And the loser is... XBox 360!
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So, it's time to tackle the latest console wars.Get comfortable... this is going to take awhile. 
Sony vs. MicrosoftThe XBox 360 is going to sell a lot of units, and eventually make money for Microsoft. But they're going to be second place to Sony, even before the PlayStation 3 is launched.The reasons for this have to do in part with the technical specs of the systems, the games available at or after launch, and brand loyalty. And while those are all going to be contributing factors, none of those are the root cause.The root cause is due to a completely different corporate culture within Microsoft and Sony. Make no mistake about it - Sony is just as big of a monopolistic bully as Microsoft is - but they approach their businesses in entirely different ways.On the surface, they share some similarities. Sony wants to dominate any market it enters. Consumer electronics, professional video equipment, video games, and so on. It does this, more often than not, by creating products that, through one means or another, become the de facto standard for their type. Sony does this, in part, through bullying, just as Microsoft does. Especially when it comes to professional products. Sony adopts a "my way or the highway" attitude, and they're so large they can usually get away with it. But the thing to remember about Sony is - they're a proactive company. They want to dominate the market by having the "must-have" product out there. Sometimes they do this by inventing a product, sometimes they do it by re-inventing an existing product in a proprietary manner that forces you to use their version of it. Either way, Sony relies on some degree of innovation to succeed. They're always taking the initiative, and they plan for the long-haul. They want the best product out there, because they know it's likely to come out on top, and when it gets there, they want it to stay there. Sony wants to lock you in as a customer for years (and many product cycles) to come.Microsoft, on the other hand, is a reactive company. Everything they do is in response to something else. They lack the ability to self-generate any sort of original ideas and are only doing what's necessary to dominate in the here and now. They see an area of technology where they don't rule, and want to get in there and take it over. They don't care about having the best products out there - they're concerned about having the biggest piece of the pie, and getting it as fast as they can. If they can take over an industry, they can own an industry. If they can own an industry, they don't have to innovate. They're short-sighted and can't see beyond the horizon. This is why they keep having to change strategies when new technologies appear seemingly out of nowhere and threaten them. They respond after-the-fact to paradigm shifts - but they don't cause them. This is the corporate attitude that spawned the XBox 360. This is also the attitude that spawned the original XBox.The original XBox came about because Microsoft saw Sony's total dominance of the videogame market, and the kind of money that industry generated. It was done as a response to Sony - not as a genuine desire to make a better gaming machine. It only took 18 months for Microsoft to throw the XBox together and get it to market. They rushed it out there to cash in on the buzz surrounding what were the "next-gen consoles" as fast as they could.The problem was, they ended up coming in second to Sony. By a pretty wide margin, too. This was unacceptable to Microsoft. The reason they ended up in second was mainly because their console really didn't offer anything that was compelling enough to get people to not buy a PlayStation 2. Certainly a lot of people bought the XBox (24 million at last count), but it didn't do what Microsoft wanted it to do - take away Sony's customers.For the XBox 360, Microsoft is once again reacting to Sony. This time, it's the PlayStation 3 they're reacting to, even though that hasn't been released yet. Now, Microsoft has always implied there would be a follow-up to the XBox, so how can this be a reaction? Because they rushed the XBox 360 to market.Microsoft released the XBox 360 when it did, not because the console was the best it could be and it was the right time to release it. They released it to beat Sony to market. Period. They wanted to cash in on the Christmas buying season, and the fact that they would be the only next generation console on the market for months. They believed that this would cause every gamer out there who wanted a next-gen system to buy the 360, since it would be here now. With Microsoft, it's always about now. Dominate now. Take out the competition by beating Sony to the punch. Get the consumers to spend their money now, and they won't want to buy a PS3 later, right?The trouble is, it's not going to work.In the short term, there are a couple of big problems for Microsoft.Console ShortagesFirst of all, there's the shortage of XBox 360s. In fact, Microsoft sold out of the units so fast (mere days after its November 22nd release), some industry pundits are claiming it actually hurt the overall holiday sales figures for videogames. And if people can't buy a 360, they're going to spend their money on something else. Either more games for existing consoles, or they'll save their money to see what the PS3 is going to look like. It doesn't do any good to bring a product to market, if people can't actually buy it. Wall Street analysts predicted Microsoft would sell 1.8 million units over the holidays. They ended up falling well short at 1.3 million. Moreover, Sony saw a 10.5% increase in PS2 sales, selling more units than the XBox 360 did. (Sony also claims to have sold more PSPs than the XBox 360.) So - bad move there for Microsoft. As it happened, the buzz over the 360 reportedly hurt the original XBox's sales over the holidays, too.Lack of Truly "Next Gen" GamesRelated to the shortage of consoles, is the shortage of games. Most stores that I went into that had XBox 360 displays had maybe 10 games available. And while this is pretty typical for a launch, it doesn't look very promising to a potential buyer. Especially when there are tons of games for existing consoles right around the corner. Add to this the fact that a lot of the launch titles are garnering less-than-stellar reviews. The games so far, aren't the quantum leap over existing games that people are expecting them to be. Software sells consoles. That is, if you have consoles to sell.Rumors of ProblemsThen there are the reports of reliability issues and the inevitable angry customers. These may not be widespread problems, but the reports of them are widespread, and that's more important. Why? Well, if you're a hardcore gamer with disposable income, it wouldn't really matter. You'll buy an XBox 360 despite negative reports, because you've probably already determined that those issues wouldn't likely affect you. But... what if you aren't the one paying for it? What if your parents have to pay for it? There was a pretty steady stream of negative reports about the XBox 360 in the news, because anything Microsoft does wrong is news. You didn't have to be a close follower of the industry to pick up on it, either. So parents who might have otherwise bought their kids an XBox 360 might think twice before spending several hundred dollars for one. Especially if they can't even find one in the stores.The reliability problems (whether widespread or not) were also backed up by what I'd seen in several stores. Just before Christmas, I hit up three stores (two Toys 'R' Us stores, and an EB Games), that had XBox 360 kiosks. In one of the Toys 'R' Us stores, the XBox 360 only had videos of the games running on it. They didn't actually have a playable demo installed in the unit. It was drawing absolutely zero interest from passers-by in the video game department. In the other two stores, both XBox 360s were not working. Whether they'd crashed, or had just been turned off didn't matter. During the busiest shopping week of the year, nobody was giving them a second look. After the holidays, the units were (generally) up and running, but by then, nobody was shopping. And of course, you still couldn't find one for sale anyway. That sort of negative impression can stay with a shopper for months. Especially with something that expensive, and hard to find. Why make the effort? If you have to wait anyway, why not just wait a little while longer for the PS3?So sure... Microsoft sold out of the XBox 360. But by doing so, Have they risked alienating potential customers? Now that the XBox 360 hype has passed, will people still buy them as they catch up with production, and games begin to trickle out? Or will consumers just wait for the PS3? Was getting their console out the door first, and selling 1.3 million units really worth it to Microsoft?Yes. For now. Because they were still first, and Microsoft thinks that's the most important factor in getting customers to buy their console, rather than Sony's.So will this work for Microsoft, and make the XBox 360 the dominant new console?Well, no.Even discounting the short-term issues, theirs is a flawed strategy for a number of reasons.Loyalty of PlayStation ownersFirst, gamers who are loyal to the PS2 are going to wait for the PS3. The specs for it are too compelling for them not to wait. There aren't any killer apps for the 360 that will drive Sony loyalists over to Microsoft. This is still the vast majority of the market (Sony claims to have sold over 100 million PS2s), and those gamers will still be able play nearly all of their PS2 (and PS1) games on the new console. And while the backwards-compatibility for the XBox 360 is better than initially expected - it is not backwards compatible with any games from Sony.Curiosity of gamers "on the fence"Gamers who could go with either console will, at the very least, wait to see the PS3 in person. Why spend their money on a 360 now, when the PS3 is maybe six months away? It's not as if Microsoft is a year or more ahead (which would give them a pretty big advantage) - they're about a half-year ahead. For $300-$400, even the most impatient gamer is likely to be able to wait that long. Some of those gamers will buy a 360, but many more will buy a PS3. And one of the reasons is because of Blu-Ray. The PS3 will have it. The XBox 360 won't.High definition moviesA little history is in order at this point. There are two main competing technologies that are aiming to replace current DVDs with media capable of supporting high definition video. Both are backwards-compatible with DVDs and CDs. One is going to lose, one is going to win.HD DVD, which is backed by Microsoft, among others, is a step up in capacity (15 GB) from current DVDs, and is largely compatible from a manufacturing standpoint with current DVDs. Microsoft is backing it, not because they think it's a superior format (it's not), but because it fits into their home media center plans. The Digital Rights Management (DRM) scheme for HD DVD would potentially allow for copying the movies off onto a home media center for easy access. Plus, it was supposed to be out to market by the end of last year. Remember Microsoft's desire to beat Sony to the market? However, Toshiba (who is the principle manufacturer backing the format) had to push the release back, missing the holiday season, and it's still not out yet.The biggest problem with HD DVD is that the movies studios are mostly backing the other technology: Blu-Ray. A few studios are considering backing both, but Blu-Ray by far has the most support from movie studios. Blu-Ray can store 23 GB of data (with higher capacities in the works), which means higher quality video - and more of it - on a single disc. But that's not why the studios want it. The studios want it because they like the DRM scheme on Blu-Ray better. Blu-Ray prohibits the user from copying movies off the disc, and copying movies is something that the studios absolutely hate. The studios control the movies, and guess who one of those studios is? Sony. Sony is a huge movie studio. They own Columbia, TriStar, MGM, United Artists, and all of the movies in those libraries. They are also one of the developers of Blu-Ray. The other movie studios on board with Blu-Ray are Disney (including Pixar, Touchstone, Miramax, Buena Vista), Warner Bros. (including Turner Entertainment, Castle Rock) and 20th Century Fox. What's left over? Well, basically Paramount and Universal. However, there are reports that those studios may back both formats, at least until a dominant one emerges.Sony has a lot to gain with the adoption of Blu-Ray as the new standard. They get to sell their own movies on Blu-Ray. They get to license Blu-Ray technology to others. They can use it as a marketing tool for selling the PS3. They can use it to sell HDTVs, and other Blu-Ray-based products. And it's going to work.High definition has been slow in adoption by the general public due to two things: the lack of high definition content, and the cost of high definition TVs. The costs of HDTVs are coming down dramatically. But because there's so little HD content, many consumers still see little reason to buy HDTVs. If there were more content, even more HDTVs would be sold, driving the cost down further, resulting in more sales, and so on.Content is the key to the adoption of HDTV. It's also the key to the successful introduction of a new media format. Blu-Ray will bring that content. Sony is going to sell tens of millions of PlayStation 3s, and the studios will have millions of people to sell new, high definition versions of their movies to. Sony will also have millions more people to sell HDTVs to. And the PS3 will be the driving force behind it. Barring an obscenely high introductory price or technological catastrophe, that's just a given fact. In order to get Blu-Ray out there and adopted as the standard, Sony will sell the PS3 at a very competitive price, and take a heavy loss on each console. Of course, Microsoft also takes a loss with the XBox 360 (for the original XBox, each owner had to purchase ten games just for Microsoft to break even on each console sold). Over time, component costs come down enough for the hardware to be sold at cost or for a profit, but the real money comes from software sales. For Sony, that also includes movies. For Microsoft, it doesn't. Sony can afford to sell the PS3 at a greater loss, since they can make more money back off software and movies, than Microsoft can on software alone.Because of its ability to play high definition movies, Sony will sell more PS3s than they would have otherwise (and they would have sold a lot of them anyway). For comparison's sake, the PS2 sold a lot of units in its initial run because it was not only a game console, but gamers got a DVD player included at "no extra cost". This was at a time when DVD players were a lot more expensive than they are now. It cost Sony a lot of money, but it paid off, and they're about to do the same thing again with Blu-Ray. (And as an aside... look for Apple to be one of the first - if not the first - company to offer computers with Blu-Ray burners and authoring software. They're one of the other major backers behind Blu-Ray, and are big proponents of HD.)Now, one knock that I've been reading about Blu-Ray is the higher cost of manufacturing discs, and therefore the higher cost of movies and games. Well, Sony just announced their pricing scheme for movies, which is in line with what DVDs were introduced at. And if you're buying a PS3 and an HDTV anyway, the odds are you've got some disposable income at hand. Furthermore... there's the rental market. I hardly even buy DVDs now, so why would I buy Blu-Ray discs when I could probably rent them through NetFlix? Finally, as far as games go, nobody has ever said that the games have to be on Blu-Ray discs. There's no reason, except for extremely large games, why they can't continue to ship them on DVDs. And gamers are likely to be willing to pay extra for Blu-Ray games anyway, since (hopefully) they'd be something pretty special to exceed a 7.9 GB dual-layer DVD.Because Microsoft rushed to market, they have no capability within the XBox 360 to play high definition movies. They didn't even wait for the technology that they're backing - HD DVD - to be ready before shipping the console. They have a next generation console, with previous generation media. Now, they have announced that they plan to ship an external HD DVD player later. But that means that XBox 360 owners have to buy another box to plug into their console, to watch HD movies. There's no indication as to when (or if) you'd be able to buy an XBox 360 with an HD DVD drive built-in. This is going to hurt their sales. Gamers will think, "Well, I want to buy a new console, and I'd like to play high definition movies too, so I either buy just a PS3, or buy an XBox 360 and an external HD DVD player, or an XBox 360 and a stand-alone Blu-Ray player". And Blu-Ray players are going to be expensive initially, just like DVD players were. The best way to buy one for months to come will be in a PS3. More to the point - HD DVD is going to lose to Blu-Ray anyway. So I suspect at some point Microsoft will offer an external Blu-Ray player for the XBox 360, because they have to be aware, like it or not, that the HD tide is turning against them. They're going to have to include support for Blu-Ray, sometime.Once Sony blazes the trail with Blu-Ray on the PS3, the cost of manufacturing Blu-Ray players will begin to drop, and they'll begin to replace DVD players as the new standard. It may take two or three years, but it will happen. The movies studios want it to happen. Sales of DVDs are slowing down, and they need to find a new way to get you to buy your movies, again. High definition Blu-Ray discs will be the key. And Sony will make it happen. As a manufacturer of game consoles, HDTVs, professional and consumer HDTV cameras and equipment, software and movies, they have far more at stake than Microsoft, and they're doing what is necessary to ensure that they win. Not because they want to beat Microsoft. Sony doesn't care at all about Microsoft. Sony has other businesses to run, which all intertwine with each other. They're in it for the long haul. Microsoft only wants to win because they can't stand to see someone else having more success than they do.Now, none of this means that the XBox 360 is going to "fail". It's just going to "lose". It will be a distant second to the PlayStation 3. Although to Microsoft, this is certainly a failure.Sony's ProblemIt won't be all smooth sailing for Sony, however. There's always the question of launch titles (how good and how many), and the reliability of a brand new technology. But Sony's biggest problem, as it is with Microsoft, is going to be meeting the demand. But I suspect this is one of the reasons Sony isn't rushing the PS3 to market now. They want to avoid the massive shortages that they've run into in the past, and are no doubt doing everything they can to ramp up production of components to a reasonable launch level. However, I think they're still going to have problems. And I think the problems will come from IBM.IBM has had trouble making G5 chips in quantity for Apple, variants of which are driving both the XBox 360 and PS3, yet the quantities are far higher than anything Apple ever needed. Sony and Microsoft are largely at IBM's mercy. Sony has the advantage though, because 1) their product has more development time ahead of it, so IBM has more time to work out issues before going into production, and 2) Sony is a bigger customer. IBM knows there will be more PS3s sold than XBox 360s, which means more money for them. So that gives them a reason to give Sony priority in research and development and manufacturing. Plus, they're selling a 7-core chip to Sony, and only a 3-core chip to Microsoft. Even though that means more complexity for the PS3 (and more potential problems), the potential payoffs are greater in terms of sellable technologies. And finally, Microsoft and IBM have had what could charitably be described as a "tenuous relationship" in the past. How much of that will come into play is anyone's guess. But IBM is, first and foremost, a business, so they'll do their best to serve both clients. Still, I wouldn't expect the PS3 to be easy to find. Especially since a lot of people will be looking for one.Nintendo... #2?The unknown quantity in all of this is Nintendo's Revolution, and I'll tell you why: the Nintendo DS. I expected the DS to go the way of the Virtual Boy. I thought it was a gimmick in search of a game, and that nobody would buy the thing. Well, 13 million units sold later, I was obviously wrong. Nintendo has a willingness to try new things with gaming, that neither Sony nor Microsoft do. Nintendo is a true game company, while the others are companies that added gaming to existing businesses. Nintendo may not get it right every time, but at least they're willing to explore what videogaming can become, rather than just taking what already exists and making it look better.The Revolution may not capture the hardcore gamer market that the PS3 and XBox 360 are aimed at, but it may not have to. There is a large untapped market of people who might be willing to play some quirky, interesting Revolution game, who have absolutely no interest in Halo 3 or Metal Gear Solid 4. There are a lot of those plug-n-play TV games on the market now, many of which have unique controllers, which aren't too far off in concept from what the Revolution's controller can do. The DS is proving that there is a pretty large market for unique gameplay ideas. This isn't too surprising anyway, if you check out the kinds of games currently populating arcades. People have traditionally gone to arcades to get gaming experiences they can't get at home. From the 70's to the present, that's what has defined the arcade experience. But as soon as the home consoles would catch up with what the arcades offered, the arcade game manufacturers would have to reinvent what arcade gaming meant.Now, it looks like Nintendo's taking the next step in console gaming, by offering far more interactivity than a standard gamepad can provide. The key will be the software. If the software is innovative, and most important - fun, then they could have a hit on their hands. A lack of DVD playback and HD output might hurt them, but not if they make the console cheap enough. Sony and Microsoft are selling home-entertainment packages. Nintendo is making a game machine. That's an important distinction, and gamers - hardcore or not - may find enough reasons to pick up a Revolution in addition to their favorite console. Besides, Nintendo still has a lot of fans out there, some dating back 20 years. Nintendo isn't just a company for "kids". Since the Revolution is designed to play all of their classic games, fans young and not-so-young may line up to buy one on launch day for that reason alone.Whether or not Nintendo can make a dent in Microsoft's #2 spot remains to be seen. I think the Revolution will be a successful console, but it's all going to depend on the software. Actually, I think Nintendo's best bet would be to follow Sega's lead, and get out of the console business (except for handhelds). After all, why couldn't Nintendo make the Revolution controller work with the PS3, and then develop software for it? It'd save them the cost and hassle of manufacturing and marketing their own console, and they could focus on what they do best - making games. Links:HD DVD vs. Blu-Ray article at CD Freaks (a little out of date, but a good technical comparison)Blu-Ray homepageHD DVD homepage (note curious lack of FAQ)Ars Technica article on Microsoft and HD DVDSony's Blu-Ray pricingXBox, PS2 sales figuresNintendo DS sales figuresXBox 360 specsPlayStation 3 specsNintendo Revolution pre-release info
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