Microsoft’s Missed Opportunity: Pricing Kinect

image This is an analysis of Microsoft’s pricing of it’s motion control add-on to Xbox 360, Kinect,  and why it’s a missed opportunity which I think is based on a lack of confidence from Microsoft regarding Kinect’s potential and target market.

Microsoft released Xbox 360 in 2005 with the direct intent to own the living room entertainment space by offering games, movies, music, and social media, utilizing its Xbox Live service. A year later, Sony and Nintendo answered with PlayStation 3 and Wii respectively. By having the advantage of being the first mover, Microsoft gained a healthy lead as a hardcore-gamer console with a great lineup of exclusive games and a superior online service. Sony did poorly with both gamers and developers due to its price, awkward architecture, and archaic online service, but they sported the most powerful machine. Nintendo, on the other hand, turned the race for market domination up-side-down by focusing on the casual market with its innovative motion controls, ignoring flashy hardware and all but the most simplistic online service. The race was on!

The Story so Far…

Nintendo Wii is holding a healthy lead worldwide with Microsoft in second place except in Asia (Japan, S Korea, Singapore, and Hong Kong, not Australia) while Sony’s catching up fast in North America and especially in the EU. Both Microsoft and Sony has realized that motion controls are a must, as is attention to the casual gamer. The casual market was ignored by both Microsoft and Sony until Nintendo, and lately fueled by the iPhone and Android, showed how big this market is.

Xbox Live is still the benchmark for online gaming and entertainment. Sony has closed the gap significantly but is still lacking the main feature of Xbox Live – a unified user experience that works across all features, whether it be games, watching movies or listening to music. Nintendo on the other hand is trailing severely.

Last but not least, Xbox 360 leads PlayStation 3, and crushes Wii in games per console sold, or attach rate. Since I don’t have direct to access to NDP data directly and only through secondhand sources, I can’t report the exact numbers. But here’s a very close guess. The average Xbox 360 owner has 9 games in his/her library thanks to hardcore games and Xbox Live, the PlayStation 3 owner has close to 6, while the Wii owner has less than 3. Combined with reports that the Wii is collecting dust in more homes than playing it, this is a very important observation to keep in mind.

Motion Control Differentiation

Sony has chosen to directly mimic Nintendo with it’s Move product. You hold a wand/controller in your hand and your movements are picked up by the console (Nintendo uses a infrared sensor, Sony uses a camera). In contrast, Microsoft is  the odd player out this time by using a two cameras (a regular camera and an infrared camera to ensure 3D scanning) and a microphone, all in one unit. This means no controller at all with the addition of voice control. It has the potential to outdo Minority Report, but for hardcore gaming it’s limited (but that’s for another post).

Almost all Nintendo games utilizes the motion controls, but many gamers prefer using "old-style" controllers.

Sony will release games made for Move, but some hardcore games not-made-for-Move will also have the option to use motion control.

Microsoft says it will release 15 games at launch, all made for Kinect, but there will be no support for hardcore games. On the other hand, with Kinect one can choose and play movies & music, initiate video calls and more, with the wave of your hand and a voice command.

Pricing

Nintendo includes the motion control when you buy the console, currently priced at $199. If one want’s to utilize the systems full potential, additional hardware is required (Motion Plus). This accessory has been unsuccessful to say the least. Tie this in with the previous comments about attach rates and dusty Wiis.

Sony will charge $180 for a full motion control set which consists of several pieces. The consumer has the option to buy the parts one by one depending on the games one wishes to play.

Microsoft will charge $150 for a stand-alone Kinect unit (all in one unit) which will connect to any Xbox 360. A bundle with Kinect and an Xbox 360 without storage has been announced at $300.

The Problems

Even though the Wii continues to sell well, they have a problem with people playing it after the first novelty wears off. Mom’s will continue to exercise with it and senior citizens will continue to bowl. Hardcore gamers will dust the Wii off once every year to play a new Zelda or Mario. But what else?

Sony uses Move in hardcore shooting games. But who wants to use slow, imprecise controls with your arms up in the air in a game that requires fast and precise controls?

Kinect can’t keep a skeleton lock when the player is close to the ground. How about sit-ups and pull-ups in a fitness game? How many co-op players can Kinect handle? There are too many questions to list here.

Who’s the Target Market?

Nintendo’s target market hasn’t changed from the release of the Wii. They own and utilize loved IP’s like Mario, Zelda, Metroid, et al for hardcore gamers, who has had to settle for a few games. With the focus on casual gamers, they have had great success with Wii Sports and Wii Fit. They made moms, young kids, and grandparents gamers. I’m sure Nintendo has plans, but for now, they are only interested in keeping their position.

Sony enjoyed the lead for so long with PlayStation 2 that they forgot to think. But they are back, and with a vengeance. Their target market is everyone. Sony is going after Nintendo.

Microsoft used their heads with Xbox Live and do very well. Their target market is also everyone. Microsoft is going after Nintendo.

Sure I exaggerate, but only slightly. An interesting observation is that only Microsoft and Sony has an comprehensive idea of being the entertainment center of the family.

The Missed Opportunity

I hope I’ve armed you with the facts and insights needed to follow me in the following thoughts. Here are the main points again.

Xbox Live is at the moment the best online entertainment service.

No-controller motion control is superior to controller-required motion control for family entertainment purposes.

Microsoft wants market shares.

Xbox 360 has a high attachment rate.

Most of Xbox 360 owners don’t care about Kinect.

Casual players only know about Nintendo Wii

At $150 Microsoft will only get half of  25+ year-olds households to buy Kinect, and a few loud teenagers. This would be around 20% of their current market. Sure this is a large number. And Kinect will still be considered a success. In this scenario I doubt they will reach more than 750k new users during the holidays.

Here’s what I think they should do.

Show off the Xbox 360 and Kinect as a controller free entertainment environment. Focus on how you navigate movies, play music, and make video calls without a controller.

Offer the new Xbox 360, with 250Gb and WiFi, with Kinect, 1 Kinect game, and 3 months Xbox Live and 3 movies from Netflix for $249. This is the highest price point Microsoft can pick if they wants to move the battle lines, or change the race if you will. Offer it from launch (Nov 4th) to mid Feb. Microsoft will take about $100-$130 loss per sold bundle. Compare this with the attach rate and Xbox Live subscription income. This strategy would rattle Sony and challenge Nintendo. Given the time frame of the offer, the Grapevine (as per Nintendo) will have time to work, and they will probably get 30% of current owners to upgrade, plus up to 2 million additional customers.

Confidence or No Confidence?

Maybe Microsoft has so much confidence in the success of Kinect, that they don’t think they have to hit the sensitive price points the market previously have shown to be important for serious market penetration. It’s doubtful that they are that naive. So they are going for a long-term strategy, slowly growing its install base. By doing this they are open for attack from both Sony and Nintendo.

Or, Microsoft has little confidence in the performance of Kinect and its games. If I’m right, we’ll see at least two major software updates for Kinect in 12 months from release, and we’ll see a drop in attach rates.

Nintendo will most likely make a big announcement (new console?, major price cut?) as soon as they see their sales dropping. Sony will chase Microsoft with all that they have. Missing the opportunity to make a bold move, Microsoft’s position on the console market will remain uncertain.