Microsoft Corporation (NASDAQ:MSFT) made one reveal at this year’s E3 that could shift the console market in its favor. The firm says that Xbox 360 titles will work with the Xbox One later this year. It’s a very cheap way for Microsoft to attract users to the Xbox One platform, and it might just be the best move from Satya Nadella’s concern since the Kinect was taken off the system.
Microsoft promised that at least 100 titles would work with the new hardware by holiday season 2015. For investors, who normally don’t care about the Xbox One as it means little to the firm’s earnings, there is a silver lining: the move will be cheap, and it might make the Xbox One a viable business.
Xbox One bets on Xbox 360 success
Microsoft had bet on an easy win over the Sony Corp (NYSE:SNE) PS4 in this gen of home consoles by virtue of its victory over the PS3. That didn’t work. A 2013 event that launched the console was met with huge backlash. Many features, including the lack of compatibility with Xbox 360 games, were met with protest.
It seems, after Tuesday’s announcement at E3, that Microsoft is still putting renewed effort into using the strength of the Xbox 360 to boost sales of the Xbox One. The current gen of home consoles has an install base of less than 40 million, while close to 200 million home consoles were sold by Sony and Microsoft when the PS3 VS Xbox One fight was in full flight.
That means that there is a market of more than 160 million people who still, have not bought the latest console. Microsoft just gave a reason for the 85 million Xbox 360 owners to invest in an Xbox One over the PS4.
Before E3 IHS Technology forecast a total install base of 20 million units of the Xbox One by the end of the year. The PS4 is set to have an install base of 34 million says the same report. That may change as Microsoft’s new strategy for the console becomes clear.
Investing small for a big return
The Microsoft system to make Xbox 360 games work on the Xbox One will be a type of software emulation. That means that there’s more to it than just flipping a switch or editing a line of code. An entire Xbox 360 system will have to built into the Xbox One platform. That’s not going to be easy, but it’s a lot less expensive than some of the other methods Microsoft is using to sell the Xbox One.
Before E3 began Microsoft revealed that a short term discount that cut the price of the Xbox One to $349 would become permanent. With gross margins on the console still razor thin, or possibly negative, that’s a move that will cost the firm with each new console sold.
Microsoft also announced a few big games at this year’s conference including Halo 5: Guardians, Fable Legends, Rare Replay, and Gears of War. All of those are going to be made by Microsoft in house, and that development is going to cost the firm a huge amount of money.
Ahead of the conference MKM Partners analyst Eric Handler said that “Halo can be a swing factor—and obviously that’s one of the biggest titles in the industry and for Microsoft their biggest exclusive. This is the point where they have to really make the push if they’re going to gain ground.”
Compared to those costs, the development of Xbox 360 emulation should be inexpensive for Microsoft, and it is the single most compelling reason to pick the console over the PS4. That may change in the months ahead, however. Integration with Windows 10 is making the Xbox One an ever more appealing console and Sony should be very worried.
Microsoft invests in Windows 10 with Xbox One
The firm also showed that it was investing in console exclusives. Fallout 4, a game that is set to be the blockbuster of the year, will include Fallout 3 for free on the Xbox One. It will also support mods that were made for the PC.
That deal with Bethesda Softworks likely cost Microsoft a lot of money, but it will give the Xbox One a new boost heading into the holiday season.
Matt Smith at Digitial Trends says that Windows 10 might just be able to save the Xbox One for Microsoft. The reveal of the modding ability of the Xbox One could be a big part of that.
PC gaming has gotten a huge boost in the last five years, driven by two factors: low-priced games and modding. Microsoft isn’t able to slash the price of games on the Xbox One, but it is able, by virtue of its Windows 10 integration, to bring mods to the platform.
That’s the big story behind Microsoft’s Xbox One at E3. The firm is treating the console like a special Windows 10 machine. That should lower software costs for the console as those working on Windows 10 should be able to work on the console.
Selling the Xbox One to investors
That might be the only way for Microsoft Corporation to sell the Xbox One to the firm’s investors. They need to be sure that the Xbox One isn’t costing them anything, at the very least, and unifying it with Windows 10 is one way to do that.
Making the console a success is another. The huge sales of the Xbox 360 are what gave Microsoft the confidence to march forward in the hardware space. As Windows Phone and the Surface tablet struggle, Microsoft badly needs a win in hardware to justify its worth to the firm’s shareholders.
That’s at the heart of the firm’s E3 moves. It needs to make the Xbox One a success without spending huge amounts of money on the system. Putting Xbox devs in the same room with Windows 10 devs is a start, and the deal with Bethesda Softworks shows how much that can add to a gamer’s experience.
Building an emulator for the Xbox One is easier for software makers at the firm because they’re not building for a new system any more. They’re building onto Windows 10 with a few quirks.
Microsoft is investing in the Xbox One in the cheapest way possible, and gamers are coming around to the system as a result. Phil Spencer, head of the firm’s Xbox Division, is driving forward with a strategy that should endear him to both the firm’s share owners and the gamers that actually use the product.
That’s the sort of thing that rarely happens at Microsoft, and it should be celebrated, at least until the firm reveals the actual cost of all of these programs at the games division.