Some articles make you stupider for having read them. This is one of them. It is full of nice sounding misinformation that you'd be better off forgetting.
The original purpose of the XBox was to kill the profit margins on Sony's cash cow, the playstation. It succeeded in that, and Sony is no longer threatening Microsoft across a range of areas. This was a wise strategic move, and profit was not the main motive.
According to Google's Q3 release, Google's annualized run rate on mobile is over a billion dollars. Android is a disproportionate share of that. Android is not a waste of resources for Google. It is a profit center.
As for Wave, it was a great experiment. It didn't work out. But lots of ideas from Wave are showing up in docs. I think it was a worthwhile risk to take, and Google learned something from it.
The one thing that I agree with the article on is that Microsoft's mobile strategy is severely broken. But the reasons for it are more complex than simply saying that Microsoft has a bunch of cash.
And now I'm going to try to forget having read that article.
The original purpose of the XBox was to kill the profit margins on Sony's cash cow, the playstation. It succeeded in that, and Sony is no longer threatening Microsoft across a range of areas.
What areas are those and why do we we think that spending billions with a "b" on Xbox to kill Sony's profits was a more effective defence of those areas than spending those same or fewer billions with a "b" making those areas more competitive?
And more importantly, are any of these areas Sony threatened actual cash cow businesses like Windows or Office?
And more importantly, are any of these areas Sony threatened actual cash cow businesses like Windows or Office?
Yes. Microsoft thought that Windows in the consumer marketplace was threatened.
Here was the theory that both companies had then (and maybe still have). A digital convergence between media and computers is inevitable. Whoever controls that platform will see a large growth in business. Whichever gets replaced will see a large drop in business. One of the keys to winding up in control of that platform was to get richer content for your platform. The key to that was to deliver a DRM system that Hollywood liked.
With that in mind take another look at Sony's WebTV, Microsoft's Media Center, the Blu-ray vs HD DVD war, and moves towards DRM from both companies over the last decade. The battle so far has been a draw. WebTV failed to dent the PC market place. Blu-ray won. Consumers don't like DRM, but a certain amount of it has been shoved down our throats anyways.
Incidentally I believe that Sony still thinks this could happen, and this is one reason that they are involved in the Google TV platform.
It is not obvious to me that spending billions on Xbox to suck the wind out of Sony's sails is superior to investing in Windows itself as a means of protecting Windows in the consumer marketplace.
You're describing spending billions of dollars to become the dominant player in an uncertain business in the hope that someday down the road you will be able to recoup all your billions by enjoying a monopoly position. But (a) they have spent years on this and are only fighting to a draw, and (b) it's not clear that by the time one of them "wins" that the business will work the same way for media that it did for PC software or operating systems.
They are trying to replicate the business model for Windows, and failing, while meanwhile companies like Apple, Amazon, and Google are bringing entirely new business models to the marketplace.
As Mitch Hedberg would put it, that's a double-whammy.
In business the right course is often not obvious, and the merits of different approaches can be heavily debated.
In the case of the Xbox, Microsoft did both. It spent money developing the Xbox. It spent money investing in Windows. It also took lessons from the Xbox to make Windows itself a better gaming platform. And finally the cost of the Xbox approach was not as much as you'd think, because the division stood to recoup much of its costs.
How much did this cost Microsoft in the end? Less than you'd think, given the article. While it is true that costs were measured in billions and profits in millions, those costs were fixed development costs in the low billions, and profits recently have been quarterly profits in the hundreds of millions. I believe that at this point, over all generations of the Xbox, Microsoft is in the black. (But if they had invested their money differently, they could be further in the black.)
So what was the result in the end? I think they sliced something like a quarter off of Sony's profit margin. Almost for free. And Sony failed to execute on their strategy of having TVs replace PCs in the home.
Whatever you think of the merits of the strategy, Microsoft clearly thinks it works. They have used it repeatedly. For example look at Bing. And I wonder whether Google TV is an attempt to return the favor.
In business the right course is often not obvious, and the merits of different approaches can be heavily debated.
At the time many things are obscured by "the fog of war," however, in publicly traded businesses the wrong course is perfectly obvious after the fact by examining the result as measured by the return on investment in the stock.
If you wish to laud Microsoft's choices, carry on without me.
There is a lot more that feeds into the return on investment in the stock than specific decisions due to one business conflict.
Microsoft's fundamental business problem is that they are on the wrong side of some disruptive innovations. And that is a very difficult business problem to face. No matter how competent the management, if a company is caught in that trap it is normal to see poor returns in the stock market. Read _The Innovator's Dilemma_ and _The Innovator's Solution_ for more on that.
Microsoft's problems are made more difficult by the fact that Bill Gates stepped down and left Steve Ballmer in charge. They went from having one of the most effective CEOs out there to someone who I think is a liability.
However, despite those factors, it is still possible to look at specific decisions and have opinions on how good or bad they were. And I think that Bill Gates' decision to start the Xbox was good.
However, despite those factors, it is still possible to look at specific decisions and have opinions on how good or bad they were. And I think that Bill Gates' decision to start the Xbox was good.
I think it is possible and laudable to make up your own mind about specific business decisions. However, it isn't really possible for us to argue the point unless we can agree on a metric for measuring their efficacy.
From an empirical perspective, a theory ("XBox is a good decision") is only meaningful if it is falsifiable. I only have two metrics in my toolbox for starting a new line of business: The ROI of the specific business and the ROI on the stock overall.
However, not all discussions neatly map to empirical methods, and even then there are other metrics besides those two ROIs. If you are saying that there is some validity to this discussion that can't be measured quite so neatly, if there are these "strategic" considerations that require a leap of faith to appreciate, well I can't argue with you.
I'm not trying deflate your argument by suggesting it's faith-based. Most corporations make a lot of decisions that aren't falsifiable. Executives stand up all the time and say, "it looks bad but it could have been worse," and it's very difficult to naysay them because we can't run A/B testing and find out whether Microsoft-Xbox does better or worse than Microsoft+Xbox.
So... In the spirit of Christmas I will wish you well and thank you for sharing your opinions in a reasoned tone.
I'm glad you elaborated on your original comment, but you're showing the fallacy of a zero-sum game perspective between Microsoft and Sony. I'd consider both companies to have lost, and lost greatly, to Apple. The battle over media formats and the console market share opened the door to disruptive products and services from Apple. Both Microsoft and Sony gave up an early lead in the mobile device market to Apple, as well. If they aren't sweating yet about those little $99 iOS boxes from Apple, then they still aren't paying attention.
You're right about Apple, as I indicated in my initial post when I said that Microsoft's mobile strategy has been a disaster. However it is important to keep in mind that a company always has to deal with problems on multiple fronts. The fact that I think they made a good decision on one issue doesn't mean that they didn't make bad ones elsewhere.
I think it is also important to pay attention to the timeline. The Xbox decision was made under Bill Gates. The Apple missteps were made under Steve Ballmer. There may be a reason for that...
It was really one area. The TV in the living room. MS feared that Sony would end up winning that with the PlayStation and then use their consumer electronics arm to have an integration stranglehold on the living room.
You have to remember that this started back in 2000 (or so). Nobody had a clear vision of Netflix or Roku or Hulu.
I don't think they ever worried that Sony would take Office, but I think the fear was that they would move computing to appliances and take Windows revenue... now that fear is the iPad will do it.
It started a bit earlier than that. Sony's WebTV came out in 1996. Which fed perfectly into Microsoft's paranoia that the web was about to make Windows irrelevant.
Absolutely. I meant XBox planning proper, but you're right, this paranoia goes back as MS also had WebTV in the 90s as well (I don't recall Sony's, but I'm not surprised that they had one).
If anything MS mis-calculated with XBOX, thinking Sony was the threat in 2000, but the real threat was Apple. Now it's 2010 and the money is not in the living room (and it never was really), it's in mobile.
A false dichotomy, it's in both. Home entertainment in the form of music, tv, and video games is a massive industry. Just because mobile is new and hot doesn't mean it defines the extent of the known business universe. Ignoring a multi-billion dollar market for the sake of intellectual simplicity is the epitome of zealotry.
Well there's money everywhere - groceries is a 100 billion dollar industry too, I don't think it's the "epitome of zealotry" for MS to ignore groceries.
Mobile wasn't exactly a hot industry 10 years ago. It's the job of a hundred billion dollar company like MS to make big investments in billion dollar markets, sure, but I don't think there's any denying Xbox was a miscalculation on MS's part.
See the market caps of Apple and MS now for lessons learned.
10 years ago mobile was an incredibly hot industry. In December 2000 the market cap of Nokia was around 200 billion, roughly comparable to the likes of Intel or Microsoft. Just a few months before telecoms had bled themselves dry in the German 3G frequency auction, seriously believing that the rights were worth tens of billions.
> Some articles make you stupider for having read them. This is one of them. It is full of nice sounding misinformation that you'd be better off forgetting.
You make this sweeping statement but do not explain it beyond suggesting that a couple of details may be incorrect. Please provide justification that the central argument of the article is incorrect.
Go read the article carefully. The "details" I criticized include every significant supporting example offered. The fact that the article got them all wrong should make you suspicious of the grandiose reasoning that they were meant to support.
In short there is no evidence that having cash makes companies stupid. Companies with cash should be doing a certain amount of experimentations with it. They should experiment with projects outside of their core area. And the fact that it isn't obvious to you why they are doing something doesn't mean that they don't have a good reason to do it.
I thought that this was one insightful article, but after reading your comment I see that not everything is as this person is trying to make us see.
There is no black and white, and not every decision/project can be put in the same sack (even though lots of em are the result of what the article says)
I believe the over-investment in consoles (by MS and others, but amped up in large part because of MS) has largely killed the PC gaming market, and the death of the PC gaming market is what's killing Windows in the consumer computing space; it's the last major "sticky" item keeping people back from switching platforms. And where the consumers go, businesses will soon follow.
The original purpose of the XBox was to kill the profit margins on Sony's cash cow, the playstation. It succeeded in that, and Sony is no longer threatening Microsoft across a range of areas. This was a wise strategic move, and profit was not the main motive.
If you think that btilly is not describing and then praising wealth destruction in that quote about Microsoft's Xbox business, please downvote this comment. Thanks.
HOW TO DESTROY WEALTH:
When I spend $100 on materials and labor, and I can -- at best -- sell the result to you for $80, $20 of wealth is destroyed. Why? Because the original $100 came from the creation of wealth equal to that, and I transformed that $100 into something that is now only worth $80. Literally, wealth was destroyed.
If you'd like a more concrete analogy, what Microsoft did is a lot like taking a a 1 carat diamond and smashing it into diamond dust. Only the arrangement of matter has changed, but in terms of wealth, the diamond dust is worth far less than the sparkling 1 carat diamond.
It's the same with the $100. As a $100 bill, it is worth exactly $100. Microsoft took that $100 and spend it on labor and materials. The matter in the world stayed the same. But the new arrangement of matter (an Xbox) was only worth $80 to the world. Microsoft destroyed $20 in wealth to the world.
This, in a nutshell, is what Microsoft did with the Xbox. Sony was doing something the world wanted with the Playstation. They were literally spending $100 and getting $120 in value out of it. That's what wealth creation looks like.
Microsoft did the opposite. Even worse, they did so in order to make it impossible for Sony to create wealth, too. In my book, reducing the wealth of the world for something so stupid, so small, as to "eliminate competition" is about the worst sin a business can do.
The literally billions of dollars of wealth destroyed at both Sony and Microsoft by the behavior of Microsoft has hurt the world in enumerable ways. For all we know, had the money been returned to shareholders, we may have made more progress on green energy. Or food production. Or water purification. Or cancer research. Or any of the other things we could have done instead of destroying wealth.
That is why the OP is so off base. And why the rest of you should upvote my comment like crazy. Wealth destruction is bad, full stop.
Your position appears to be one of tactical and not of strategic thinking.
Per the article, Xbox itself wasn't itself intended to be a large revenue stream.
It was (again, per the article) intended to protect other existing revenue streams of Microsoft from a competitor (Sony) that had been enjoying increasing success with gaming products, and a competitor that was then likely to use that success and that revenue to start competing against Microsoft in other arenas and other products.
And yes, Xbox does look to have been a wise move.
There have been more than a few comments over the years of companies having used press releases and roadmaps and deliberate leaks to freeze a market; to effectively remove the wind from a potential competitor's sails. Steps taken to change the business environment that the competitor is operating in.
BTW: the difference between tactics and strategy is analogous to the differences between sales and marketing. Confuse the two at your corporate peril.
Anyone know why I'm not getting more downvotes? Lots of people have upvoted replies to my comment that disagree with me, and I'm assuming they also downvoted my comment.
Is the downvoting on some kind of logarithmic scale? I've lost something like 27 karma points, so clearly something is happening. Any ideas?
UDPATE: I suppose it could be that people can't read it anymore, and so the downvotes have stopped. Hard to say. My karma has started creeping back up though.
However many downvotes something gets, the lowest score that will be shown is -4. The goal of this is to mitigate bandwagon downvoting. I'm not sure it actually works, because when I see -4 I just assume it's something significantly lower, but there you go.
"When I spend $100 on materials and labor, and I can -- at best -- sell the result to you for $80, $20 of wealth is destroyed. Why? Because the original $100 came from the creation of wealth equal to that, and I transformed that $100 into something that is now only worth $80. Literally, wealth was destroyed."
In your example, no wealth is actually destroyed in the global sense, only relative to your bank balance (where you lost $20). Most people would call this a negative return on investment rather than wealth destruction.
The $100 you spent on labour and materials doesn't disappear into the ether - it is transferred to the people who worked for you and manufactured your materials. They could well do much more productive things with the cash than you and raise the wealth of the society accordingly.
Granted, Microsoft may not have used their resources particularly efficiently and there are indeed opportunity costs with their strategy, but who's to say that these resources would've been optimally used?
Without getting into it too deeply, money is not wealth. It is a wealth transfer mechanism.
When wealth is converted into $100 for trade with someone (e.g. Microsoft, by buying Windows and Office products) and Microsoft takes that $100 and converts it into something that can only be traded for $80, it has destroyed wealth, even though the original $100 of money is still around (it paid for materials and labor after all). The "world" still has the $100 that Microsoft used to have, but instead of having $100 worth of wealth to trade it for, Microsoft has stupidly destroyed wealth and now there is only $80 of wealth to trade for.
So yes, the money is the same, but the wealth actually did decrease, by $20. Someone, somewhere is stuck with $20 and nothing to buy after the Xbox is sold for $80, thanks to Microsoft. Global wealth was destroyed; the amount of $100 bills stayed the same.
When I enter into a trade, the amount of wealth I gain is my utility for the item I am purchasing. The amount of wealth I lose is my utility for what I'm giving away. This is true whether we are trading money for goods, or baseball cards for other baseball cards. Money is just a convenient item that people want which can easily be used to keep score. But since we each value the item at a different price than the trade, we can both become wealthier when we trade. It happens all the time. It happens every time I purchase an apple from the store that the shopkeeper was not willing to eat, but which I am.
Let's go back to your example. In your example the person who spent $80 and was willing to spend $100 winds up $20 off wealthier than they were before. That $20 can be traded for some other item of sufficiently higher value, so all the money is likely to remain in circulation.
There are other people for whom the item was only worth $90. They are now willing to buy it. And each one that does winds up $10 wealthier. That's new wealth spread around the world.
The seller, in your example Sony, now winds up benefiting less from each trade. But they still benefit. And they get new trades that they wouldn't have made before. They might or might not wind up wealthier at the new price point. But even if they become less wealthy, the world as a whole is more wealthy.
Incidentally the figures are bigger than you indicate. According to Sony's stock report for Oct-Dec 2000, they were making $175 in profit per PS2 sold. I believe that the Xbox got them to drop the retail price by over $100. At that point Sony was still making a handsome profit. Just less handsome than it had been. (And in truth they didn't have to drop it that much, I think they were trying to make the Xbox too expensive for Microsoft to stick it out. At that price point they made money and Microsoft lost money on every single console sold.)
Thanks for sharing. You got a lot of things right.
What you didn't get right was my example. I'm not talking about a situation where Microsoft is pricing a $100 product at $80. That does not result in wealth destruction, as you explained in detail. (It does result in less $$$ in Microsoft's bank account, though.)
My example was specifically about an Xbox that people were only willing to pay $80 for, and that Microsoft spent $100 to create. (Obviously, $100/$80 are illustrative, not actual figures.)
I will continue to assert that spending $100 to create a product that no one else values at more than $80 does, in fact, destroy global wealth. And that that is a Bad Thing, not "wise". You're free to continue to tell people the opposite.
Have you considered disposable razors, printer ink cartridges, cartridge-based coffee makers, those dust mops that use sheets, highway toll transponders, etc.
You might not be making a profit up front, but there can well be profit from convincing a customer into a particular revenue stream.
In cases like that, the wealth effect would have to consider the entire value stream, not just an individual transaction.
If the company with products you describe, over many years, lost money consistently and it was not due to just "giving away" product at lower than the market would pay but was truly because the market would not pay the company's cost of production for the goods and services offered, then in that case, the company will have destroyed global wealth.
I agree that spending $100 to create $80 is wealth destruction. However Microsoft justified it at the time by taking a cut of game sales. If people bought enough games, then they made a profit per unit.
Later generations of the console had much better profit margins for them.
The original purpose of the XBox was to kill the profit margins on Sony's cash cow, the playstation. It succeeded in that, and Sony is no longer threatening Microsoft across a range of areas. This was a wise strategic move, and profit was not the main motive.
According to Google's Q3 release, Google's annualized run rate on mobile is over a billion dollars. Android is a disproportionate share of that. Android is not a waste of resources for Google. It is a profit center.
As for Wave, it was a great experiment. It didn't work out. But lots of ideas from Wave are showing up in docs. I think it was a worthwhile risk to take, and Google learned something from it.
The one thing that I agree with the article on is that Microsoft's mobile strategy is severely broken. But the reasons for it are more complex than simply saying that Microsoft has a bunch of cash.
And now I'm going to try to forget having read that article.