X box

ICMR Case Collection
Icfai Center for Management Research

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The Making of Xbox 360
OPER061
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This case was written by Indu P, under the direction of Vivek Gupta, ICFAI Center for Management
Research (ICMR). It was compiled from published sources, and is intended to be used as a basis for class
discussion rather than to illustrate either effective or ineffective handling of a management situation.
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 2007, The Icfai Center for Management Research. All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means- -
electronic or mechanical, without permission.

To order copies, call +91-40-2343-0462/63 or write to Icfai Center for Management Research, Plot # 49,
Nagarjuna Hills, Hyderabad 500 082, India or email icmr@icfai.org. Website: www.icmrindia.org

OPER/061

“The winner in the next-generation console battle is likely to be the Xbox 360, which is the leader
in North America, the world’s biggest market.”1
– Yoshiyuki Kinoshita, Research Analyst at Merrill Lynch, in 2006.
“This is not Xbox 2. This is not an incremental thing within an era, like PlayStation was the
beginning of the 3D era, and PlayStation 2 was the second half of the era. This is a new era. This

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is a big jump -- kinda like vinyl to CD to iPod.”2
– J Allard, Corporate Vice President, Design & Development,

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Entertainment and Devices Division, Microsoft, in 2005.

INTRODUCTION

In September 2006, Peter Jackson3 (Jackson), Director of The Lord of the Rings4 trilogy and King
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Kong5, announced that he planned to create two interactive games for Xbox 360, a game console
from Microsoft Corporation (Microsoft). The unique aspect of these new games was their episodic
format. Jackson planned to create a series based on the popular Halo6 games. On his shift to games
from movies, Jackson remarked, “More and more I’m looking forward to the release of games and
not movies. I am more aware and excited about games. I do not have to keep delivering stories as
movies - there are other things I can do. Technology is at a point where we can blend a lot of film
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storytelling with interactive entertainment.”7
Xbox 360, which was launched in December 2005, attracted serious gamers and other audience,
owing to its simple design and convergence features. It was a part of Microsoft’s plan to move into
the consumer’s living room, and comprised a gaming console with several additional features like
media center, photo archive, music download, Internet access and other services. According to Bill
Gates (Gates), Co-founder and Chairman, Microsoft, “You can’t just sell it as a convergence
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device. You gotta get in there because certain members of the family (i.e. teenage boys) think it’s a
must-have type thing. But the way to cement it is as a family experience. And the way that it really
makes sense for Microsoft, and we justify this sort of circuitous route that we went down, is
because of how it fits in the living room.”8

1
Thomas Fredrickson, “Xbox and Wii to Break Playstation Domination: Analyst,” www.ibitimes.com, November
14, 2006.
2
Dan Shoe Hsu, “A Full Revolution,” Electronic Gaming Monthly, July 2005.
3
Peter Jackson is a New Zealand based film maker.
4
The Lord of the Rings is a fantasy novel written by JRR Tolkien. The film trilogy consisted of The Lord of the
Rings: Fellowship of the Ring, The Lord of the Ring: Two Towers, and The Lord of the Ring: Return of the King.
The films were globally successful and won 17 academy awards.
5
Peter Jackson remade the 1933 classic King Kong in 2005. The film grossed more than US$ 500 million worldwide.
6
Halo Combat Evolved, popularly known as Halo is a first person shooter video game. The game developed by
Bungie Studios was released in November 2001along with Xbox. Subsequently Halo 2 and Halo 3 were released.
7
Darren Waters, “Director Jackson Signs Xbox Deal,” BBC News, September 27, 2006.
8
Lev Grossman, “Out of the Xbox,” Time South Pacific, May 23, 2005.


Microsoft’s first foray into gaming was Xbox, which was launched in November 2001; more than
a year after Sony9’s PlayStation210 was launched in the US. This gave Sony the edge to capture the
market and by the time Xbox was launched PlayStation 2 was well established in the market with
loyal customers (Refer Exhibit I for the sales of Xbox and PlayStation 2 in 2002). After Xbox’s
lower than expected performance, Microsoft decided to launch Xbox 360, the next version of the
gaming console, well before PlayStation 311 could hit the market.
Xbox 360 was launched in May 2005 well ahead of Sony’s PlayStation3, which was released in
November 2006 in Japan and the US, and Nintendo12 Wii13 which was also launched in November
2006. This gave Microsoft the advantage in capturing market share. In the quarter ending
December 2005, Xbox 360 sold 1.5 million units (900,000 in North America, 500,000 in Europe
and 100,000 in Japan). By June 2007, Microsoft expected to sell over 13 to 15 million Xbox
consoles in the market. According to Wagner James Au from GigaOM14, “Microsoft’s lead seems
unbeatable now, fueled by a one-year headstart, the raging success of Gears of War as 2006’s
killer app, and most recently, a blitzkrieg of promotion for Halo 3, scheduled for 2007.”15

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BACKGROUND NOTE

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Microsoft was founded in April 1975 as a partnership concern by William H Gates (Gates) and
Paul Allen. At this time, the duo had developed an improved version of BASIC16, which was
distributed by Micro Instrumentation and Telemetry Systems. In 1977, Microsoft introduced
FORTRAN17 and COBOL18 languages for PCs. By the end of 1977, Microsoft had emerged as the
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market leader in microcomputer languages, with sales exceeding $1,000,000.
In 1980, Microsoft bought an operating system called Q-DOS from a Seattle-based programmer
for $50,000 and renamed it MS-DOS (Microsoft Disk Operating System). Soon, MS-DOS became
the accepted standard for PCs. By 1983, 99% of the PC makers were using MS-DOS. In 1983,
Microsoft introduced a word processing system called Word 1.0. In 1984, Microsoft introduced
Multiplan, BASIC and Word 1.0 for Apple’s Macintosh computer.19 It also upgraded MS-DOS for
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IBM. In 1985, it introduced Windows 1.03, and the Excel spreadsheet for Macintosh. In 1986,
Microsoft launched an initial public offering (IPO) and raised $61 million.
9
Japan based Sony Corporation is one of the largest media conglomerates in the world. The company is involved in
several businesses including electronics, communications, video, media, and information technology. Sony
generated revenues of US$ 63.98 billion in 2006, and net income of US$ 1.05 billion. The company entered the
gaming console market through launch of PlayStation in 1994. The product was highly successful and Sony
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launched PlayStation 2 in 2000.
10
Sony’s PlayStation 2 was its second video gaming console after the successful launch of PlayStation. Sony
announced development of PlayStation in March 1999 and it was launched in March 2000 in Japan and in October
2000 in the US. Sony had sold more than 111 million units of PlayStation 2 by end of 2006.
11
PlayStation 3 was released in November 2006. It has Blu-ray drive, HDMI Port, Blue tooth controller etc. On the
first day of its release, PlayStation 3 sold over 80,000 consoles.
12
Nintendo was founded in Japan in 1889 as a maker of Japanese playing cards. The company entered into several
other businesses but emerged as one of the leading video game console manufacturers. The company’s revenues in
2006 were at US$ 4.5 billion.
13
Wii is the fifth game console from Nintendo. The company announced the development of Wii in 2004 and was
launched in December 2006. As of January 2007, Nintendo had sold 1,720,700 units of Wii in North America.
14
GigaOm is a blog published by Giga Omni Media. According to Technorati, GigaOm.com is one of the top 50 blogs
worldwide. The blog offers Web 2.0 news, analysis, details of new technologies, broadband and online games etc.
15
Ed Oswald, “Has Xbox 360 Already Won the War?” BetaNews, December 07, 2006.
16
Beginners All-purpose Symbolic Instruction Code (BASIC), one of the first programming languages for computers.
17
FORTRAN stands for Formula Translator. It is a high-level computer programming language suitable for
mathematical and scientific computations.
18
Common Business Oriented Language. A programming language used in business data processing.
19
The Macintosh was a 32-bit single user system. It popularized graphical user interface.

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In 1989, Microsoft introduced Microsoft Office, which included several applications like Word,
Excel, etc. In 1990, Windows 3.0 was launched, followed by Windows NT 3.1 in 1993. In 1995,
Windows 95 operating system was launched. This was followed by web browser and Internet
explorer, MSN online service. In 1997, Internet Explorer 4.0 was released. In 1998, Windows 98
operating system was released and Steve Ballmer (Ballmer) was appointed the President of
Microsoft, while Gates remained its CEO and Chairman20. Subsequent launches included
Windows XP in 2001.
Microsoft was also involved in the computer hardware business from the early 1980s. Microsoft’s
hardware group was formed in 1982, and by 1983, the company was shipping pointing devices. In
1989, Microsoft shipped more than 2 million pointing devices. In 1994, Microsoft launched an
ergonomic keyboard and by 1997, Trackballs and joysticks were added. In 1999, Microsoft
launched the first optical mouse. By 2001, Microsoft’s revenues from pointing devices stood at
US$ 569 million. Other hardware products from Microsoft were broadband home networking
products like wireless base station, network adaptors, and others.

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Microsoft’s interest in gaming dates back to 1983, when the company sold the game Microsoft
Flight Simulator. Some other gaming ideas were also pursued. But these were limited to developing

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gaming software. By 2000, Microsoft emerged as one of the top PC game marketing companies,
with four titles in the top ten games, in PC gaming business valued at US$ 1.4 billion. Its gaming
site www.zone.com had 12 million registered users at that time. Microsoft also acquired some
game companies like FASA Interactive, Access Software, and entered into agreements with other
companies to develop games. Some of the popular games from Microsoft were Age of Empires,
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Close Combat, Pandora’s Box, Microsoft Golf, and Midtown Madness, among others.
Though Microsoft played a major role in the PC gaming business, several designers opted to
develop games without using the Windows operating system. They were of the opinion that the
Windows operating system slowed down depiction of graphics. Several games developed by other
companies bypassed Windows and were loaded through DOS. As Microsoft went on to develop
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the Windows 2000 operating system, it was widely believed that many of the games that were
using DOS would become incompatible with Windows 2000. In order to avoid this, in early 1998,
Microsoft acquired several gaming companies and entered into exclusive publishing21 deals with
game developers in order to develop games using the Windows operating system.
During this time, several popular gaming console manufacturers like Nintendo and Sony were
looking at upgrading their consoles by making them Internet compatible. They had to add a
keyboard to the existing console, in order to enable the gamers to surf Internet. Microsoft faced a
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major threat from gaming console makers, which would be manufacturing peripherals. Before that
could happen, Microsoft itself wanted to enter the gaming arena and bring out its own console.
Since the company already owned several popular game titles, converting them into console games
from PC games would help Microsoft further expand its reach.
Though it was widely believed that Microsoft was keen on coming up with its own gaming console
from 1999, it was only in March 2000 that Microsoft confirmed its entry into gaming. Microsoft
announced that its gaming console would have Internet access, would allow multiplayer gaming
and have movie quality graphics. Microsoft also announced that the console would be called Xbox.
Microsoft estimated that its gaming console would be three times more powerful than the existing
market leader PlayStation 2.

20
In January 2000, Ballmer was appointed the CEO of Microsoft and Gates remained its Chairman.
21
Video or computer game publishers are companies that publish the games, which are developed internally or
externally through a game developer. The game publishers are responsible for manufacturing and marketing the
games. Some of the well-known game publishers include Electronic Arts, Nintendo, Activision, Sony Computer
Entertainment and Microsoft Game Studios.

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According to analysts, there were several reasons why Microsoft opted to venture into gaming.
The most important were: one, its dependence on software; and two, the rapidly growing gaming
market. According to J Allard (Allard), Corporate Vice President, Design & Development,
Entertainment and Devices Division, Microsoft, “We had a really good vision for where we
wanted to go in 20 years. We really saw the vision in terms of the entertainment industry becoming
a software industry and Microsoft having the lead role in providing a platform to really motivate
the entertainment industry forward in an interactive medium”22

THE XBOX

Developing Xbox was a new experience for Microsoft as the company had never worked with
retailers and game developers before, nor did it have any experience in making consoles.
Microsoft, the first American company to enter into the gaming business, had to transform itself
from a software developer to hardware manufacturer and create a consumer brand from scratch.

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From the beginning, Allard was clear that the console should have Internet and broadband
capabilities, he said, “Microsoft is totally committed to online gaming. I believe broadband will
emerge from a novelty to a necessity, just as cell phones and Web browsing have.”23

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Through market research and focus group studies, Microsoft arrived at its target audience, who
were aged between 16 and 26 years, and were gaming enthusiasts. The brand was positioned to
target this group of passionate gamers who spent at least 10 hours every week playing games.
According to Microsoft, this group comprised of more than seven million people, predominantly
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male. To a lesser extent, Microsoft planned to cater to two other groups who played games for 3-6
hours a week, which comprised of 8-15 year olds and another group of 18-22 year olds.
Xbox had a 733 MHz CPU, which could process more than 1 trillion operations per second, a 250
MHz graphics chip that was custom designed by Nvidia Corporation24. The chip was said to be
three times faster than any other chip in the market at that time. Xbox had 64 MB RAM, a DVD
drive, and an 8GB Hard drive, which could store games and download game enhancements
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through the Internet. Other features of Xbox were its Ethernet port, a low-end version of Windows
2000, and a 3-D audio processor with 64 audio channels. The console was targeted at serious
gamers. With a view that serious gamers do not often use USB supported devices, Microsoft did
not include USB drives in the Xbox. The reason cited for not providing the modem, was that the
gamers expected a better gaming experience, than the one provided by 56 Kbps modems, and the
growing popularity of broadband.
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Microsoft entered into an alliance with Konami25, a game developer in Japan, which agreed to
provide some of its famous titles like Jurassic Park and Metal Gear, to Microsoft. Several other
game developers expressed their willingness to work with Microsoft due to the software
compatibility and ease in making the new games and transforming the old games. According to a
developer from Epic Games, “Our games are good on the PC. They’re gonna be great on PS2
(PlayStation2). But they’ll be unbelievable on X-Box.”26

22
Tor Thorsen, Ricardo Torres, “Spot On: The Road to the 360,” www.gamespot.com, May 12, 2005.
23
John Gaudiosi, “Game Makers Throw Support Behind Xbox,” Video Business, September 25, 2000.
24
Nvidia Corporation is US based supplier of microchips. The company’s products are used in PC motherboard
chipsets, graphics cards, graphics processors, etc. The company was founded in 1983, and as of 2006, the revenue
stood at US$ 3.07 billion and net income at US$ 448.8 million.
25
Japan based Konami Corporation is a leading developer of toys, computer and video games. The company also
manufactured slot machines, trading cards, and develops animation and special effects. Some of the popular games
developed by Konami are Coded Arms, Gradius Portable for PlayStation Portable, Lunar Knights, Iron Feather for
Nintendo DS, Winning Eleven 8 International, Winning Eleven 9 for Xbox, WTA Tour Tennis, Frogger Beyond,
Teenage Mutant Ninja Turtles 2: Battle Nexus for PlayStation 2.
26
N’Gai Croal, Karen Breslau, “How to be a Player,” Newsweek, March 20, 2000.

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In 2000, Microsoft entered into agreements with more than 150 game developers to develop games
for Xbox. The prominent developers included Konami, Capcom, Bungie Studios, Indie Built, High
Voltage Software, Digital Illusions, Ubi Soft, etc. By the time of the launch of Xbox, around 20
titles were ready. Xbox compatible versions of some of the popular PC games like NFL Fever,
Halo: Combat Evolved, Halo 2, Links, Midtown Madness, etc were released subsequently.
In January 2001, Xbox was shown at the consumer electronics show in Las Vegas. Microsoft
approached consumers to gather their feedback about the product and incorporated the changes
suggested. The game that was displayed in the show, Malice, attracted instant attention. In March
2001, the console was displayed in Tokyo. At this time, industry insiders opined that the console
was too big for Japanese homes. In May 2001, in Electronic Entertainment Expo held at Los
Angeles Convention Center, California, several titles like Halo, Oddworld, Tony Hawk Pro Skater
2, Shrek were displayed.
Some of the titles received positive feedback while others like NFL Football were said to be slow

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and dull. Some games were said to be showing uneven lines. Analysts opined that due to the
limited time given to the developers, they had not been able to come out with a quality product. At

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the same time, there was another section of industry experts, who were of the opinion that Xbox
was just the beginning and Microsoft was just testing the waters in the gaming industry. They
opined that the next version of Xbox would be a major competitor to Sony.
To launch Xbox, in November 2001, Microsoft spent US$ 500 million covering advertising,
retailer and third party software support, merchandising, and event sponsorships. The marketing
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team was supported by a team which had earlier involved in the launch of three Windows
operating system versions and PC games software. The others involved in the launch were Don
Coyner who was earlier with Nintendo and Jennifer Booth who was involved in the launch of
PlayStation.
Analysts opined that Microsoft had followed a similar approach for developing Xbox as it did for
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developing software. The approach allowed improvements to be made from time to time and
emphasized the features rather than the design. This resulted in a bulky box, which weighed 8
pounds and had a huge controller. Many gamers had problems with the controllers of Xbox, as
they could not be held comfortably owing to their size. For the Japanese version, Microsoft made
smaller controllers. With several gamers opting for these controllers, Microsoft began shipping all
the Xbox consoles with modified smaller controllers. (Refer Exhibit II for Visual of Xbox)
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Though Microsoft incurred more than US$ 375 on manufacturing each console, it had to sell it at
US$ 299, the same price as PlayStation 2, effectively incurring loss of US$ 76 on every console
sold. But this was the norm in the game console market, which followed the ‘razor and blades’
business model27. According to analysts, Sony lost around US$ 188 on every PlayStation 2 sold in
the US. In March 2001, Merrill Lynch estimated that Xbox would breakeven only in 2005, and by
then Microsoft would have lost US$ 2 billion on Xbox.
Some analysts opined that Microsoft’s intention in entering the gaming console market was to pull
Sony down from the #1 position. They were of the view that Microsoft with its power and position
could easily take the lead over its competitors. However, by the time Xbox was released,
PlayStation 2 was well established in the market. In spite of providing better hardware, it was
difficult for Microsoft to make gamers shift their loyalties from PlayStation 2 to Xbox. Ultimately,
Microsoft was unable to dethrone Sony from the top slot. The main reason was the lack of popular
games, which could be attributed to the exclusive contracts that Sony had entered into with several
27
The Razor and Blades business model refers to selling the initial master product at a subsidized price, and make
profit by selling the consumables at a high price. The consumables are essential to use the master product. By
selling master product at a lower price, the consumer is captured and is forced to buy the additional products. King
C Gillette pioneered the model and used it to sell razors and razor blades.

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developers, due to which they were not able to give the same games to Microsoft. Popular games
like Game Theft Auto were made exclusively for PlayStation. By August 2003, Sony accounted
for a share of 54% in the console market as against Microsoft’s 27%.
Though Microsoft claimed that Xbox was three times more powerful than Sony PlayStation2,
game publishers felt that PlayStation, Xbox and Gamecube28 were all in the same league. Industry
experts also opined that though Microsoft had a good product, it went wrong in its marketing. The
company created PR buzz, and began selling the console at a lower price, but failed to get good
games for the console. The marketing failure was attributed to Microsoft’s lack of experience in
this industry. Commenting on Xbox, Allard said, “We didn’t get the controller right. The Live
experience wasn’t that seamless in the dashboard. We didn’t future-proof it enough. If there’s one
frustration that I look back on in terms of that, you know, really rapid-fire entry into the market, I
would say we had a lot of seams that showed.”29

THE NEW XBOX

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In early 2002, Microsoft planned to launch the second version of Xbox. The project to develop the

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new Xbox was code named Xenon. The company planned to create a seamless experience to the
consumers by bringing in connectivity between gaming consoles and personal computers and by
providing access to digital music, videos, photos, for the gamers. According to Allard, “If you
think of Xbox 1 as a painting, we mostly sketched in what we wanted to do. So, in Xenon, what I
wanted to do was really set out more like a sculptor would and just marinate in the problem for a
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little bit...decide what it is, what singular vision we wanted to have to shape.”30 The team for
developing the new Xbox was clear that the project should not be delayed and the new Xbox
should be launched well ahead of Playstation 3. The team wanted to develop a high performance
gaming console using hardware that should become cheaper over the years. Another aspect that the
team wanted was to make the new Xbox compatible with components like digital cameras, MP3
players, video cameras, etc. The essence was to make the new console an all-in-one console, and
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not just for gaming. Microsoft decided on having two versions of the new Xbox, one for game
enthusiasts and the other for budget conscious gamers.
Development of the new Xbox was carried out at Millennium campus located at Redmond,
Washington, away from the Microsoft headquarters. This was a deliberate move on part of the top
management, who were involved in the development of the new Xbox. They were of the view that
as the product had to be developed at a faster pace and required interaction and collaboration with
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different partners, its development should be carried out away from the main office, in a culture
that was completely different from that of Microsoft’s. According to Peter Moore, In-charge of
Marketing Xbox, “They allowed us to set up a separate division almost, that is physically,
geographically, psychologically and spiritually different from what Bill himself calls the Borg.”31
Several engineers working on the project started studying computer architecture ranging from
supercomputers to portable gadgets. The team consulted several manufacturers of semiconductors
and decided not to manufacture the chip from scratch. Instead, they opted for semi-custom chip
design and used their own ideas for developing the gaming console hardware. The top
management decided that Microsoft would lead the project for integrating the hardware, own the
intellectual property, establish cost-reduction schedules and manage its vendors closely. In all
these ways, the company aimed at reducing the product development costs considerably and

28
Launched in 2001, Game Cube is the fourth home video game console from Nintendo. As of December 2006,
Game Cube sold 21.52 million consoles worldwide.
29
30
31

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expected to launch the product in the market by 2005. Microsoft decided it would own the
Intellectual Property (IP) rights for the chips created by other vendors for the new Xbox. From the
beginning, Microsoft aimed to bring out a console that was high on performance, and would not
overheat easily.
Vendors like Intel and Nvidia, however, were not in favor of Microsoft owning the IP rights for
the chips created by them. Nvidia planned to make a chip for the new Xbox, if Microsoft agreed to
share the cost of developing a new chip. The new chip was totally different from PC graphics chips
it had been making earlier. However, IBM, which had entered into chip engineering business,
expressed its willingness to provide a customized game console graphics chip for Microsoft.
The team involved in finalizing the chips was of the view that IBM and ATI Technologies32 would
be able to provide the required chips for Xbox and this view was conveyed to the top brass of the
company. Microsoft reaffirmed that it intended to retain IP. In February 2003, the planning for the
new Xbox platform began. In August 2003, ATI was formally assigned the task of producing
graphic processing control for the new Xbox. The chip from ATI had embedded memory of 10

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megabytes and had 48 processors to handle the details of colors, texture, and surface features, of
the objects. In September 2003, Microsoft entered into an agreement with IBM to develop a triple

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core CPU.
IBM speeded up the process of manufacturing the chip in order to meet Microsoft’s deadlines. The
Engineering Technology Services Unit of IBM developed the chip in a short span of time, instead
of the 30-36 months generally taken by other manufacturers. IBM’s chip was ready by January
2005. However, ATI had to face several problems initially in debugging the chips. Still, ATI
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managed to ship the chips by April 2005. In the same month, Microsoft decided to double the
memory of Xbox 360 to 512 megabytes from 256 megabytes of GDDR3 chips (Graphics double
data rate). Samsung33 and Infineon Technologies34 (Qimonda) agreed to provide the GDDR3 chips.
During the development of the new console, Microsoft followed an integrated approach where the
marketing and sales teams, content developers and silicon designers were regularly consulted. This
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resulted in a development manual that was called the ‘Book of Xenon,’ which addressed all the
aspects of development of the new Xbox. The book focused particularly on DEL or digital
entertainment lifestyle, which talked about the convergence of movies, music, games, phones,
television, PC and cameras. Microsoft decided to name the new console Xbox 360; Allard
explained, “If we were building another console in the 3D era, we’d just call it Xbox 2. So, we
eliminated Xbox 2 from the list? So, the name that we came up with was Xbox 360, because we
are putting the gamer at the center of the experience.”35
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THE DESIGN

During the development phase of Xbox 360, one of the first problems that Microsoft encountered
was the design. The first version of Xbox received some bad reviews due to its huge size, which
was one of the reasons for its dismal performance in the Japanese market. The next version was to
be designed to be aesthetically appealing to a wider range of customers.

32
ATI Technologies ULC is a Canada-based designer and supplier of graphics processing units and video display
cards. In 2000, ATI acquired the company that designed the chip for Nintendo GameCube and created a modified
version of the chip for Wii. For Microsoft, ATI produced custom graphics chip called ‘R500.’ The chip had 48
shaders or processors whose main task was to enhance color shading and surface texture of the objects.
33
South Korea-based Samsung Electronics is primarily involved in digital media, telecommunication network, digital
appliances, semiconductors and LCDs.
34
Infineon Technologies was formed when Siemens spun off its semiconductor operations. In 2006, the company’s
sales stood at US$ 5.275 billion. The company is primarily involved in providing semiconductor and system
solutions and memory products. In May 2006, Infineon Technologies created a memory products division and
named it Qimonda.
35

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Jonathan Hayes, Design Director of Xbox, who was from Rhode Island School of Design, wanted
Xbox 360 to convey power and grace. He approached several exclusive design studios to design
the new Xbox and zeroed on Astro Studios, a San Francisco-based design firm and Hers
Experimental Design Laboratory based in Osaka, Japan. The teams two located in different
continents began collaborating on the venture. The fact that they didn’t understand each other’s
language and were working in different time zones, led to problems initially, which were
overcome subsequently. Each company was initially asked to design something new - that would
represent a machine that was more than just a gaming console. The designers also worked with the
engineers involved in Xbox and the manufacturers like Flextronics, to ensure that the console
could stand on its side or lie flat.
The result was a box that was 30 centimeters high and 7 centimeters wide, with curving insides,
which several analysts called ‘a feminine hint or an hourglass figure.’ It was in off-white and silver
color and the users could change the colors by replacing the faceplate. Microsoft received good
reviews for the design of Xbox 360. According to Moore, “We knew we had finalized it when the

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research came back from Japan. We asked people, ‘Who do you think designed this?’ And they
said, ‘This has to be from either Sony or Apple.’ That was the seminal moment.”36

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THE FEATURES

Xbox 360 had a built-in Windows Media Center37 extender through which the console could access
data including movies, music, pictures, stored on the PC; these could then be streamed on to a
television connected to the console. Even when the devices were in different rooms but connected
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through the same home network, the content on the PC could be streamed on to the television.
Similarly, audio files from the PC could be streamed on to television or any other audio output
device, through Xbox 360. Xbox 360 had an Ethernet port to connect to the Internet. Xbox 360 had
three USB 2.0 ports to connect other devices like MP3 players, digital cameras, etc. Photographs
from PC, digital camera or other portable media devices could be accessed through Xbox 360 by
connecting the device to the console. Apart from the USB ports, Xbox 360 had two memory unit
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slots and could support four wireless game controllers. Xbox 360 could be connected to home PC
through Wi-Fi and the music and pictures in the PC could be accessed.
The chip used in Xbox 360 had three cores, as against two cores used in most other devices like
personal computers. Each core operated at 3.2 gigahertz. With three cores, the chips were able to
split the tasks manageably, and speed up the process. At the same time, the use of more cores
reduced electricity consumption. Each core could handle two threads at a time.
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Due to extra memory, loading did not take a long time, and several high definition graphics could
be stored without any constraint. The games could give a cinematic effect. Higher memory also
helped the game developers to bring out clearer images and enhanced game play. The high
polygon performance resulted in elimination of sharp edges, making the images realistic. Another
feature was 16 simultaneous textures, due to which the texture of surface and the things was highly
authentic.
The result was clearer pictures and a better gaming experience. For example, in one of the Xbox
games, the grass appeared like a green carpet; but, in Xbox 360 each blade of the grass could be
seen clearly. Again, the trees were not a patch of green, but each leaf could be seen swaying in the
wind, and each leaf had its corresponding shadow. The characters in the games were life-like and
each wrinkle and frown on their faces could be seen clearly, and their emotions were clear, even to
the beads of sweat on the brow.

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37
Windows Media Center is an application that is included in Windows XP Media center edition and Windows Vista.
Media Center is equipped with a remote control using which it can be launched from Windows. Media Center
visualizes the pictures, videos and music from hard drives, optical drives and network locations and tags them using
different attributes.

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Xbox 360 had a power button divided into four quadrants, called the Xbox 360 guide button or
Ring of Light. The Xbox guide button could be used to access features common to all the Xbox
360 games. With a press of the button, users could turn on the Xbox, pause any game they were
playing and listen to music, chat with friends, download, etc, and then return to the game by
pressing the button again. The controller of Xbox 360 was also provided with an Xbox guide
button. Through a slot provided on the controller, users could set any headset or mike (Refer
Exhibit III for some visuals on Xbox 360).
Xbox 360 had a ‘wireless binding button’ to be used for wireless controllers. By pressing the
button, all the wireless controllers could be detected and would be bound to the console. Xbox 360
supported upto four wireless controllers.
Xbox 360 was released in two versions – Xbox 360 Premium which consisted of games console,
wireless controller, cables to attach Xbox 360 to a television set, 20 GB removable hard disk,
headset and customized head plates. The basic version of Xbox 360 consisted of console, wired
controller and Xbox live subscription. Xbox 360 premium was priced at US$ 399 and the Xbox

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360 core system was priced at US$ 299. Additional accessories provided with Xbox 360 premium
were Ethernet cable, Xbox Live Headset, Xbox Media Remote and subscription to Xbox Live

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Gold, which had online gaming capabilities.
Xbox Live, a multiplayer gaming content delivery system, was launched in November 2002. With
Xbox 360, Microsoft planned to turn Xbox Live into a major online community on the lines of
eBay. Due to additional features available, users could meet other gamers online and play with
them. Xbox Live was also used by game developers to show the trailers of the games being
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developed. Through Xbox Live, players could customize the gaming gear and sell it to other users.
Gamers could interact with others through voice chat, e-mail and instant messaging. By attaching a
camera, video conferencing with other users was possible.
As of June 2005, Xbox Live had more than two million subscribers. Xbox Live was also modified
to enable the users to choose their game partners by providing feedback. If the feedback was
negative, the users were not paired again and positive feedback enabled the users to play with each
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other. Through this feature, one could choose the skill level of one’s opponents. Xbox 360 allowed
users to always remain connected – the property was called ‘live aware.’ Even while watching
DVD, or playing games, users could remain connected to the Internet enabling them to interact
with other players. A small window popped up, letting the users know that they were being invited
to interact by their friends (Refer Exhibit IV for the features of Xbox 360 and Xbox).

THE LAUNCH OF XBOX 360
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In the US, Xbox 360 was unveiled on November 22, 2005 on MTV, in a program titled ‘MTV
Presents: The Next Generation Xbox Revealed,’ hosted by Elijah Wood38. Xbox 360 was launched
on December 02, 2005 in Europe and on December 10, 2005 in Japan. The launch was supported
by an advertising blitz on which Microsoft spent US$ 500 million. The campaign ran for over
eight months across the world. During the holiday season in 2005, 1.5 million consoles were sold,
with shortages reported due to higher demand from several places. Along with Xbox 360,
Microsoft also launched several games, and Call of Duty 2 became one of the best selling games of
2005. Other games that were launched with Xbox 360 were Amped3, Every Party, GUN, Kameo:
Elements of Power, Madden NFL 06, NBA 2K6, NBA Live 06, Perfect Dark Zero, Tony Hawk’s
American Wasteland, etc (Refer Exhibit V for some of the popular games of Xbox 360).
Xbox 360 received positive reviews from gamers and analysts. The consoles were pre-booked and
in several cases, they were sold at a higher price running upto US$ 600 on eBay. Even at this price,
Xbox 360 found many takers. While this was the scenario in the US and Europe, in Japan, in the
first week after its release, several consoles of Xbox 360 were left unsold. Of the 159,000 consoles
that were shipped to Japan, during the first week only 62,135 consoles were sold.

38
Elijah Wood is an American actor popular for his portrayal of Frodo Baggins in The Lord of the Rings film trilogy.

9


In September 2006, Microsoft launched Xbox live vision camera priced at US$ 39.99. The camera
could be used for video chat and to chat while playing online games. Using the camera, the gamers
could take their pictures and post them on Xbox Live. The camera could be connected to Xbox 360
through a USB connection. In November 2006, Microsoft announced launch of a new service
through which users of Xbox 360 could download and view films. Microsoft came up with a
software update through which an HD DVD player, with an output of 1,080 p, could be used as an
accessory. With the new software, streaming video from any XP PC with media player could be
played on Xbox 360. Prior to this, Xbox 360 supported streaming video only from Windows
Media Center PCs.

THE ROAD AHEAD

By December 2006, Microsoft had sold 10.4 million consoles of Xbox 360 in 37 countries across
the world. In the US market, for the month ending December 2006, Xbox 360 had emerged as the

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winner of the console wars, selling 1.1 million consoles, followed by Nintendo at 604,200 consoles
and PlayStation3 with 490,700 consoles. Analysts attributed the lower sales of PlayStation3 and
Wii to supply restrictions. With the success of Xbox 360, Microsoft’s next target was iPod and

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iTunes. In November 2006, Microsoft released ‘Zune’ – digital audio player, and ‘Zune Market’ –
online music store.
Industry analysts also opined that Microsoft could be well on its way to dominate the gaming
console market. They pointed out that no company had remained as a market leader for more than
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one or two generations. In the first generation Atari was the leader, and it was replaced by Sega in
the next generation. By the third generation, Nintendo made its mark but was overtaken by Sony
PlayStation in the fifth generation. In the sixth generation, Microsoft Xbox made its entry and in
the seventh generation which began in 2004, Xbox 360 emerged as one of the top gaming consoles
(Refer Exhibit VI for the History of Gaming Consoles).
Analysts said that backward incompatibility was one of the drawbacks of Xbox 360 since many
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games that were made for Xbox could not be played on Xbox 360. On the contrary, games meant
for PlayStation2 could be played on PlayStation3. Only few of the games from Xbox could be
played on Xbox 360, this required the gamers to buy the new versions of the games, or the gamers
had to connect to the website of Microsoft to download additional software for each title.
According to the market researcher iSuppli, in 2005, on each unit of Xbox 360, Microsoft was
incurring a loss of US$ 126. For the year ending June 2006, Microsoft had sold 5 million units of
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Xbox 360, and the operating losses of the company’s Home and Entertainment division were at
US$ 1.26 billion. According to Microsoft, “Home and Entertainment operating loss increased
primarily as a result of a $1.64 billion increase in cost of revenue primarily as a result of the
number of Xbox 360 consoles sold and higher Xbox 360 unit costs, partially offset by the revenue
growth. Our business model anticipates that while we currently sell Xbox 360 consoles at a
negative margin, product cost reductions and the future margins on sales of games and other
products will enable us to achieve a positive margin over the Xbox 360 console lifecycle.”39
Microsoft remained positive about Xbox 360 and announced plans to launch Xbox 360 with the
Microsoft TV IPTV edition. According to Robert Bach, President, Entertainment and Devices
Division, “Our goal is to make entertainment more personal, more interactive and more social.
IPTV on Xbox 360 and Xbox Live are powerful examples of ways we are bringing together the
worlds of gaming, TV viewing and community to make it easy for people to access and discover
their favorite content and share their personal experiences with the communities they are part of.”40
(Refer Exhibit VII on statistics on the US gaming industry).

39
Marius Oiaga, “Xbox Sinks into a $ 1.26 Billion Hole,” Softpedia News, July 25, 2006.
40
“Microsoft Unveils Wave of New Products and Services at CES”, www.microsoft.com, January 07, 2007.

10


Exhibit I
Xbox and PlayStation 2 Sales – 2002
(In Millions)

Region XBox PS2
Western Europe 1.91 6.29
US 3.50 8.54
Japan 0.39 4.03
Australia / New Zealand 0.30 0.50
Source: Screen Digest, (From Ravi Chandiramani, “Can Xbox Prevail over Power of
Playstation?” Marketing, May 15, 2003).

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Exhibit II
Visual of Xbox
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No
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Source:www.gwnonline.net

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Exhibit III A
Visual of Xbox 360

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op
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No

Source: www.news.com.
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Exhibit III B
Visual of Xbox 360

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No
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Source: www.cespage.com.

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Exhibit IV
Xbox Vs Xbox 360
XBOX XBOX 360
CPU Intel 733 MHz Pentium III Custom designed IBM power PC
One hardware thread based CPU
CPU Floating point 1.466 GFLOPS 115.2 GFLOPS
Performance
Graphics Processor 233 MHz custom designed chip 500 MHz custom designed chip
4 parallel processing units 48 parallel processing units
Total Memory 64 MB 512 MB, GDDR3 RAM
Memory Bandwidth Main memory: 6.4 GB/Sec Main memory: 22.4 GB/Sec

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Frontside bus: 1 GB/Sec EDRAM rendering memory: 256
GB/Sec

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Polygon performance 116.5 million /sec 500 million / sec
Pixel Fill Rate 3.7 G / Sec 16 G / Sec
Input/Output Game Controllers (X4) Wireless game controllers (4)
Ethernet port USB 2.0 ports (3)
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Memory unit slots (2)
Ethernet port
Audio Channels 256 > 256
Size 3.5” X 10.25” X 12.75” 3.27” X 10.16” X 12.17”
Weight 8 lbs. 11 oz 7 lbs. 11 oz
No

Source: Electronic Gaming Monthly, July 2005.
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Exhibit V
Xbox 360 – Popular Games
Game Manufacturer
2006 FIFA World Cup EA Canada
AirForce Delta Storm Konami Studios
All Star Baseball Acclaim Studios
Batman Begins Eurocom
Call of Duty Activision
Gears of War Microsoft Corp.
Saints Row THQ Inc.

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The Lord of the Rings, Electronic Arts Inc.
The Battle for Middle Earth

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Project Gotham Racing Microsoft Corp
Marvel: Ultimate Alliance Activision
Halo 3 Microsoft Corp
Tom Clancy’s Rainbow Six Vegas Ubisoft Entertainment
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Xbox Live Arcade Unplugged Microsoft Corp.
Compiled from various sources.
No
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15


Exhibit VI
History of Video Game Consoles
Particulars Time Period Some Products
First Generation 1972-1979 Magnavox Odyssey (1972)
PONG (Atari) (1975)
Coleco Telstar (1976)
APF TV Fun (1976)
Second Generation 1976-1984 Fairchild Channel F (1976)
Mattel Intellivision (1980)
Sega SG-1000 (1983)

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RCA Studio II (1977)
Magnavox Odyssey² (1978)

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Third Generation 1983-1989 Sega Master System (1986)
(8-bit era) Atari 7800 (1984)
NES (1985)
Fourth Generation 1989-1997 Sega Mega Drive / Genesis (1988)
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(16-bit era) NEC PC Engine / TurboGrafx-16 (1987)
SNES (1991)
Fifth Generation 1993-2004 Atari Jaguar and Atari Jaguar CD (1993)
(32-bit/64-bit era) Sega Saturn (1994)
No

Sony PlayStation (1994)
Nintendo 64 (1996)
Sixth Generation 1998-2005 Sega Dreamcast (1998)
(128-bit era) Sony PlayStation 2 (2000)
Nintendo GameCube (2001)
Microsoft Xbox (2001)
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Seventh Generation 2004-present Microsoft Xbox 360 (November, 2005)
Sony PlayStation 3 (November, 2006)
(Nintendo)Wii (November, 2006)
Source: http://experts.about.com.

16


Exhibit VII
Some Statistics on the US Games Industry

The three largest markets for computer and video games are the United States, Japan, and the
United Kingdom, in that order. Other major markets are Australia, Canada, Spain, Germany,
South Korea, Mexico, France, and Italy.
In the US, the average age of a game player is 33 years. Among those who play games
frequently, adult males, on an average, have been playing video games for 10 years, while adult
females have been playing for 8 years.
Age of Game Players

>50 years,
<18 years,
25%

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31%

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18-50 years,
44%
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In the US, women aged 18 or older represent a significantly greater portion of the game-playing
population (30%) than boys aged 17 or younger (23%). On an average, gamers in the US spend
6.8 hours per week playing games.
Gender of Game Players
No

Female,
38%

Male, 62%
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Parents are involved when games are purchased 89% of the time. Around 49% of parents said
they played computer and video games with their children at least once a month.
Best-Selling Console Game Genres (In 2005)
Others Fighting
5% Role-play ing
11%
8%
Children and
family
Sports entertainment
17% 9%
Shooter
9%

Racing
Action
11%
30%

17


PC And Console Game Dollar Sales
In Billion Dollars

8

6

4 6.2 6.06

2
1.1 0.95
0
2004 2005

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PC Console

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Source: Essential Facts about the computer and video game industry, www.theesa.com (The official website
of Entertainment Software Association, USA).
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No
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References and Suggested Readings:
1. N’Gai Croal, Karen Breslau, How to be a Player, Newsweek, March 20, 2000.
2. John Gaudiosi, Game Makers Throw Support behind Xbox, Video Business, September
25, 2000.
3. Steven Fyffe, Nvidia Reveals Its X-factor, Electronic News, September 25, 2000.
4. Tobi Elkin, Gearing up for Xbox Lunch, Advertising Age, November 20, 2000.
5. Best Game Companies Rally around Microsoft Xbox, Multimedia Publisher, November
2000.
6. Xbox, Electronic Gaming Monthly, January 2001.
7. John C. Dvorak, More Microsoft Madness, PC Magazine, January 02, 2001.
8. Doug Desjardins, Microsoft Unveils X-Box Game Console, DSN Retailing Today, January
22, 2001.

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9. Microsoft Unveils Xbox to the World at Winter CES., Electronic Gaming Monthly, March
2001.

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10. William O’Neal, Behold the Xbox!, Computer Gaming World, March 2001.
11. John Gaudiosi, Analyst: Xbox will Bleed Red for 4 Years, Video Business, March 12, 2001.
12. John Gaudiosi, Xbox is Going Mobile, Video Business, April 09, 2001.
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13. Chris Clark, Lords of the Token Ring, Adweek Magazines Technology Marketing, January
2002.
14. Ravi Chandiramani, Can Xbox prevail over power of PlayStation?, Marketing, May 15,
2003.
15. John C Dvorak, The Xbox Quagmire, PC Magazine, June 17, 2003.
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16. Gefforey James, Microsoft Does Hardware, Electronic Business, October 2003.
17. Kemp Powers, Xbox, Forbes, November 10, 2003.
18. A Serious Contest, Economist, May 08, 2004.
19. Olga Kharif, An X-Factor for the New Xbox?, BusinessWeek, April 25, 2005.
20. Steve Fox, Microsoft’s Xbox 360 Takes the Stage, PC World, May 12, 2005.
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21. Tor Thorsen, Ricardo Torres, Spot On: The Road to the 360, www.gamespot.com, May 12,
2005.
22. Cliff Edwards, Jay Greene , Who’s Got Game Now?, BusinessWeek, May 16, 2005.
23. Lev Grossman, Out of the Xbox, Time South Pacific, May 23, 2005.
24. Scott Woolley, Xbox 180°, Forbes, June 06, 2005.
25. Lee Alan Hill, Xbox 360, Television Week, June 20, 2005.
26. Dan Shoe Hsu, A Full Revolution, Electronic Gaming Monthly, July 2005.
27. Karen Jones, The Console Wars, PC Magazine, July 01, 2005.
28. Battling Game Consoles, PC World, July 2005.
29. Jason Cross, Game Consoles Bulk Up, PC Magazine, August 09, 2005.
30. Arik Hesseldahl, Inside IBM's Xbox Chip, BusinessWeek, October 25, 2005.
31. Jay Greene, Xbox: How It’s Designed to Thrill, BusinessWeek, November 22, 2005.
32. The meaning of Xbox, Economist, November 26, 2005.
33. Peter Lewis, Let the Games Begin, Fortune, November 28, 2005.

19


34. Stephen H Wildstrom, Xbox: A Winner Only at Games, BusinessWeek, December 01,
2005.
35. Arik Hesseldahl, Dan Beucke, For Every Xbox, A Big Fat Loss, BusinessWeek, December
05, 2005.
36. Steven Levy, For Gamers, X Marks the Spot, Newsweek, December 05, 2005.
37. Stephen Manes, Generation X, Forbes, December 12, 2005.
38. Beth Snyder Bulik, Xbox can't Score on Hobbled Sony, Advertising Age, March 20, 2006.
39. Marius Oiaga, Xbox Sinks into a $ 1.26 Billion Hole, Softpedia News, July 25, 2006.
40. Darren Waters, Director Jackson Signs Xbox Deal, BBC News, September 27, 2006.
41. Beth Snyder Bulik, PS3, Wii Get All the Buzz, But Xbox Could have the Happiest
Holidays, Advertising Age, October 30, 2006.

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42. Thomas Fredrickson, Xbox and Wii to Break Playstation Domination: Analyst,
www.ibitimes.com, November 14, 2006.

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43. Xbox 360, PC Magazine, November 21, 2006.
44. Ed Oswald, Has Xbox 360 Already Won the War? BetaNews, December 07, 2006.
45. Microsoft Unveils Wave of New Products and Services at CES, www.microsoft.com,
January 07, 2007.
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46. Jay Greene, Microsoft's Sales Bounce Back, BusinessWeek, January 26, 2007.
47. David Perry, The Next-Gen Great Gaming Experience, BusinessWeek, January 26, 2007.
48. www.xbox.com.
49. www.microsoft.com.
50. www.gamespot.com.
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