Pre-E3 positioning: Microsoft dis-Kinects, but what are the implications?

Piers Harding-Rolls is director and head of games at analyst IHS Technology. Here, he delivers his verdict on today’s Microsoft announcements.

In what is becoming a relatively common strategy of news control for consumer electronics and technology companies before major trade events, Microsoft has confirmed it will sell a standalone version of the Xbox One without Kinect at a MSRP of $399/£349 starting from June 9th, the day of its press event at E3. The company has also confirmed it will be increasing value of the free Xbox Live service by bringing entertainment apps out from behind the Gold paywall. Lastly, Microsoft has confirmed that Games With Gold will be coming to Xbox One in June and has confirmed the inclusion of Halo: Spartan Assault and Max: The Curse of Brotherhood for free.

Microsoft has made a bold but sensible decision to compete on a level playing field with Sony’s PS4 as the company’s come head-to-head at E3. Ultimately the company has decided to sacrifice the necessity of Kinect to reduce purchasing friction and collapse the price differential between the two consoles. There is now a much more gamer focused edge to the Xbox One positioning, which will only help Microsoft in these opening stages of the latest console cycle.

Why drop the Kinect requirement?

Microsoft has framed the decision to sell a standalone SKU of its new console as a response to feedback from its existing and potential users – its fans – to drop the requirement of the Kinect motion and voice sensing accessory and to offer more choice. The fact is that while the Kinect functionality is nice to have, for many its value proposition does not match up to the price increment of the Xbox One over the PS4 at this point of the cycle. This has been clear to see, with PS4 outselling Xbox One in Europe strongly and to a lesser degree in its home market of USA as well. As such, the move is primarily about removing friction from the buying process for the Xbox One. The decision to shift entertainment apps outside the paywall will also help its positioning against Sony’s console: online video remains a hugely important feature in terms of device usage and consumer engagement, so having this behind a paywall is counter-productive.

Microsoft has confirmed that a standalone SKU has been in the works for a number of months, although the fact that both new smaller packaging or a standalone Xbox One Kinect SKU won’t be available until the later in the year also suggests that this move has been brought forward from the end of the year. IHS believes this is a response to the strength of PS4 sales and also that E3 represents an opportunity for the company to refocus its message on the gamer and regain some sales momentum. A similar opportunity will not come again in 2014 before the holiday sales season.

It’s sensible to suggest that a standalone version was always on the table and as such this is not a full strategic u-turn, although the fact that Kinect has been somewhat sacrificed at this early stage will have stung at Microsoft and may not have been possible without a change in leadership at Xbox.

Value proposition of Xbox Live Gold changes

With the shift of entertainment apps outside of the Gold paywall, Xbox Live is now closely aligned to PlayStation Network in functionality for free users. With this significant difference eradicated, both Microsoft and Sony will be looking at ways to differentiate their offering. Bundled games – Microsoft also announced the extension of its Games With Gold program to the Xbox One – could be core to this strategy. On the face of it, this sounds good for gamers, but this will be hard to achieve using third-party content with the economics of bundling desirable triple-A games as it stands or lesser-known indie games. First-party games will be decisive here.

What are the implications?

There are a few standout implications – aside from the obvious importance of improving Xbox One competitive positioning against Sony’s PS4:

- With two SKUs in the market, Microsoft has reverted to its Xbox 360 strategy. This gives the company some better flexibility with pricing, bundling and product positioning. Microsoft has already described the Xbox One with Kinect as the premium offering.

- Microsoft will have to work hard to communicate the difference between the SKUs
Having launched with a Kinect version, much of the UI functionality that has been highlighted will not be available to standalone SKU buyers, so to avoid disappointment, the company will have to ensure both packaging and messaging communicates the differences clearly.

- Removing the requirement for Kinect is likely to undermine third-party investment in Kinect-based games
While Microsoft is ready to show off a number of Kinect titles at E3, third-party publishers will be less willing to invest in the platform now it has become an optional accessory.

- Bundled games will become a key differentiator and battleground between the two online console subscription services
This will be good for gamers, but may put further pressure on subscription service profitability. It may also results in some commoditisation of third-party content, with first party games being the key differentiator once again.

- A de-coupled strategy may be more profitable to Microsoft
The cost of the Xbox One Kinect peripheral is well documented, with IHS’ teardown team pegging the bill of materials at around $75. By charging separately for Kinect at a similar price point to the original Xbox 360 Kinect – $149.99 – it’s conceivable that this may deliver more profitable sales to Microsoft in the long run.

Is this the end for Kinect?

IHS believes that this is confirmation that Kinect is not a major decision making factor in buying a Xbox One – at this stage games and price are the key factors involved. In effect, Microsoft has reverted to its Xbox 360 Kinect strategy and with a likely drop in interest from third-parties, Kinect for Xbox One has suddenly shifted from central to the Xbox vision to the periphery. However, later in the cycle when adoption is more mass market aligned and entertainment functionality is more heavily built out, Microsoft will be hoping that the value of Kinect will be more easily demonstrated and in demand.

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