and waslaunched in December 2006. As of January 2007, Nintendo had sold 1,720,700 units of Wii in North America. 14 GigaOm is a blog published by Giga Omni Media. According to Technorati, GigaOm.com is one of the top 50 blogsworldwide. The blog offers Web 2.0 news, analysis, details of new technologies, broadband and online games etc. 15   Ed Oswald, “Has Xbox 360 Already Won the War?” BetaNews, December 07, 2006.   16 Beginners All-purpose Symbolic Instruction Code (BASIC), one of the first programming languages for computers. 17 FORTRAN stands for Formula Translator. It is a high-level computer programming language suitable formathematical and scientific computations. 18 Common Business Oriented Language. A programming language used in business data processing. 19 The Macintosh was a 32-bit single user system. It popularized graphical user interface.  The Making of Xbox 360 3 In 1989, Microsoft introduced Microsoft Office, which included several applications like Word,Excel, etc. In 1990, Windows 3.0 was launched, followed by Windows NT 3.1 in 1993. In 1995,Windows 95 operating system was launched. This was followed by web browser and Internetexplorer, MSN online service. In 1997, Internet Explorer 4.0 was released. In 1998, Windows 98operating system was released and Steve Ballmer (Ballmer) was appointed the President of Microsoft, while Gates remained its CEO and Chairman 20 . Subsequent launches includedWindows XP in 2001.Microsoft was also involved in the computer hardware business from the early 1980s. Microsoft‟s hardware group was formed in 1982, and by 1983, the company was shipping pointing devices. In1989, Microsoft shipped more than 2 million pointing devices. In 1994, Microsoft launched anergonomic keyboard and by 1997, Trackballs and joysticks were added. In 1999, Microsoft launched the first optical mouse. By 2001, Microsoft‟s revenues from pointing devices stood at US$ 569 million. Other hardware products from Microsoft were broadband home networkingproducts like wireless base station, network adaptors, and others. Microsoft‟s interest in gaming dates back to 1983, when the company sold the game MicrosoftFlight Simulator. Some other gaming ideas were also pursued. But these were limited to developinggaming software. By 2000, Microsoft emerged as one of the top PC game marketing companies,with four titles in the top ten games, in PC gaming business valued at US$ 1.4 billion. Its gamingsite www.zone.com had 12 million registered users at that time. Microsoft also acquired somegame companies like FASA Interactive, Access Software, and entered into agreements with othercompanies to develop games. Some of the popular games from Microsoft were Age of Empires, Close Combat, Pandora‟s Box, Microsoft Golf, and Midtown Madness, among others.Though Microsoft played a major role in the PC gaming business, several designers opted todevelop games without using the Windows operating system. They were of the opinion that theWindows operating system slowed down depiction of graphics. Several games developed by othercompanies bypassed Windows and were loaded through DOS. As Microsoft went on to developthe Windows 2000 operating system, it was widely believed that many of the games that wereusing DOS would become incompatible with Windows 2000. In order to avoid this, in early 1998,Microsoft acquired several gaming companies and entered into exclusive publishing 21 deals withgame developers in order to develop games using the Windows operating system.During this time, several popular gaming console manufacturers like Nintendo and Sony werelooking at upgrading their consoles by making them Internet compatible. They had to add akeyboard to the existing console, in order to enable the gamers to surf Internet. Microsoft faced amajor threat from gaming console makers, which would be manufacturing peripherals. Before thatcould happen, Microsoft itself wanted to enter the gaming arena and bring out its own console.Since the company already owned several popular game titles, converting them into console gamesfrom PC games would help Microsoft further expand its reach.Though it was widely believed that Microsoft was keen on coming up with its own gaming consolefrom 1999, it was only in March 2000 that Microsoft confirmed its entry into gaming. Microsoftannounced that its gaming console would have Internet access, would allow multiplayer gamingand have movie quality graphics. Microsoft also announced that the console would be called Xbox.Microsoft estimated that its gaming console would be three times more powerful than the existingmarket leader PlayStation 2. 20 In January 2000, Ballmer was appointed the CEO of Microsoft and Gates remained its Chairman. 21 Video or computer game publishers are companies that publish the games, which are developed internally orexternally through a game developer. The game publishers are responsible for manufacturing and marketing thegames. Some of the well-known game publishers include Electronic Arts, Nintendo, Activision, Sony ComputerEntertainment and Microsoft Game Studios.
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