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Xbox Live is a One Billion Dollar success

Bloomberg recently reported that Microsoft’s Xbox Live service brought in more than $1.2 billion dollars in revenue this past fiscal year. $600 million came from more than 12 million Xbox Live Gold memberships subscriptions ($50/year), and another $600 million came from movie downloads and rentals, DLC and other premium content. Microsoft’s vision to launch a paid online service on the original Xbox’s first anniversary was first seen as a controversial pay-to-play model, but is paying off big time.

Xbox Live is probably best described as a Gaming Service Provider (GSP) or Multi-Player Gaming Service Provider (MGSP), a subscription based model that allows console gamers to connect online for multiplayer games, a feature that was already free in the PC gaming market, and even on rival consoles at the time. However, Microsoft’s Xbox Live offered some key elements that solidified the value for gamers:

  1. A single persistent gamer ID across all games (and a single friends list)
  2. Improved matchmaking
  3. Headsets and voice support in every game

Gamers essentially had to give up the cost of one additional game per year for the service and millions of them did.

The Xbox 360 has had one of the highest consumer electronics failure rates of all time, and the 3-year extended warranty cost Microsoft over an estimated $1 billion dollars. The success of Xbox live helps to off-set this loss in two ways. First, the extra revenue from these downloads and subscriptions are helping the gaming division produce a positive revenue. Secondly, the community aspect of Xbox live, the persistent gamer tag (now tied to achievements and gamer score), friends list, and a high percentage of chatting gamers adding a social element to the multiplayer games all add reasons to go through the warranty and repair process instead of moving to other consoles with almost exactly the same games. This social identity and continuity is what keeps Xbox live gamers paying for Gold subscriptions year after year.

Where does Microsoft go from here?

As Xbox Live has expanded over the years from gaming to include more entertainment services, it needs to tie those services more deeply into the Gamer Tag to make them more social and sticky. If Xbox Live is meant to be the digital delivery channel of choice outside of games, then Microsoft needs to apply their three core competitive advantages to other aspects of the entertainment industry. It seems odd to offer achievements for watching movies or TV, but some system of tracking and rewarding a history of views adds an incentive to choose to rent the next Twilight film on Xbox Live instead of a competing service. Connecting with friends to watch a rental while chatting over a standard voice connection will ensure that the community shares the experience and drives each other to use the service more.

This creates a platform that Microsoft can use to expand across other entertainment services like music through album launches, concerts, music videos. Microsoft can also further expand these experiences through Xbox Live on mobile phones and on the internet offering a single ubiquitous profile for all of you gaming, entertainment consumption and social networking. Right now Microsoft may be the only company well positioned to develop this opportunity and monetize it rapidly.

One Comment

  1. Ouimer says:

    I got my PS3, what, like, 6-7 months ago, and I have yet to play a single game online with friends, I have a couple friends on my list but find it difficult and tasking dealing with the PS online. Compared to the XBL, which is leaps and bounds ahead. Simple, direct, visceral, organized. It’s no competition and no surprise that XBL is doing so well. It will be interesting to see how Playstation plus does

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