XBox One Case Study

I really need this before midnight tomorrow May 6th. Write a data analysis for this case study. The report should be 5-6 pages double-spaced not include cover pages and reference and have the following sections in this order:Executive summaryProblem (Issue) statementData analysisKey Decision CriteriaAlternatives analysisRecommendationsAction and Implementation PlanExhibitsThe Case Study is attached
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NEAL J. ROESE AND EVAN MEAGHER â??09
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By the time he climbed into the back of the limousine that would take him to the airport on
June 11, 2013, Don Mattrick, Microsoftâ??s president of the interactive entertainment business, was
an Internet pariah. He had spent the day at the Los Angeles Convention Center, site of the
Electronic Entertainment Expo 2013, where he had presented Microsoftâ??s new game console, the
Xbox One.
The Xbox One was the most advanced entertainment and video game platform in history, but
hardcore gamers had objected to Microsoftâ??s decision to protect its software investment by
requiring the console to always be online. The backlash had turned what should have been a
triumph into a disaster, with Internet memes lampooning Mattrick, his company, and his product.
Mattrick pulled out his Windows phone and began composing an e-mail to his team that
instructed them to clear their schedules for the rest of the week. A full review of the productâ??s
features and communication strategy was urgently needed before the Xbox One went on sale in
November.
Console Gaming Industry Overview
In 2013, the video game market was projected to exceed $70 billion, with console games
accounting for 43 percent of that total (see Exhibit 1). Historically, two to three manufacturers
had occupied the console market at any given time, with a total of seven console generations as of
early 2012 (see Exhibit 2). Nintendo dominated the market from 1983 to 1994 with its Nintendo
Entertainment System and Super Nintendo consoles, with Sega as its only significant competitor
during that period. From 1994 to 2006, Sony emerged as the market leader with its Playstation
and Playstation 2 consoles. Competition grew increasingly fierce with each subsequent
generation, with the most recent generation exhibiting the greatest competitive rivalry to date.
Nintendo launched an impressive comeback with its novel and inexpensive Wii console in 2006,
but Microsoftâ??s Xbox 360 and Sonyâ??s Playstation 3 managed to remain competitive in game
sales, and interest in the Wii began to fade by 2010 (see Exhibit 3).
The eighth generation of consoles officially launched with the release of the Wii U in
November 2012. Soon thereafter, Microsoft and Sony made announcements that their Xbox One
and Playstation 4 consoles, respectively, would launch in Q4 2013. This signaled the end of the
seventh console generation, the longest in history at eight years; prior generations generally had
lasted five to six years, depending on the manufacturer. Market observers largely attributed this
©2014 by the Kellogg School of Management at Northwestern University. This case was developed with support from the December
2009 graduates of the Executive MBA Program (EMP-76). This case was prepared by Professor Neal J. Roese and Evan Meagher â??09,
CFA. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary
data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. 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 meansâ??electronic,
mechanical, photocopying, recording, or otherwiseâ??without the permission of Kellogg Case Publishing.
This document is authorized for use only by Eleanor Nguyen (linh.mvt.jack315@gmail.com). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
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KEL794
lengthening of the console cycle to the decreasing marginal improvements in graphical
performance of newer console generations. In the past, huge leaps in graphical performance had
propelled significant consumer interest in new consoles, making the expensive hardware more
easily marketable. By 2013, however, the graphical performance of the Xbox 360 and Playstation
3 consoles had reached a sufficiently high level that truly radical improvements had become
impossible, preventing the manufacturers from using better graphics as the primary selling point
for the new generation.
The ability of the Playstation 3 and Xbox 360 consoles to connect to the Internet also helped
lengthen the console cycle, as that connectivity allowed them to update their operating systems to
address bugs, add features, and incorporate technologies created since the original release.
Previous consoles lacked such connectivity, so their operating systems could not change once the
console was shipped. These two factors had convinced most market observers that the lengthened
console cycle was here to stay, and the rise of cloud computing suggested that the eighth console
cycle would be even longer.
The popularity of a console depended on several factors, including price, game exclusives,1
interface innovations, graphical performance, and brand loyalty. Nintendo cultivated a number of
popular exclusive games, such as the Mario Brothers franchise, and priced its consoles lower than
the competition at the expense of graphical capability and computing power. The Wii consoleâ??s
novel interface opened up new ways for people to interact with their games and was responsible
for reinvigorating the Nintendo brand by appealing to a broader set of consumers that included
children, families, and more casual gamers.
Microsoft and Sony products had more in common with each other than with Nintendo
products: their same-generation consoles featured comparable hardware and performance, and
their game libraries demonstrated significant overlap. First-person shooter games2 tended to be
heavily represented among each consoleâ??s best-selling games, although each console had
developed several exclusive and popular game brands in other genres as well. Both companies
increasingly emphasized their consolesâ?? online functionality, which included multiplayer support,
digital downloads (downloadable content) via their proprietary online marketplaces, and videostreaming services that had begun to compete with Roku, Netflix, Hulu, and Amazon Prime.
Gamer Segmentation
Many consumers played games on multiple devices, which offered a new method of
segmentation. Previously, gamers had tended to play one console or platform exclusively, but in
2013, 22 percent of American gamers played on four different screens, including an
entertainment screen (a television connected to a game console), a floating screen (an iPad or
other tablet), a personal screen (a cell phone), and a computer screen (a desktop or laptop).
However, personal and floating screens accounted for a small share of total revenues: 70 percent
1
For example, Microsoftâ??s exclusive access to the first-person shooter Halo franchise by 343 Industries proved a significant driver of
demand for its original Xbox console.
2
First-person shooter was the most popular genre of video game in the early twenty-first century. In first-person shooter games, the
player engaged in gun- and projectile weapon-based combat while viewing the action through the eyes of the protagonist (or in some
cases, the antagonist).
2
KELLOGG SCHOOL OF MANAGEMENT
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customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
KEL794
XBOX ONE
of game revenues from American consumers came from purchases played on entertainment
screens (29 percent) and computer screens (51 percent).3
A more conventional segmentation of gamers categorized consumers not by where they
played games but rather by the kinds of games they played and the ways in which they played
them.4
ï?·
Hardcore Gamers: These consumers were highly engaged across all screens, but
particularly so on consoles. They tended to gravitate toward the Xbox 360 and
Playstation 3 and spent more time gaming than any other segment, with an average of
fifteen hours per week. Their purchases were divided evenly between digital
(downloadable) and physical media, but they were the most likely segment to purchase
downloadable content that extended the functionality of an already-purchased game.
They also tended to be the earliest adopters at the beginning of each new console cycle.
ï?·
Digital Gamers: These consumers engaged in a variety of gaming activities, from PC to
mobile, console to portable, both online and offline. They tended to purchase downloads
rather than physical discs because of the immediate satisfaction of a digital download.
They also tended to purchase the most games, although the lower price points of digital
games made them second in spending to hardcore gamers.
ï?·
Mobile Gamers: This segment was defined by its heavy use of mobile devices for
gaming, with a strong emphasis on iOS games purchased through the iTunes Store. The
total time spent gaming on mobile devices was almost half of total gaming time across all
segments, but it represented the vast majority of time spent by mobile gamers. This
segment had a lower spend than other segments because these gamers downloaded the
highest percentage of free games, but the segmentâ??s paid digital acquisition approached
that of the average gamer.
ï?·
Family and Kid Gamers: This segment was the most likely to use the Wii console for
gaming, in addition to systems such as Leapfrogâ??s Leapster. The segment tended to
purchase fewer, lower-priced games, and showed an inclination toward educational
games.
ï?·
Heavy PC Gamers: This segment consisted of gamers who spent more than ten hours per
week playing PC games. PC gamers were further divided into casual and serious subsegments. Casual PC gamers tended to be women over the age of 35 who preferred
games prevalent on social media platforms such as Facebook. Serious gamers tended to
be men under the age of 35 who played standalone games requiring greater PC
performance, many of which were also popular on consoles.
ï?·
Light PC Gamers: These users also focused on PC gaming, but not nearly to the extent of
heavy PC gamers. Their primaryâ??and for the most part, onlyâ??genre preferences were
card games, puzzle games, word games such as Words With Friends, and so on. The vast
majority preferred free games, so the segment had the lowest purchase likelihood and
lowest average spend.
3
â??Newzoo Launches Alternative Games Market Segmentation,â? Games Industry, May 30, 2012, http://www.gamesindustry.com/
newzoo-launches-alternative-games-market-segmentation.
4
The NPD Group, â??Gamer Segmentation 2012: The New Faces of Gamers,â? 2012.
KELLOGG SCHOOL OF MANAGEMENT
3
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customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
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KEL794
Hardcore gamers made up 21 percent of the market by population, but mobile gamers had
overtaken them as the largest segment at 22 percent (see Exhibit 4). The number of family and
kid gamers had dropped 7 percent from 2011.
Transition to the Eighth Console Cycle in 2013
All three major console manufacturers enjoyed strong sales during the seventh console cycle
(see Exhibit 5). Although the Wii shipped more units and led all consoles in game sales, its
market share fell dramatically between 2010 and 2012, from 39 percent to 18 percent. Games
sales also dropped off for the Xbox 360 and Playstation 3 consoles over that timeframe, but not
quite so dramatically.
Wii dominated headlines early in the seventh console cycle, but the Wii U did not generate
nearly as much interest in the run-up to its release. Both consoles were released in late November
(the Wii in 2006, the Wii U in 2012), but the Wii had sold 2.9 million units by the end of
December 2006, compared to 2.3 million units for the Wii U by the end of December 2012.5 The
Wii U was priced at $300 for the basic package that included the console and newly designed
GamePad, whereas the Wii had been priced at $250. The new Wii U GamePad was a hybrid
controller and tablet with a sizeable touchscreen that allowed users to play games directly on the
controller even when the television was off or set to another input, making it convenient for
families who wanted to consume multiple streams of content at once.
Late in their life cycles, the Xbox 360 and Playstation 3 began offering more digital content.
Both began selling digital versions of games that previously would have required physical discs
for installation given their size and bandwidth limitations. In addition, the manufacturers
enhanced the consolesâ?? menus by adding access to Netflix, Amazon Prime, Hulu, Vudu, and other
video-streaming services; these services were added automatically during required system
updates, without user choice or input.
Digital Rights Management
In the run-up to the eighth console generation, the issue of digital rights management (DRM)
became increasingly controversial in the PC gaming world. Protecting the intellectual property in
video games was appealing to game producers, but DRM had a rocky history among PC gamers.
Restrictions on sharing games had always met with resistanceâ??or even severe backlashâ??from
gamers, who wanted to control how their games could be shared and resold.
One common form of DRM was a â??limited install activationsâ? feature, which limited the
number of devices onto which a purchaser could install a game. In 2008, Maxis (the maker of the
Sims franchise) released a game called Spore with SecuROM DRM technology, which allowed
purchasers to install the game on up to three computers but required online users to authorize
their copy once every ten days. Many gamers felt this repetitive authorization was onerous and
overly restrictive, and they pledged to pirate the game rather than accept the terms of the DRM
5
VGChartz, Yearly Chart Index, http://www.vgchartz.com/yearly (accessed March 15, 2014).
4
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This document is authorized for use only by Eleanor Nguyen (linh.mvt.jack315@gmail.com). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
KEL794
XBOX ONE
technology. Irate gamers took to Amazon to register their dissatisfaction; more than 90 percent of
Spore reviews were one star out of five, the lowest possible score.6
A newer form of DRM was â??persistent online authenticationâ? (also known as â??always-on
DRM�), which required that users maintain a persistent Internet connection in order to play a
game. In 2012, Maxis announced it would launch its reboot of the SimCity franchise in 2013 as an
online-only game, in contrast to its history as an offline single-player game. Gamers suspected the
change was primarily to prevent piracy, but the company insisted it was building a true
multiplayer game. In late 2012, when Maxis developers fielded user questions on the website
Reddit, they were met with overt hostility regarding the always-on requirement. The game was
released with persistent online authentication as planned, but it ended up selling so well that
Maxis servers were unable to handle the load and gamers who had paid for and installed the game
were unable to play for extended periods of time. The resulting online backlash caused even more
bad publicity for the company and always-on DRM.
The Xbox One Launch
On April 4, 2013, gaming website Kotaku reported that the next-generation Xbox console, at
the time codenamed â??Durango,â? would require an always-on Internet connection in order to
operate.7 Rumors to this effect had been circulating for more than a year, but hardcore gamersâ??
who made up the vast majority of the readership of gaming websites like Kotakuâ??saw this as a
confirmation of their worst fears. Microsoft demurred, stating, â??We do not comment on rumors or
speculation. We are always thinking about what is next for our platform, but we donâ??t have
anything further to share at this time.�8 The Kotaku article predicted that an always-on console
would prove disastrous for Microsoft, in part because of the fiasco surrounding the always-on
SimCity game earlier in the year. Meanwhile, Sony confirmed that the Playstation 4 would not
have an always-on requirement.
On the day Kotaku broke the story, Microsoft Xbox employee Adam Orth took to Twitter
with the message, â??Sorry, I donâ??t get the drama around having an â??always onâ?? console. Thatâ??s the
world we live in. #dealwithit.� Twitter, Facebook, gaming websites, and other social media
exploded with comments from outraged gamers, whose anger was fueled by additional
derogatory comments from Orth. The uproar triggered an official apology from Microsoft the
following day, and Orth was dismissed from the company a week later.9
On May 21, Microsoft hosted a press event for the official reveal of the Xbox One console.
The majority of the presentation was dedicated to the consoleâ??s â??all-in-oneâ? functionality, which
positioned it as the digital entertainment hub for all media in the â??newâ? living room. Microsoft
6
Erick Schonfeld, â??Spore and the Great DRM Backlash,â? TechCrunch, September 14, 2008, http://techcrunch.com/2008/09/14/sporeand-the-great-drm-backlash.
7
Stephen Totilo, â??The Next Xbox Will Require an Internet Connection To Start Games, Sources Say,â? Kotaku, April 4, 2013,
http://kotaku.com/the-next-xbox-will-require-an-internet-connection-to-st-470062456.
8
Lance Whitney, â??Microsoft May Announce Next Generation of Xbox on May 21,â? CNET, April 8, 2013, http://news.cnet.com/830110805_3-57578387-75/microsoft-may-announce-next-generation-of-xbox-on-may-21.
9
John Koetsier, â??Adam Orth, Microsoft Game Exec Who Insulted Fans on Twitter, Has Left the Company,â? VentureBeat, April 10,
2013, http://venturebeat.com/2013/04/10/adam-orth-fired-microsoft-xbox-exec-who-insulted-fans-appears-to-have-joined-the-ranksof-the-jobseekers.
KELLOGG SCHOOL OF MANAGEMENT
5
This document is authorized for use only by Eleanor Nguyen (linh.mvt.jack315@gmail.com). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
XBOX ONE
KEL794
had long aspired to serve as the â??center of the digital home,â? and the new Xbox One promised
that owners could switch quickly and seamlessly between cable television, games, streamed
movies, or VOIP servicesâ??even split the screen between sources to accommodate multiple users.
The next generation of Microsoftâ??s Kinect deviceâ??a motion-sensing peripheral originally
released for the Xbox 360 that, like Wiiâ??s Remote Plus, allowed users to interact with the Xbox
360 through voice commands and gesturesâ??would further recognize individuals and
automatically update the interface to match their personal preferences and offer content tailored
to the viewing habits recorded in their user profiles.
To emphasize the Xbox Oneâ??s functionality as an all-in-one entertainment hub, the press
event featured a segment with the National Football Leagueâ??s commissioner, Roger Goodell, who
announced a partnership with Microsoft that would integrate interactive information and statistics
with live viewing of NFL games. Additionally, 343 Industriesâ??the developer responsible for the
Xboxâ??s flagship Halo first-person shooter seriesâ??announced the release of a new Halo television
series produced in part by Steven Spielberg.
Microsoft executives spent about one-third of the event showcasing specific games, all of
which targeted the hardcore gamer segment: a first-person shooter, a sports game, and a racing
game. There was no mention of any games that were child-friendly or for mo …
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