Microsoft Tells Customers The Offline Strategy for XBox One is XBox 360

In a recent interview Microsoft’s Don Mattrick told a reporter that if customers didn’t have an Internet connection then Microsoft has an offline device, it’s called Xbox 360. Whilst this was a heavy handed and perhaps unwise statement, it underlines the company’s position pretty clearly.

So has the Microsoft senior management team lost all understanding of their customer’s needs? Certainly the discussion of this feature has flared across the social media channels and much of the response has been negative. Bearing this in mind, why insist on Internet connectivity for XBox One? The answer is simple, Microsoft want to make money.

Now before you throw your hands up in the air and say “Well they won’t make money if everyone buys a PS4” take a moment to consider that Microsoft have almost certainly taken a good long look at their customers and have still decided to go down this route. The question is why?

On the face of it the PS4 is a better gaming platform, with a more open development strategy to encourage indy developers. It doesn’t have to be online and it has a lower price tag. Gamers at E3 certainly seem impressed with comments like “They’ve listened to us and given us exactly what we want” being frequently heard.

The answer to what Microsoft are doing is that they are not aiming at hardcore gamers. They’ve noticed four important trends:

1. The market for hardcore gamers is significantly smaller than the entire home entertainment market. Customers want games sure, and your gaming console better not disappoint, but the on-demand entertainment market is just starting to become mainstream.

2. Net-neutrality has become pretty enshrined in U.S. law with the Federal Communications Commission (FCC) approving new rules in 2010 banning Internet providers from interfering with traffic from “over-the-top” service providers like Netflix.

3. Networks are beginning to have the speed with fiber optic roll outs to reliably deliver high definition, on-demand content in a reasonable time-frame.

4. The Fremium model has shown that you can make millions out of in app purchases on mobile platforms and that some games with very limited scope can perform beyond expectations.

So what does all this mean when we look at Microsoft’s strategy? Simply, they don’t just want to be a gaming platform, they want to be a home entertainment platform and for this they need to be online. They want a bigger bite of the cherry and they don’t mind offending a few hard core gamers to do it.

Expect to see more on-demand video, TV channel packages, non-AAA title games with fremium models and other web based pay-as-you-go services.

There’s no doubt that Microsoft are taking a bit of a gamble with this approach but ultimately time will tell whether they manage to successfully position themselves as a media provider and quarterly financial reports will inform as to whether the strategy is a success. However, they’re in good company with taking an online purchasing approach; Apple makes as much money from apps now as it does from the hardware.

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