Three Strategy Lessons From the Latest Round of Xbox vs. PlayStation

Three Strategy Lessons From the Latest Round of Xbox vs. PlayStation

Learn From Your Mistakes

In 2008, when the Harvard Business School case study was written on the launch two years earlier of the PlayStation 3, the question was whether it was “game over” for Sony. The electronics giant had seemingly lost its dominant position in the gaming console market, with the Nintendo Wii’s surprise success overshadowing the more powerful but pricier PS3.

Few product releases are as hotly anticipated, fiercely competitive, or widely debated as those that keep the console wars waging. And as Sony and Microsoft each released a new console last week, the latest battle for gamers’ dollars is finally here. While it is, of course, far too early to declare a winner of this “8th generation,” two case studies written since the last round offer insights into the state of the industry heading into this holiday season. There are already strategy lessons to be drawn from the contest.

The easiest way to understand Sony’s position with the PS4 is to review the mistakes it made last time around, beginning with its price. Ranging from $499 to $599, the PS3 was significantly more expensive than previous consoles, and than both the Xbox 360 ($299-$399) and the Nintendo Wii ($249). The Xbox 360 had the advantage of beating the other two consoles to market by a year, while the Wii introduced a novel motion-sensing wireless controller that allowed for significant innovation in gameplay. Despite its impressive specs, the PS3 was widely viewed, according to the case, as too expensive.

Both the price of the PS3 (which Sony reportedly sold at a loss at launch) and the timing of its release could be attributed in part to the inclusion of a Blu-ray Disc player, then a new technology of Sony’s that was in competition with Toshiba’s HD-DVD format to become the standard for high definition discs. The inclusion of Blu-ray in the base model not only allowed for better, faster games; it meant that the PS3 was a next generation DVD player as well as a gaming console. It was the ultimate home entertainment device. (By contrast, the Xbox 360 offered an HD-DVD drive only as an option with its premium model; the Wii played DVDs but not in high definition.)
The HBS case quotes Holman Jenkins of The Wall Street Journal writing in 2004 about Sony’s strategy:

…somehow, some way consumers in the future will probably need a device to organize all the digital fun streaming around their lives. Sony believes the superbox will sneak into the living room in the guise of a non- threatening consumer appliance…In one swoop, Sony will place a supercomputer in an innocent-looking piece of entertainment hardware and drop it into the home, leading couch potatoes painlessly to their digital nirvana.

But as Sony soon learned, what mattered most to gamers was, not surprisingly, games. And a weak lineup of games at launch, combined with the high price translated into a weak holiday season for Sony in 2006.

“They were touting both messages,” said Elie Ofek, Harvard Business School professor and author of the PS3 case. Sony talked up its gaming platform, of course, but also that it “want[ed] to be the center of your home.” In Ofek’s view that created “confused messaging.”

Sony responded to its mistakes quickly, notably by lowering the price of the PS3 over time, to eventually sell 80 million consoles, roughly equivalent to the Xbox 360. But evidence of these stumbles can also be found in last week’s PS4 launch. This time around, Sony came to market a week ahead of Microsoft, priced its console $100 cheaper than the new Xbox One, and has been careful not to muddy its message — it’s talking the PS4 up simply as the ultimate gaming platform.

In other words, Sony learned from its mistakes. The problem is, it could be over-correcting.

Yesterday’s Mistake Could Be Tomorrow’s Advantage

While Sony may be stressing gaming above all else with its latest console, Microsoft is offering a different narrative with its Xbox One, as The Washington Post summarizes:

The main difference between the two is that Microsoft wants the Xbox to be an all-in-one entertainment system while Sony is sticking to making games the main feature of the console.

Despite early pushback from the gaming community, Microsoft hasn’t shied away from this positioning, advertising the Xbox One’s television integration, as Polygon reports in its review:

It’s not just that Microsoft is more aggressively courting video content and providers with Xbox compared to the competition. With Xbox One’s TV integration, their plan seems to be that you’ll never need to switch away from the system for all the entertainment you’re already consuming in your living room. It becomes a part of the television experience seamlessly and drifts into the background until you’re ready for it — or, say, when you receive a game invite or Skype call.

At first glance, Microsoft seems poised to repeat some of Sony’s mistakes. It has the priciest console on offer (Nintendo’s Wii U came out last year and has not been selling very well) and it includes the latest and greatest in non-gaming entertainment. It’s too early to know how this strategy will work out for Microsoft, but there’s an argument to be made that the console-as-entertainment-hub moment is finally here.

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“In 2000, when we taught about the 6th generation it was already a question of whether this should be the entertainment hub,” Ofek told me. Sony’s attempt in the 7th generation was not successful. But the proliferation of entertainment across multiple devices and apps makes such a hub more useful. “Now we’re on the 8th generation [and] the need for what I’d call a digital entertainment convergence is more acute today than it was before.”

Despite differences in positioning, it should be noted that while the PS4 does not have the same level of TV integration, it does offer streaming services like Netflix, Hulu, and Amazon Instant Video.

“The boxes aren’t that radically different at the end of the day,” said Lewis Ward, an analyst with IDC. “Gamers have absolutely embraced the idea of streaming movies and TV at least on their consoles. The game consoles are moving out from a beachhead of gaming into multimedia in general.”

But if consoles are finally broadening their competition beyond gaming, the threats are as notable as the opportunity.

Your Biggest Competitor Isn’t Necessarily Your Biggest Competitor

For all the attention paid to the head-to-head competition between Sony and Microsoft, the biggest threats to the console makers are external, as explained in the 2012 HBS case “Videogames: Clouds on the Horizon?”. In it, authors Andrei Hagiu and Kerry Herman argue that the industry faces challenges from the rise in mobile and tablet games, as well as from cloud-based gaming.

“Both cloud gaming and tablets and smartphones are essentially substituting away from the console gaming market,” Hagiu told me, adding that “the most vulnerable victim is Nintendo” because of its focus on more casual gamers.

Cloud-based gaming poses a higher risk to the casual end of the market because it allows relatively complex games to be played on simpler, cheaper devices.

“Both Sony and Microsoft are very reluctant to embrace cloud gaming,” said Hagiu. “They’d be very happy if they’re able to delay [it].” That’s because, he says, the widespread adoption of cloud-based gaming could lower barriers to entry in the gaming industry, increasing competition and lowering profit margins for the incumbents.

“Cloud is one of these perennial ‘right around the corner’ technologies,” according to IDC’s Ward. Nonetheless, the threat and opportunity was imminent enough for Sony to last year shell out $380 million to acquire Gaikai, one of the pioneers of cloud gaming. For now, Sony plans to use the service to stream PS3 games for the PS4, and to stream game previews.

Finally, to the extent that Sony and even more so Microsoft are in the entertainment hub business, they must compete with Roku, Apple TV, and similar entertainment devices which, particularly if cloud-based gaming catches on, could also encroach into the casual gaming market.

Sony and Microsoft each have their own strategy for dominating the living room, and edging out the other this holiday season. But for all the spec comparisons, the PS4 and Xbox One may not be each others’ biggest threats.

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