Slow Motion Marketing Catastrophe

by Mike on 12/11/2005

in Cold Hard Cash, First We Kill All the Lawyers, Video Games are Good for You, Xbox360 - The New Hotness

This week saw some significant revelations in the comedy of errors that we all know as the Xbox360 launch. In the wake of widespread reports of defects in the console, a Chicago man has filed what promises to be a significant class-action products-liability lawsuit against Microsoft.

The proposed class action suit claims that in Microsoft’s bid to gain share in the $25 billion global video game market, the company was so intent on releasing the Xbox 360 before competing next-generation machines from Sony and Nintendo that it sold a “defectively designed” product.

Microsoft, meanwhile, is admitting that the launch-day drought was the result of a last-minute chip shortage that almost caused them to push launch back past Christmas:

We’re getting a little less, but not much less than the yields we expected, and we know that the yields we expected will probably outrun supply. We decided to go ahead and launch rather than wait until post-Christmas and get a few million units out into the hands of users. We’re doing our best.

Unfortunately, Microsoft chose to push ahead and launch anyway, despite the chip shortage. This caused the predictable shortages, predatory retailing practices, and disappointment amongst fans. One retailer has had to apologize for the way it handled its “bundling” on launch day. And those who pre-ordered from up to two months in advance found out that their orders were cancelled this week because there’s almost no chance those orders can be filled.

Though we had expected to be able to send this item to you, we’ve since found that it is not available from any of our sources at this time. We realize this is disappointing news to hear, and we apologize for the inconvenience we have caused you.

I’ve said before that Microsoft’s approach has been a disaster. With the benefit of hindsight, we can now see just how bad it’s been – possibly even fatal for the platform. Many factors play into the disaster. Most obviously, legions of devoted gaming fans came away empty when launch day demand far outstripped the supply. Those people, who would be playing the games, showing it to their friends, and serving as the most effective viral marketing force one can imagine, instead left bitter and disappointed. Weeks later, they’re still griping about the 360 instead of supporting it.

The short supply also threatens the dual core of Microsoft’s marketing strategy for the 360 – the game experience and the social effect. One of the forces that made the first Xbox a huge success was Halo, the “killer app” of the original Xbox console. So far, no game for the 360 has developed the buzz of the first Halo. In no small part this is because few gamers have had the chance to play any of these games. The dearth of consoles dries up the market for game developers. Those games already on the market will recover development costs more slowly than they should; developers planning future games which are not yet committed to the 360 platform have to consider whether or not the market will be there by the time the games would come to market. The lack of consoles therefore threatens the long-term viability of the game library for the 360.

The second prong of the strategy for the 360 is the social aspect of the console – the online experience. With only a handful of players overall, it will be almost impossible to have a meaningful online experience. Those players who do enjoy online, head-to-head competition will not be able to find others to play with, because the online matching pool is tiny and none of their friends have the console yet. Poor matchmaking means uneven, unsatisfying play. Combined with a possible future shortage of game titles, the reasons for buying a 360 get smaller and smaller.

The retail distribution problem amplifies the crisis for Microsoft. Anyone who didn’t get a console on Day One now knows that it’s virtually impossible to get one without paying extortionate prices on eBay or elsewhere. Days and weeks of checking supplier stocks drives home the point: there are none to be had. Eventually, that takes a psychological toll on the market’s desire for a product. Prospective purchasers will get used to the idea that they can’t have a 360 and won’t for months. They will go one gaming without it, and if the game titles come up short and and the online experience remains sub-par, they might eventually get used tot he idea that they don’t really need a 360 anyway. These are folks who would have spent hundreds of dollars on consoles, accessories, games, and online microcontent, who will now never spend a penny on 360-related products.

Since launch day in the U.S., Microsoft has launched in the U.K., Japan, and elsewhere. Microsoft could have used the components of boxes sold abroad to ramp up for the demand here, deferring overseas launches. If cannibalizing the overseas launches would not have made a dent here at home, they should have deferred the launch here as well. A late launch would have been much less of a disaster than what eventually happened. While consumers would have been disappointed at deferment due to low chip supply, they would have been much less disappointed than they have been as a result of the badly bungled launch that actually took place.

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