By David Becker
Staff Writer, CNET News.com
December 10, 2003, 4:00 AM PT
The design and functionality decisions underlying Microsoft's Xbox and Sony's PlayStation 2 reflect the differing strategies of their makers for controlling the flow of digital content through the home. Microsoft maintains a computing-centric vision of the universe, while Sony remains committed to digital evolution through consumer electronics.
"If you look at the overall company strategy, Microsoft views the PC as the center of the home, and Sony views the TV as the center," said Schelley Olhava, an analyst at research firm IDC.
The distinction has sharpened, as the two powerhouses compete head to head in the game market, where they are taking strides toward digital convergence--the combination of diverse multimedia and communications technologies in one device.
There are important consequences to the development of PlayStation and Xbox that transcend the game businesses of both companies, as they map out broader strategies at critical junctures in their corporate histories. And because Sony and Microsoft are leaders in their respective fields, analysts and competitors are monitoring the rivalry for clues to the future of consumer technology.
"If you draw a map of the connected home, the PC industry's version--and that includes Microsoft--has a PC in the middle of it, with content flowing to multiple devices for consumption," said P.J. McNealy, an analyst for American Technology Research. "That could be a game console, a handheld--take your pick. The Sony version is very much electronics-focused, with no PC required."
Sony is facing its most dire financial difficulties in years, recently announcing that it will cut 20,000 jobs amid a drop in worldwide demand for traditional consumer electronics. That is a far cry from the brash company of the 1980s that expanded into movie studios and music labels in a bid to control content, from its creation to the hardware that would play it. The company has identified convergence projects that capitalize on its consistently profitable game business as a key element of its turnaround strategy.
Microsoft, meanwhile, has encountered its own problems in trying to fit content and media into its software empire. Some analysts speculate that the company, which has largely returned to its computing roots under CEO Steve Ballmer, may eventually withdraw from the costly business of making game consoles, once the Xbox has established itself--a move that would be consistent with the Microsoft philosophy of licensing its software to other companies that make the hardware.
The move toward convergence is still in the early stages in the game industry, but Sony says the PlayStation 2 is already succeeding in its new role because the company has made a conscious decision to use a design flexible enough to accommodate emerging consumer needs.
"What we've been able to do with the PS2 in the last year or two has shown how a sensible strategy toward convergence can lead customers into these new activities," said Andrew House, an executive vice president at Sony Computer Entertainment America. "We haven't relied solely on software to motivate customers. The key difference this time around is adopting an evolving hardware strategy."
Sony is keeping everything in the same box with the PSX, its first attempt at a multipurpose PlayStation device. Just plug the PSX into a TV signal, and the box provides everything needed for video recording, game playing and media playback.
Microsoft, not surprisingly, views the PC as the logical centerpiece for any digital entertainment experience. "We look at it as the PC being the hub of the digital lifestyle, and it's great for that," said Cameron Ferroni, general manager of Microsoft's Xbox Live online service. "It's got tons of storage. It's very flexible."
In that vision, the Xbox is just part of a network of consumer devices that can shift content to wherever people want to consume it, with Microsoft technology ensuring that everything works together. "We want to be in the business of creating protocols and standards to make it easy to move stuff around the house," Ferroni said.
Roping in Longhorn
A larger part of that strategy will emerge with the company's next iteration of the Windows operating system. Code-named Longhorn, the software will include a new search-and-storage system intended to make it easier to find any digital content stored on individual PCs or across a network.
The exact role that Longhorn will play on the Xbox is unclear, but Microsoft is expected to revise its software so that the game console can be linked into a larger home network, in what Microsoft terms the "Longhorn time frame" of 2005 or 2006. Microsoft Chairman Bill Gates told CNET News.com recently that "every group at Microsoft is talking about the Longhorn wave."
Analysts say that schedule is particularly important because home networking is on the cusp of mass-market acceptance. Today's network technologies, whether wired or Wi-Fi, often have spotty connections and are too complex for most consumers, they say--but that will change soon.
"Microsoft and the PC industry have a two-to-three-year window to simplify home networking and moving content around the home," American Technology Research's McNealy said. "After that, you'll see a real wave of reasonably priced consumer electronics devices doing the same thing."
Microsoft recently showed how Xbox can fit into a PC-based home network with its first nongame application, the Music Mixer. The technology allows Xbox to be used as a karaoke machine but also includes more-advanced functions--such as loading digital photos to run slide shows on a TV set--that require a computer connection.
To that end, many industry veterans believe that Microsoft got into the console business to ensure that PC technologies would have a lasting role in the game industry.
"I can't see Microsoft continuing to be interested in a hardware battle with Sony," said Matt Rosoff, an analyst for research firm Directions on Microsoft. "What's more important to them is that everything supports a format that guarantees the PC won't be locked out, and they've done that with Xbox."
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Rosoff said there's a good chance Microsoft will license the specifications for the Xbox hardware at some point, as it's done with the Tablet PC and other devices. Such a move would help popularize the game console's format by allowing electronics manufacturers to build support for Xbox games into DVD players, video recorders and other devices. At the same time, it would allow Microsoft to cut hardware-related financial losses.
"Microsoft likes to be a software company and a platform company," Rosoff said. "They want to sell the software. They're not particularly interested in selling the boxes at a loss. If they can find some way to release Xbox technology as a platform, that would be a very Microsoft approach."
Xbox executive Ferroni acknowledged the obvious bottom-line appeal of leaving the hardware business, but he said licensing the console's design to multiple manufacturers would undercut one of its strengths.
"The games space is obviously where most of the money is made, so it sounds great on paper to just license the design. But as soon as you get into the reality of it, you lose the magic of the console--the fact that it always works," he said. "By having a platform with a single manufacturer--that allows you to guarantee that it always, always works."
If Microsoft's approach to the game business is defined by its PC orientation, Sony might reasonably be expected to exploit its dual role as a producer both of entertainment content and of the devices that play or broadcast that content. Yet to date, Sony's extensive entertainment portfolio has had little apparent effect on the PlayStation business.
Sony executives have talked for several years about the PlayStation 2 becoming a conduit for downloadable media, but the arrival of such content--and the hard drive needed to store it--has yet to materialize. That's partly because of larger company concerns about copyright protection, which were part of Sony's decision against introducing an MP3 player.
"Copy protection is sort of a pain in the ass for these guys, especially Sony, but they have to get around that," said Jay Srivatsa, a senior analyst at research firm iSuppli.
Sony has also been constrained by internal balkanization. Divisions within Sony are notorious for not working with each other, as exemplified by Sony Online Entertainment's hit PC game "EverQuest," which was ported to the PlayStation 2 well after the launch of online games for the console.
"I would argue that those units--music, movies and games--have been very siloed," McNealy said. "Getting them all on the same page is a big challenge. Traditionally, the business units there just haven't worked together very well."
That may change by necessity, as the company grapples with its harsh economic realities. For instance, Sony-produced content will be among the downloadable media services available for the PlayStation 2 shortly after an add-on hard drive is released next year.
Sony's House said time and technology are coming together to allow more cross-fertilization between the PlayStation business and Sony content.
"You'll see us moving forward with the kind of innovation that really shows Sony at its best," House said. "We are at our best as company that really understands entertainment and the consumer part of consumer electronics and how those two come together."
CNET News.com's Mike Ricciuti contributed to this report.