A Tale of Two CEOs

This week saw two of the most interesting "business as usual" statements that we've seen in the games industry for a while. Sure, that sounds like a contradiction in terms - "business as usual" is rarely a terribly interesting thing for an executive to announce - but the comments made by Microsoft CEO Satya Nadella and Sony CEO Kaz Hirai about their respective games businesses were a little more than that. On the surface, both men were reaffirming their company's belief in games as a part of their business, but given the very different positions in which Sony and Microsoft find themselves, such affirmations carry very different weight.

For Sony, after all, this isn't a hard thing to say. The PS4 continues to sell strongly and unless there's a major change to the trajectory, will likely double the Xbox One's overall sales within the coming months. It's by far Sony's most successful product launch of recent years - arguably the most successful thing the company has done since the PlayStation 2, in fact, and Hirai made a deliberate point of comparing PS4 to the extraordinarily successful PS2 rather than to its more disappointing (though ultimately not unsuccessful in its own right) sibling, the PS3.

To reaffirm Sony's support for the PS4 is simply logical; it's the best thing Sony has going for it right now. Hirai noted that PS4 is at the heart not only of Sony Computer Entertainment, but of Sony overall; it's the core device that's going to drive the company's network strategy, a strategy which Sony desperately needs to work if it's going to rescue its status as a consumer electronics company. Bridging the gap from "successful games console" to "heart of a consumer entertainment network strategy" is still a very big ask, but Hirai, at least, understands what both of those things mean - and his company is on track to complete the first part of the task, namely actually having a successful games console.

"Short of a price cut (which would drive hardware back into loss), expect Sony to promote and sell the PS4 even more aggressively in the rest of 2014. No wonder Hirai feels confident"

This is worth noting not least because it's such a contrast with Sony's leadership a few years ago. Former boss Howard Stringer came from the content side of the company, and his grasp on Sony Computer Entertainment and its business was often tenuous. For years, under his leadership, talk of building a Sony strategy around PlayStation circulated, but it never seemed credible when the man in charge struggled to name key game franchises or explain the details of the PlayStation business. It often seemed that to Stringer, Sony Computer Enterainment was a black box which was obviously doing quite well, despite its struggles with turning around the PS3, but whose workings were a mystery.

Not so to Hirai, who can confidently talk about contrasts between the PS4 and past platforms, discuss PlayStation's role in Sony's network strategy, and describe Sony Computer Entertainment as being at the heart of Sony's business and actually sound like he means it. Moreover, Hirai's confident statements about PS4 come at a very interesting time for the console; the company has also confirmed that it is no longer making a loss on hardware units, which is a significant milestone that has been reached very early in the device's lifespan.

It's possible to read too much into that milestone, of course; hardware profitability is a notion bounded by a very limited definition. PS4 itself, as a project, remains in the red; it will be some time before the significant launch and R&D costs of the hardware are paid back (note the large loss SCE took in the past quarter, which included a large chunk of the launch costs). Moreover, gross profitability on hardware only means that Sony is selling the console to retail for less than the components and manufacturing costs; all manner of other costs (most notably marketing) aren't included in that calculation.

Even with such caveats, however, hardware profitability is a very major milestone. For one thing, it makes it much, much easier for Sony to actually reach overall profitability on the console, and with any luck should contribute to solid financial figures for SCE in the near future. Perhaps more importantly, though, it frees the company up to make certain strategic decisions that would otherwise be impossible or at least unpalatable. When console hardware is still losing money on each unit sold, platform holders have to carefully balance their sales strategy. If they push too hard and sell too many units, it will actually create serious operating losses - losses which need to be weighed up against the importance of rapidly building an installed base. That calculation is far from being a no-brainer; installed base doesn't always win. Nintendo, for example, supply-constrained the Wii in its launch window; that strategy was not in order to create sales hype, as it was often accused of, but rather because the device was losing money on each unit sold. Had Nintendo fulfilled demand completely, it would have taken a huge operating loss. By waiting, it got to hang on for manufacturing costs to fall before supplying the demand in the market.

There's no evidence that Sony has been constraining its supply of PS4 up to this point; supply shortages for the console were minor, and easily explained by the stockpiling required for launches in other territories. Any shortages which exist now are supply chain errors rather than a widespread lack of stock. However, even without making a move as drastic as cutting back supply to retail and creating artificial shortages, a manufacturer still takes moves to limit sales when consoles are losing money. Key games are held back or slowed down; marketing budgets drop; promotional plans are held back. Once the console is breaking even on hardware sales, though, options open up - the company is freed, financially, to pursue installed base with no further limitations. Short of a price cut (which would drive hardware back into loss), expect Sony to promote and sell the PS4 even more aggressively in the rest of 2014. No wonder Hirai feels confident.

"honestly, it's pretty hard to see how Xbox even fits in to the overall direction of Microsoft at the moment, let alone being at the heart of the business"

What of Microsoft, then? Of course, statements of confidence from the Xbox leadership team haven't been thin on the ground, but while Phil Spencer's enthusiasm for the Xbox One is welcome and unquestionable, it hasn't dispelled question marks both over the performance of the console and over how the rest of Microsoft regards it. Stephen Elop, former Nokia boss and new head of Devices & Services at Microsoft, has said before that he'd sell off Xbox; Bill Gates said he'd support such a move, if it happened, though it's unclear whether he meant he actually agrees with the logic behind it, or that he'd simply support new CEO Satya Nadella in whatever decision he made.

Well, Nadella sounds like he's made a decision, telling the Code Conference in California that he's going to stay the course on Xbox, and won't be doing "anything different" with the division - including, presumably, selling it off. That's not to say the option hasn't been investigated; everything we've seen and heard in recent months suggests that it's been thoroughly investigated. For now, though, it seems to be off the table - Xbox is secure at Microsoft for the time being. We might have guessed such, in fact, when the company announced that it was making Kinect optional. Much of the attraction of Xbox One for proposed suitors like Amazon would have lain in Kinect, a device designed as much to be a control centre for media of all types as it is to be a game controller (hence much of the lukewarm reaction to it from gamers, of course). Unbundling Kinect makes the Xbox business less attractive to many suitors while making the Xbox One much more attractive to many consumers, so it's a pretty solid affirmation of what Nadella was saying.

All the same, I hope Nadella wasn't being too literal about not doing "anything different", because it's clear that Xbox does need to do quite a lot of things differently. Xbox One's sales even in its native USA don't stack up spectacularly well against Sony's, while in every other global territory, it's a disaster. It's early days yet and unbundling Kinect to price match the PS4 is a good start, but the extent to which Microsoft trails Sony in this round of the console wars is truly significant and will take a lot of repair work. That's not to say Microsoft can't pull this off; bear in mind that PS3 eventually matched the sales of Xbox 360 in the past generation, and its disadvantage at launch was arguably even worse than Microsoft's now.

I do wonder, however, about the difference in tone between the two CEOs. Hirai is a CEO of a consumer electronics company who understands the PlayStation business intimately and talks about putting it at the heart of his firm's future. Nadella, though, is the CEO of a company that's largely focused on corporate software and services; he has no personal experience of the games business and honestly, it's pretty hard to see how Xbox even fits in to the overall direction of Microsoft at the moment, let alone being at the heart of the business. Of course the company wants to retain its consumer-facing brands; not just Xbox but Windows, Surface and now Nokia and Lumia as well; but how exactly those tuck in alongside a company whose future overall looks increasingly enterprise-focused is slightly hard to fathom. I don't doubt Nadella's commitment to maintaining the Xbox business; I do wonder how much support and understanding Xbox is going to get from the rest of Microsoft as it seeks to turn around a pretty underwhelming launch and build a long-term business on Xbox One.

Two CEOs, two statements of support for games; yet two very different tones and two very different contexts. It's extremely positive that Xbox looks to be settled at Microsoft for now; a move to another company like Amazon could also have been positive, of course, but the uncertainty over the future of the division needed to be resolved more than anything else. However, for now, it remains Sony's star that's in the ascendant. With Nadella's apparent blessing and the Kinect millstone removed from its neck, we now get to see if Microsoft can do what Sony has learned afresh in recent years - being a plucky, innovative challenger that uses its underdog status to great effect. It did it once before, with the original Xbox and the early years of the Xbox 360. If it can recapture that attitude, Xbox One still has plenty of potential - and the industry as a whole will be in for a very interesting few years.