When Gears of War debuted Nov. 12 to critical acclaim and frenetic fandom, it was the culmination of a years-long strategy for Microsoft to gain credibility in the videogame industry. And it was just in the nick of time to make the Xbox 360 look good, as Sony and Nintendo launched their consoles. It was proof that Microsoft could live up to its promise of launching second-generation 360 games, just as the rivals launched their first-generation titles.
One game isn't going to win the console war, but Microsoft's newest hit will keep its console in the limelight at a critical time when gamers are deciding where to invest their hard-earned dollars. Gears of War arrives just as Microsoft has plenty of consoles available in the market, while at least one of its competitors is supply-constrained. As such, the game is one more piece of evidence that Microsoft is executing according to its plans. It remains to be seen if gamers will anoint Microsoft the console king, or if the 360 is doomed to fall behind, now that it is no longer the freshest lettuce on the shelf.
The string of on-time results with the 360 makes Microsoft seem accidentally brilliant. After all, it was an accident, because Microsoft had no clue about when Epic Games would really finish the game. Cliff "CliffyB" Blezinski, the lead designer at Epic Games, proposed his concept for Gears of War in 2002. It turned into four years of effort, $10 million in development costs and a marquee title.
And when Microsoft launched the 360 last fall, its executive team really didn't know that they would beat Sony's PlayStation 3 by a year. Now, as Microsoft enters its second holiday season, it has more than 160 games available, while Sony will struggle to get 22 out by year's end, and Nintendo shoots for 32 games on the Wii. Microsoft has a permanent advantage over Sony in this generation.
"In the last generation, we were late and our box was more expensive to build," said Bill Gates, former chairman of Microsoft, on a recent visit to the TechNet conference in Silicon Valley. "We said this generation we we're not going to repeat that. We traded positions with Sony. We came out a year before them. We have lower costs and a sleek box."
Sony's $600 version of the PS3 is indeed more expensive to produce, with an estimated manufacturing cost of $840, according to a "tear down" analysis by market research firm iSuppli. The same company estimates that the 360 now only costs $323 to manufacture. The cost difference is important, because Microsoft is in a position to introduce price cuts that could drive Sony deeper into the red. In its most recent quarter, ended Sept. 30, Sony's earnings fell 94 percent to $14.4 million because of costs related to its laptop battery recall. It also reported a $369 million operating loss in its videogame business due to PS3 start-up costs. Sony has $4.7 billion in cash and $3 billion in short- and current long-term debt.
Meanwhile, Microsoft has $31.8 billion in cash. The Entertainment and Devices division, which includes games, grew its sales for the most recent quarter by 70 percent, to $1.03 billion. The division lost $96 million, down from a loss of $173 million. Even if all of its other businesses were just breaking even, Microsoft could lose that much money for 80 years before it ran out of money.
Robbie Bach, president of the E&D division, says Microsoft has no intention of just bleeding Sony to death. His goal is to make the division profitable through smart thinking, not brute force. He says the division is on target to hit profitability by June 30, 2008. In the last generation, Microsoft lost an unimaginable $168 per box, or about $3.7 billion altogether. It burdened every machine with a $40 to $50 hard disk drive, making the hardware too expensive to ever break even. This time, Microsoft balanced its system better, toning down the technology in the name of shaving costs.