Executive Summary
Microsoft is a powerful industry incumbent with the power and corporate strategy to respond to emerging technologies and potential threats. Microsoft also fosters and maintains key business relationships across all layers of the gaming industry stack. This further enables them to respond to threats.
Position and Potential Threats
Microsoft's strengths include a strong developer community, which is enabled by the cross-platform development capabilities of XNA. The XNA framework recently allowed Microsoft to compete in the mobile gaming space with Windows Phone games. Another strength is enhanced social capabilities through Hotmail, Xbox Live, Windows Live, Facebook, Bing, Twitter and Windows Phone. Connecting gaming devices to the social layer grows the convenience and usability of the gaming device. Microsoft could be disrupted by new emerging technologies specifically ones that enable new user gaming experiences. One example of this kind of disruption would be the Nintendo Wii and Microsoft’s response with the Xbox Kinect. If Microsoft had not responded with Kinect, Nintendo could have taken greater share, greater developer mind share, and greater revenue and value away from Microsoft in the gaming industry. In the next 5 years new corporations that integrate more quickly into new devices or new gaming experiences and steal developer mind share, and gamer market share can threaten Microsoft. Microsoft can respond to potential threats by aggressively sourcing and acquiring companies with potentially disruptive technologies.
Layer Analysis
Microsoft has key relationships in all layers of the gaming industry. Many of the relationships are in addition to the participation of Microsoft itself in a layer.
Hardware
Microsoft is active in the hardware layer with the Xbox 360. Microsoft uses a loss leader strategy for the Xbox, looking to recapture value in the other layers. Xbox 360 uses key relationships with IBM and NVidia for chip design and Flextronics, Wistron, and Celestica for manufacturing. Microsoft has another strategic partnership in the hardware layer with Nokia. Microsoft’s investment into Nokia enables higher volumes of Windows Phones. Mobile gaming is a growing trend and influencing the hardware layer further enables Microsoft to capture value in other layers.
Content Creation & Publishing
Microsoft participates directly in the content creation layer, but to a much lesser extent than at the publishing layer. Many of the Microsoft developed games are well known classics because they have seen a wide distribution (e.g. FreeCell, Flight Simulator). Microsoft also develops games when it adds value to another layer, for example, Microsoft acquired Bungie Software to launch the Xbox with Halo. Halo was the ‘killer-app’ that helped cross sell the original Xbox. Microsoft also has many key relationships in the content creation layer. Exhibit 1 shows Microsoft’s sphere of influence. Most of the relationships represented there are game developers who rely on Microsoft for publishing the games they’ve developed. Currently content development and publishing is the most profitable layer, with Microsoft and game developers holding onto the biggest share of the end user’s dollar.
Distribution
The distribution layer has seen significant disruption in the past 5 years. Game purchases are trending away from physical discs and brick-and-mortar retailers and trending toward digital distribution and virtual storefronts. Microsoft stands to benefit from this disruption. The Xbox Live Marketplace now delivers full downloadable titles, add-ons, downloadable content, as well as movies and music to gamers’ Xbox 360s. Microsoft operates the Xbox Live Marketplace with Microsoft points, an artificial currency valued at 80 points to the dollar. Microsoft also has key relationships in the traditional distribution layer. Many Microsoft Published games are still purchased at the brick-and-mortar retailers like GameStop.
OS/Platform
Microsoft has 4 concurrent strategies in the OS/Platform Layer: 1. Windows as platform 2. Xbox as a platform 3. Windows Phone as a platform 4. XNA as a developer platform Windows, Xbox and Windows Phone address different ‘screens’ the PC, the TV and Mobile phone screens. In the current industry structure the operating system/platform layer is the layer with the most influence on other layers, as the controller of this layer dictates capabilities to other layers. The XNA development framework is Microsoft’s strategic play to capture and keep developers in the Microsoft ecosystem. XNA minimizes code rework to address the 3 screens.
Social
Microsoft’s involvement in the social layer has a two-pronged approach. First, Microsoft maintains it’s own social connections with Friends on Xbox Live, Windows Messenger and Skype. Secondly, Microsoft established key relationships with other social networks, like Facebook and Twitter and connects these social networks to Xbox Live and Windows Phone. Conclusion Microsoft participates in all the layers of the gaming industry to some extent. A combination of direct participation and key relationships with other companies illustrates Microsoft’s strategic choices with regards to each later. The choices made in one layer directly impacts the other layers and the amount of value Microsoft can capture from the gaming industry.
Exhibit 1: Microsoft’s Sphere of Influence
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