August 10, 2005 11:42 AM PDT

Digging profits out of Xbox

Microsoft is looking to squeeze a profit out of the gaming market with a new royalty program tied to the release of its next Xbox console.

Only accessory makers that get Microsoft's blessing and fork over a slice of their sales to the software maker will be able to produce Xbox 360 game pads, steering wheels, joysticks and other controllers.

In addition, in order to ensure that only authorized products connect to the new console, Microsoft is adding a security mechanism that will be available exclusively to those who sign a deal with the company, according to documents from a peripheral company filed with the SEC. The Xbox 360 console, announced in May, is slated to go on sale this holiday season.

News.context

What's new:
Microsoft has introduced a program to get royalties by restricting accessories for its upcoming Xbox 360 update to authorized makers only.

Bottom line:
The program could be part of Microsoft's goal of turning a profit with the console, something it wasn't able to do with the previous Xbox.

More stories on Xbox 360

With the last Xbox release, Microsoft had a licensing program in which makers of such gadgets could either pay a royalty and display an Xbox logo, or offer the products without paying the fee or using the logo.

The new royalty program could be part of Microsoft's goal of turning a profit with Xbox 360, something the company was not able to do with the prior generation console, said IDC analyst Schelley Olhava.

"Microsoft has made it very clear that it's all about profitability" with this generation of console, Olhava said. "Maybe this is a way they are looking to make additional revenue off of the Xbox." But, she said, the move could also be intended as "a way to ensure quality products make it out the door," reasoning that makers willing to pony up a share of the proceeds would be the kind of companies that make more reliable gear.

Microsoft declined to comment on the royalty structure for the program or outline how it compares with the logo-only program for the original Xbox. "We want to make sure the customers are getting the best experience possible," a company representative told CNET News.com.

According to a contract between Microsoft and Mad Catz Interactive, the software giant will get a share of the wholesale revenue generated by the accessory maker's Xbox add-ons. An edited version of the contract was filed by Mad Catz as part of the company's annual report to the Securities and Exchange Commission. The edited document does not state the percentage cut that Microsoft will get from the accessory sales.

"Microsoft has made it very clear that it's all about profitability."
--Schelley Olhava, analyst, IDC

Whatever the royalty figure amounts to, it will come on top of a variety of other revenue sources for Microsoft. These include upfront licensing fees from accessory makers, the money Microsoft gets from selling the console itself and, most importantly, the royalties the company gets from those who sell Xbox 360 games.

The decision to seek royalties from console controllers is not unlike a move Apple Computer made earlier this year, in which it sought to get as much as a 10 percent cut from iPod accessory makers that wanted to display Apple's "Made for iPod" logo. The move was referred to by some analysts as tantamount to a "tax" on the iPod economy.

The Mad Catz agreement, which refers to the Xbox 360 console by its Xenon code name, also hints at the type of security that Microsoft may use to ensure that third parties work with it to produce Xbox 360 add-ons.

"'Security Feature' means Microsoft's proprietary protocol used to validate authentic devices on the Xenon platform as implemented in a Xenon Chip or other implementation method designated by Microsoft in writing," according to the Mad Catz agreement.

Precedent set years ago
Programs that seek royalties from accessory makers are not unprecedented. Indeed, game console makers make most of their money off of similar royalties charged on sales of the game software that runs on their machines. Nintendo pioneered the "Seal of Quality" years ago as a way to nail down game-related revenue. But the moves from Apple and Microsoft appear aimed at expanding the concept.

At the same time, the software maker's move carries some risk, Olhava said, noting that some of the appeal for third parties is the ability to offer controllers cheaper than the official Microsoft-branded accessories.

"There could be less opportunities for third-party peripheral makers, just because the market opportunities may not be there, because they cannot bring out products that are priced low enough," Olhava said.

It's unclear whether Microsoft's licensing plans will affect the market for third-party devices. The Microsoft representative would not say how

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52 comments

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Interesting...
I don't have an Xbox, and I don't intend to ever get one, or any
other game device. I don't have any interest or time for games;
there's just too much else to do that's more interesting or
profitable one way or another.

But, MS is sure trying to set up a massive golden goose with the
Xbox, especially now that MS is fixing it so only accessories from
which MS gets a cut will work on the Xbox. It's almost a wonder
that MS did not install a quarter slide on the Xbox like on arcade
games.

Anyhow, for those gamers in the know...
1. How easy will MS's 'key' requirements be to hack?
2. Will it be worth the effort to hack, if it can be done?
3. Does the PS2 play the same restrictions game on accessories?

Just curious....
Posted by Earl Benser (4310 comments )
Reply Link Flag
FYI
No, Playstation (as of yet for the PS 3) does not require a cut of the profits.

Yes, MS's code will be easy to crack.
Yes, MS's OS will be easy to hack and manipulate.
Yes, the system will be easy to create other OS's for. (and since it runs on the PPC architecture, a Native version of OS X will be made by someone, I'm sure.)

The old XBox has been hacked and modded and converted to other things, like mine. MS just plain sucks. The good thing they've ever made (the XBox) is easy to make better, whether they like it or not.
Posted by (461 comments )
Link Flag
An extra defense against modders?
It seems to me that, aside from helping Microsoft make more money, this could also be used as an extra line of defense agains people who would make unauthorized mods - software or otherwise - to the console.

The current Xbox is vulnerable to "Soft-modding" whereby an unchecked buffer flaw in savegame code is exploited to get unauthorized software onto the system. But in order to do that, you have to use a device such as an Action Replay to load the exploit on to the Xbox in the first place.

In the Xbox 360 world, devices like Action Replay will most likely be carefully controlled by Microsoft to make sure they can't be used for similar purposes. This technology will give them the teeth they need to enforce their controls.

I don't think this can be a good thing for gamers.
Posted by UnnDunn (55 comments )
Reply Link Flag
But I'm allowed to Mod my hardware
I'm allowed to buy something, say a laptop from Dell. Break it open, take out all the guts, sodder here and there, and build a robot from it. There are no rules saying I can not do this. I void my warrenty, but I paid for the hardware, its mine to do what I please. If I buy and Xbox, I am allowed to sodder something onto the board, or tear things off it, and run what software I feel like running. And again, it voids my warrenty. MS can only disallow this because this is how people can cheat, so they call the modders cheats and band them from Xbox Live, which they are allowed to do, just like they voided your warrenty when you did it in the first place. So long as MS says they ban you for possible cheating by modding your Xbox, its legal. As long as I buy my Xbox, I'm allowed to mod it or do what I want, maybe throw it out the third floor window of the building I live in, its legal. Well, as long as I don't hit anyone, and I clean it up after I do it.
Posted by (43 comments )
Link Flag
This is a completely stupid idea
That was most liekly thought up by the bean counters at Microsoft.

What people need to realize is that Microsoft has always thought of hardware as a comodity. They have always felt that hardware was not important, only their OS matters.

Now all of a sudden, they think that hardware is important and should cost more money. Yeah, when they are in control.

The other thing that people need to take notice of is that this IS how their trusted computing will work. They will make it so that hardware manufacturers have to pay them money for the hardware to work in, oh I don't know, Vista.

Microsoft is testing the waters with the XBox 360 to see if they can get away with this. I will sit back and watch the train wreck.

This isn't about money, it is about control.
Posted by SteveBarry687 (170 comments )
Reply Link Flag
Fair point
Only recently Microsoft was saying that computers were too expensive, and that hardware was the biggest problem. For them to do this is a bit hypocritical. Still, it is their product and if they want to reduce the chance of it being the dominant console then it is their choice.
Posted by Andrew J Glina (1673 comments )
Link Flag
u r dumb
this is an industry standard u idiot...no f'in news here but everyone likes to think they are an expert and jump all over it.
Posted by (6 comments )
Link Flag
DMCA Garage Door Openers anyone?
This is going to end up as another DMCA garage door opener debacle. Someone will create an accessory that defeats the trusted device requirements by reverse engineering it, MS will sue and we will have a repeat of the garage door opener suit.
Posted by Stormspace (1028 comments )
Reply Link Flag
Xbox to become next Dreamcast...
If Microsoft isn't careful, Xbox will become the next Dreamcast. The 360 is getting way to much hype it does not deserve.
Posted by PCCRomeo (432 comments )
Reply Link Flag
Let me guess what's next ..
I bet the next move (pending of course a partial success of Xbox initiative) will be to lock out unlicensed kernel developers for Windows platform. They are already milking driver writers with their 'optional' Logo Certification program and I can see no reason why they would not adopt Xbox-style fee collection there.
Posted by (2 comments )
Reply Link Flag
Exactly
Check my comment above. I have first hand knowledge. Microsoft tried to do this with XP. That is why a lot of drivers that are installed say "Warning, this is not a blah blah blah" You know what I am talking about. Microsoft thought that it would charge every hardware company on the market money every time they had a driver update.

The hardware companies said "Screw you" and release drivers all the time without Microsoft "approval."

MS really is too big for its britches.
Posted by SteveBarry687 (170 comments )
Link Flag
X-Box IS the PROTOTYPE of the "Trusted-PC"
Microsoft has claimed, for years, that you DO NOT OWN ANYTHING that you buy from them. Furthermore, Microsofts plan IS to eliminate ALL of your OWNERSHIP-RIGHTS. They have flatly stated this as their goal (Read any of their EULAs).

Microsoft wants to completely control EVERY aspect of the "digital-world" and be able to DEMAND perpetual-payment for EVERYTHING that you use a computer for (Bill Gates HAS said this for years).

And, Microsoft wants to be able to throw ANYONE that opposes that "...vision", in jail (look at their use of the "DMCA").

If "Trusted Computing", "MS-DRM", and the current, FLAGRANT, abuse of "Copyright", is allowed to march-on, ...EVERY COMPUTER soon will be a, COMPLETELY-CONTROLLED, TRACKED, and PERPETUALLY-BILLED-FOR, "Microsoft PC".

And... it IS ALL happening right now.
Posted by Had_to_be_said (384 comments )
Reply Link Flag
Exactly again
I feel sorry for the technically challenge that won't be able to switch over to Linux, et.c to get away from this garbage. That is the real reason that Microsoft wants to kill Open SOurce. It is the only threat to their vision (Vista) of the computing future.

And I meant only. Apple is in bed with Microsoft. Apple and Microsoft = Duopoly. That is exactly how they want to keep it.
Posted by SteveBarry687 (170 comments )
Link Flag
Might not be a bad idea
If I buy a PC I can plug any old crap into it and then blame the OS maker when the dodgy hardware causes problems I see this all the time in IT. 100 users use brand X and have no probs. Then when user 101 puts card y into the equation to get an extra 2 frames/sec in their games and it goes belly up it's all because of the OS.

At least this way only hardware that is certified can go into the machine so it shouldn't crap it out.

As for the modding argument. I have an Xbox and I have it modded. If I mod the machine to make it to things that the manufacturer don't sanction then I don't really care if the MS won't support me or let me go onto Xbox Live. I know that before I mod it and that's fine by me. If I can get around it I will but I would expect them to try and stop me.

An analogy would be the IT environments of many companies. We have servers that are really important (to us). We will let you put your PC on the LAN if it's one we've installed because we know what's in it and we've tested that combination of hardware and softwre. We won't let you put your home laptop on the LAN because we don't know what's on it, we don't know what problems it has and we really don't have the time or money to troubleshoot your hacked OS or your dodgy drivers or your viruses.
Posted by (79 comments )
Reply Link Flag
Except that...
In response to those that think such a Microsoft-imposed control-paradigm could actually be a good thing, I would like to offer the following observations, about this particular Microsoft-initiative.

...The "MS-Windows OS" has never really been all that stable, OR secure, ...on ANY equipment, or in ANY standard-configuration.

...It will NOT be the owner/administrator, that decides what equipment, or use, IS or IS NOT allowed.

...It will, in fact, be Microsoft, a REPEATEDLY-CONVICTED "illegal-monopoly", which will be able to pull ALL the strings in the computer-industry.

...Additionally, Microsoft, IS NOT merely refusing to "support" such "modifications" (I.E. non-Microsoft-approved USE or equipment). Microsoft is actually trying to make ALL consumer-choice, or "un-approved" use, ...IMPOSSIBLE, ...or even (as is their apparent ultimate-goal) ...ILLEGAL.

...Therefore, this has NOTHING to do with limiting "support-problems". And, Microsoft is clearly NOT doing this to improve operability. Microsoft IS obviously doing this for one reason, ...to create an environment where EVERYBODY (users, consumers, and competing technology-companies) have to pay Microsoft (and ask Microsofts permission) simply to use, or produce, ANY computer-technology.

In essence this would create a TAX, paid directly to Microsoft, levied against virtually the entire computer-industry.

Even if this was only applied to the "X-Box game-console" (hardly likely), it sets a dangerous precedent against "consumer ownership-rights" and the entire third-party, after-market, "add-ons" industry.

So, in my opinion, ...YES, this approach, especially if expanded to all PCs (based upon an entire history of Microsoft products, policies and conduct) WOULD be a VERY BAD IDEA, ...for you, ...for me, ...and for the future of computer-technology in general.
Posted by Gayle Edwards (262 comments )
Link Flag
Forget the technology
Q. When did you EVER hear of a company that made a profit, relying on other people, rather than it's own product ?

(Hint : NEVER)

Bad business model.
Posted by (409 comments )
Reply Link Flag
Sony, Nintendo, THQ
u have to be kidding me...do you want me to start naming just about every industry? Do retailers make the goods they carry on their shelves? Does Sony only distribute their own games? Do movie theaters only show their movies that they create? Just about every industry out there is built on this concept.
Posted by (6 comments )
Link Flag
Trusted Computing - Xbox not bad, NOT on PC's though
I can understand Microsoft wanting to control their Xbox's as much as possible. Problem is since they want it to turn into a media center at the TV, this Trusted Computing (TC) with DRM will eventually be abused. What happens when all your music files you've downloaded over the years can only run on Windows Media Player and you want to switch, oh well too bad, they can exclusively lock you into using Windows Media Player. I'll probably buy thier new Xbox 360, but I'll only use it for playing games, well only Halo 3 and Battlefield 2.

I have a real problem with taking this Trusted Computing with DRM and expanding it into the PC. This is not a good thing. I ran across this a couple months ago and just recently decided to learn more about it. Read this article if your interested: <a class="jive-link-external" href="http://www.againsttcpa.com/tcpa-faq-en.html" target="_newWindow">http://www.againsttcpa.com/tcpa-faq-en.html</a>

If you look at where their going with Win Vista, it is not a good thing. You have all your documents under MS Word and you want to transport them over to WordPerfect, well guess what MS can lock your Documents out since with the new Trusted Computing scheme they have encryption attached to it.

In response to this I just downloaded some LiveCD/DVD linux distros: SimplyMepis, SUSE Linux Pro 9.3 and Ubuntu. So far I like them, but am still very new to Linux and it looks pretty good so far (I'm online right now writing this with LiveCD-SimplyMEPIS).

I have 3 desktops (2 new ones) and one laptop all with WinXP Pro. I have a 24" Sony Widescreen CRT (LCD's to me don't look good enough yet) As long as I can get my laptop's 802.11a to work I will be dual booting 2 or three of my computers.

Wtih Windoes Vista I'll have to buy a new monitor with the HDMI and the HDCP (security) function built in or you won't be able to fully utilize the monitor. Same goes for all the Plasms's and LCD Tv's people have bought through the years. When the new HD-DVD's or Blue-Rays come out you won't be able to play them like you'd want to.

This Trusted Computing on PC's from what I've read will be taken to far. Only problem is looks like both AMD and Intel are in on this.

Enough ranting a raving.
Posted by Sbvmax (16 comments )
Reply Link Flag
What's the big deal--Apple does it?
Doesn't Apple control all the hardware? Heck, don't they also control much of the software? I think we hold these two companies to a different standard. (And I am not a Microsoft junkie. I am simply agnostic)

I am tired of computers having frequent problems. It got bad enough that I dumped all my individually "superior" devices and just bought a Dell. I think it is too much to ask Microsoft to make an OS that runs on millions of different hardware configurations, millions of different software configurations and then expect it to flawlessly. I am ok if Dell is the only hardware vendor. I am ok if Microsoft has to bless every peripheral. And if they charge some premium for it, then I'm ok with that as well.
Posted by (1 comment )
Reply Link Flag
It is not about who controls the software or hardware.
It is about Microsoft controlling how you use your PC. What hardware you can use, what programs you can install, What you can download, etc. etc. etc.
Posted by SteveBarry687 (170 comments )
Link Flag
...And that's why Apple doesn't have the dominant OS
People want software and hardware that's compatible with as many things as possible. You don't get that with Apple and Macintosh. This move is taking Xbox in the direction of Apple and could lead to the end of the Xbox.
Posted by PCCRomeo (432 comments )
Link Flag
As far as I know,....
... Apple doesn't control peripherals for the Mac. It may get a cut
from iPod add-on manufacturers, but I don't believe that Apple
prevents anyone's add-on device from working. That's a MS trick.
Posted by Earl Benser (4310 comments )
Link Flag
Stop Picking on Microsoft...
Why is it, that every time Microsoft rolls out yet another new component of "Trusted-Computing", so many Industry-experts, IT-professionals, consumer-rights advocates, and a seemingly unending collection of disgruntled-PC-owners, seems to come out of the woodwork to denounce Microsofts actions as anti-consumer, anti-competitive, or even anti-American?

After all, Microsoft must have learned its lesson when they were found to have violated anti-trust laws, to create and maintain their illegal-monopoly. Microsoft, surely changed its ways when every court upheld the convictions. Microsoft must have realized that they needed to change their behavior, when even the Supreme-Court refused their last appeal. Why, Microsoft could hardly have missed the importance of the Whitehouse needing to order the DOD to, basically, drop the case, after Microsoft had already lost. After all, who knows what might have happened if Microsoft had been held accountable for their actions.

And, all of this must be especially evident to Microsoft, now that, there are so many other legal-matters, and business-problems, closing-in on them.

So, it is really not fair to keep attacking Microsoft, simply for trying to make the computer-world safe for their own corporate-profits, the whims of media-giants, and possibly furthering the numerous business and political agendas, aimed specifically at eventually being able to track and control virtually all privately-owned computers.

Its just good business on Microsofts part. And, the X-Box is really just a great way to test the waters, and prepare consumers for the future that Microsoft has planned.

So, everybody, should just leave Microsoft alone.
Posted by (12 comments )
Reply Link Flag
Heh
How blind could you possibly be. You do realize that TPM allows Companies to tell YOU what you can and cannot have on your computer. From digital media files to applications to plugins.

I'm going to laugh when they bust down yoru door one day because you streamed a TV show to your livingroom, kill your family and arrest you then burn down the house. Then they'll throw you in a dark hole whilst rapists and murderers get 3 squares a day.

YAY! GO MICROSOFT! gimme a break.
Posted by (461 comments )
Link Flag
no news here...
this has been an industry standard for years...this is not news but it sure seems to rattle everyone's cage that it must be a dirty MS trick to punish the consumer.
Posted by (6 comments )
Reply Link Flag
Microsoft is a company...
... that means they're in business. So if they want to profit from this and that, if it's legal, then you can't really do anything about it. To Microsoft, it's legal and profitable. So watch and learn.
Posted by Mendz (519 comments )
Reply Link Flag
 

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