Microsoft is a world leader in the PC industry and has $36. 2 billion of cash. However, sales of PC would not last forever! The PC industry which is in its fourth decade shows signs of saturation and maturity (exhibit 13 in case). Launching XBOX allowed Microsoft to drive a revolution in digital entertainment and deliver the future of experience. The decision taken by Microsoft lead to its diversification in gaming consoles and online gaming industry. The diversification allowed Microsoft to utilize the economies of scope of the two industries.
XBOX diversification satisfies the three essential tests to be applied in deciding whether diversification will truly create shareholder value. | The attractiveness test: The gaming industry which includes PC games, online games and gaming consoles is attractive for XBOX to diversify from the PC industry for reasons given below: * The recent exit of a respected competitor made the industry attractive. * The growth of the industry till date and its projected growth (given in table below) prove the attractiveness of the industry on the whole. 1. The hardware and software growth of the gaming industry was significant.
According to Bank of America, the hardware and software together account for $18. 7 billion in revenue in 2001. US market itself has $8. 1 billion in 2000. 2. The video game market also has been predicted to grow by $40 billion. 3. One third of the internet users play online games and industry of online gaming forecasted to grow from $270 million in 2001 to $4. 6 billion in 2005. * At the moment the market is a duopoly with only two players Sony and Nintendo at present have 70% of the market share for gaming console out of which 50% is with Sony. This increasing the opportunity of another company to establish its footprint in the market. The future share of online gaming in entertainment would increase to 75%. Hence the increasing consumer preference towards online gaming would affect the attractiveness of the industry. (Exhibit 13) * The declining trend of PC unit growth beyond 2002(Exhibit 16) shows the saturation in the PC industry and the availability of online or PC games acts as a competitive advantage to the players. | Cost of entry test: 1. The entry barriers to hardware development were very high. Microsoft muscled its way into the gaming industry with a $500 million marketing campaign and a $2 billion development costs. 2.
The cost of software and accessories was low as was largely outsourced. 3. Microsoft has reduced the cost of entry barrier and scored by taking the following steps: * The company hired the two men behind the creation of PS 1, and they would shorten the development process. * Microsoft used a slightly modified version of Intel 733 MHz Pentium III. The Intel chip guaranteed that the system would be able to run a stripped down Windows OS. * Windows based tools made it easy for the developers to create or port games to gaming consoles. Doom can run on XBOX and PS2 which gives a competitive advantage to Microsoft. Unlike Sega who spent $100 million to develop, Microsoft used zone. com as their online gaming network. * By adopting its Windows 2000 OS, Microsoft could shorten a lengthy and expensive OS development process. * Microsoft outsourced the production of the GPUs to NVIDIA, hence reducing their production costs further. * XBOX was eventually a cheaper option for consumers as priced at $ 299 it included an inbuilt hard drive and broadband adaptor worth $100-$150. This justifies that at very low cost of entry Microsoft could create a competitive product. Better off test: The gaming industry depends on the growth of PC industry and internet to increase its reach. Hence the two industries share a symbiotic relationship. The diversification of Microsoft to the gaming industry would provide strengthening of its position in both. * Microsoft owns zone which counted more than 22 million gamers as members provides a strong online community for XBOX. Additionally by bringing in XBOX the usage of zone increases. ZONE is a perfect example of a hybrid gaming site. * Microsoft was only a fringe player in the growing gaming industry with only a 4% share in the PC gaming industry.
By bringing in XBOX Microsoft expected to get a larger share of this pie. * Sony indicated the increasing threat to PC industry in general by marketing PS 2 as more than just gaming consoles challenging the PC with its communications capabilities and overall experience. Microsoft can reduce these risks by launching a gaming console powered by the strength of its technology in the PC industry. * Microsoft had very little market power in video games but needed a network of third party developers. By bringing in XBOX, Microsoft signed agreement with 300 developers which made them very strong in the software games side as well. |