Microsoft said so long to production for the Xbox 360 video game console this week. Phil Spencer, head of Xbox, announced in a blog post that Microsoft would finally cease production of the video game console.
It was a rare sentimental moment in an industry that always looks forward, not back. I was a chronicler of the console’s history, as the author of two books on the making of the original Xbox and the Xbox 360. For me, it gives me a chance to reflect on the history and the changes we’ve seen in what has now become a $99 billion video game business. As the old guy in game journalism, I don’t pass up opportunities to reminisce about the good old days. As time goes on, it’s sometimes hard to retain the milestones that we should remember most.
“From the original Zero Hour launch event, to the incredible reaction received last year at E3 when we announced that you could play your Xbox 360 games on Xbox One, the soul of Xbox 360 was about putting gamers at the center of every decision we make — and we apply this principle across our business to this day,” Spencer wrote.
I was at that Zero Hour event in an old airplane hangar in the Mohave Desert. I wrote a few dozen posts about all of the people who attended the event, including a family that came out from Moab, Utah, to take a bunch of boxes back so they could operate an Xbox 360 retail arcade. Even back then, as a relative youngster in consoles, Microsoft had loyal fans who were true believers. Spencer took some time in his post to thank those fans for their loyalty.
Without those fans, there would have been no Xbox business. At the very beginning, in the late 1990s, Microsoft’s entry into the video game business was not a slam dunk success. Microsoft lost $5 billion to $7 billion on the original Xbox, launched in 2001. The machine debuted 20 months behind Sony’s PlayStation 2, and Sony sold more than 20 million PS2s before Microsoft sold its first Xbox. Microsoft tested the patience of its fans and sprayed out a lot of games, including bad titles like Azurik and the seminal blockbuster, Halo: Combat Evolved.
Robbie Bach, former chief Xbox officer and our lead speaker at the GamesBeat Summit 2016 event on May 3-4 in Sausalito, Calif., almost quit his job after a disastrous first revelation of the original Xbox at the Electronic Entertainment Expo. His boss wouldn’t accept the resignation, and Bach went on to lead the Xbox team through 2010. I’m looking forward to reminiscing with Bach about some of this stuff, which we can view with more perspective these days and distill some lessons for the current generation.
Bach has written Xbox Revisited, a memoir of his time at Microsoft as well as his strategy for fixing our country’s problems. He made a lot of the important decisions of the time, and he gets some of the credit for turning around Xbox and making billions of dollars with the Xbox 360. More than any other console, the Xbox 360 helped Microsoft close the gap with its competitors.
“Xbox 360 means a lot to everyone in Microsoft,” wrote Spencer. “And while we’ve had an amazing run, the realities of manufacturing a product over a decade old are starting to creep up on us. Which is why we have made the decision to stop manufacturing new Xbox 360 consoles.”
Microsoft knows what it’s like to have manufacturing … “realities.” The Xbox 360 suffered at the outset from the “red rings of death,” a defect problem that I have written tens of thousands of words about. I interviewed an engineer who tried to stop the launch from happening, arguing that the defects in the console were so severe. His prediction came true, and Microsoft had to recall a bunch of bad machines at a cost of $1.15 billion.
After that debacle, the loyalty of fans was sorely tested. A fellow named Chris Szarek went through a few replacement consoles. I would not have bet that Microsoft’s Xbox 360 console would become known for its longevity. But here we are, in the best of all possible worlds for a console maker, seeing the machine surpass a decade on the market.
You see, consoles are loss leaders that are sold on a razor-and-razor-blades model. At first, manufacturing costs per machine are sky high, and the hardware is sold at a loss with hope that game sales will offset the losses and eventually lead to profits. Hardware engineers can redesign chips and hardware to make it decline in cost over time — if enough advance planning is done. The original Xbox was built last-minute, as a reaction to Sony’s threat in the living room with the PS2, and it was made with off-the-shelf parts that couldn’t be easily cost-reduced. Microsoft discontinued the first Xbox after four years because it was losing money on every box sold.
With the second generation console, Microsoft had much more advance planning. The Xbox 360 was designed to be a break-even machine at its launch. It was also created to last a decade. During the latter part of that decade, Microsoft would lower the manufacturing costs through volume production and constant advances in chip design and other cost efficiencies. So the more years it stayed in the market, the more the Xbox 360 became a profit center, with more games sold and profits generated on hardware sales.
Microsoft lost a bit of its focus on gamers once again with the launch of the Xbox One. Microsoft put too much faith in its Kinect successor, while Sony put its focus on controller-driven games for the PS4. The latter move turned out to be right, and Sony was able to sell its machine at a lower price at the outset.
The Xbox One debuted in 2013, and it has sold well, around 20 million units by some estimates. But it has fallen significantly behind the PlayStation 4 in worldwide sales, which are nearing 40 million. That’s not a great scorecard, but Microsoft has been able to make money on those hardware sales, and it has far outsold Nintendo’s Wii U.
And it hasn’t given up on the current generation fight. Microsoft has made it possible to play Xbox 360 games on the Xbox One, creating backward compatibility that eliminates the need to sell the older machines. And in the meantime, it is focused on marrying the Xbox and Windows 10 PC ecosystems. The investments show that Microsoft is very serious about updating and improving its console and making sure that fans are still happy.
The business is progressing and constantly changing our perspective of the past. For the original Xbox, the console was a financial disaster but it gave Microsoft a strategic foothold. The start of the Xbox 360 was ignominious, with the red rings of death. But it enabled Microsoft to solidify its franchises such as Gears of War and Halo. And Microsoft’s Kinect add-on for the Xbox 360 allowed Microsoft to put a stop to the growth of the Nintendo Wii console.
With Xbox One, a failure to focus on the desires of gamers cost Microsoft the lead. It put too much emphasis on Kinect and its console’s TV experiences, only to fall short when it came to providing the best games. The good thing about Spencer’s messaging ever since he took over from the previous Xbox leader, Don Mattrick, is that what matters are the games and the ongoing relationships with loyal fans. So long as Microsoft lives up to that messaging, it should do well.
Meanwhile, more than a decade later, the Xbox 360 is still with us, and it represents Microsoft’s high-water mark in the fight against Sony. When you look at it that way, the Xbox 360 was Microsoft’s peak in the gaming business, a generation that made the most money and the most progress against the competition. It’s only now, with Microsoft in the console business for more than 15 years, that we can truly understand how significant its position has become.