E3 2014: Microsoft's Big Choices

Microsoft comes into E3 2014 with some distinct advantages and a set of key challenges to overcome. The company's E3 presentation and its booth display should tell us, either directly or indirectly, how it intends to overcome these challenges. The [a]list daily takes a look at what's in front of Microsoft and some of the possible solutions the company may have been mulling over.

Microsoft has had a very successful launch for its Xbox One console, compared to previous Xbox launches. At last report (in April) Microsoft had sold in over 5 million Xbox One consoles so far, well ahead of the pace that the Xbox 360 was at the same number of months after launch. Still, the PlayStation 4 is clearly outselling the Xbox One, with 7 million PS4s sold through to consumers so far. The most obvious reason for the sales discrepancy is, of course, the $100 price premium of the Xbox One ($499 versus $399).

Microsoft has taken a number of steps to soften the price difference, by bundling $60 software with the Xbox One (right now either Titanfall or Forza Motorsport 5, depending on the bundle you choose) and working with major retailers like Best Buy, Walmart and Costco to put the console on sale at $50 off. That brings the effective price to actually less than the PS4, but at last report the sales differential remains.

"Outselling the PS4 certainly makes for nice bragging rights, but it's not essential to creating a profitable Xbox One business for Microsoft"

Microsoft has three choices: Stay the course with the $499 price (and continue bundling games or offering sales as desired); offer a version of the Xbox One without the Kinect at $399; or just lower the price of the Xbox One to $399 and suck up the loss on the price of the hardware.

While many have called for Microsoft to take some action, sticking with the current $499 price point is a perfectly reasonable option. Outselling the PS4 certainly makes for nice bragging rights, but it's not essential to creating a profitable Xbox One business for Microsoft. In the past, when each console was a very different proprietary system, being the best selling console was crucial to lining up third-party support. Developers naturally gravitated towards the console with the biggest installed base, and others would get titles later or not at all.

That's not the case with the PS4 and the Xbox One. The two consoles are so similar in basic design that the only exclusive titles will be because the developer is owned by one of the platform holders, or a platform holder pays to make a title exclusive. Because of this, it's less important which console actually sells more, since developers will support both.

Microsoft could unbundle the Kinect to lower the price of the Xbox One, as some have suggested, but that would remove a key differentiating feature with the PS4. It would be more likely for Microsoft, which has huge cash reserves, to simply lower the price of the Xbox One to be more competitive with the PS4 and eat any minor losses this would cause. A lower price would spur faster adoption of the platform, though exactly how much faster is open to debate. In any case, at E3 we'll see which one of these options Microsoft chooses.

While we're talking about pricing, the issue of Xbox 360 pricing will be resolved at E3, too. Will Microsoft lower the price to boost flagging sales, or just stick with the current prices and try to move demand to the Xbox One? In the past console sales have boomed as prices sank below $199, but it's a different, more competitive market now with boxes like the FireTV to contend with. Watch for any announcements about the Xbox 360, and in particular how much prominence Microsoft gives to the Xbox 360. Is it front and center at their press event and in their booth, or is it relegated to a smaller spot? You'll be able to tell how important the Xbox 360 is in Microsoft's fall strategy just by looking around.

"Can a new Halo possibly be as important a driver for Xbox sales as it has been in the past, particularly with Bungie's Destiny out there on multiple platforms?"

Microsoft is facing many competitors for the entertainment time that the Xbox One provides: streaming games, microconsoles, mobile games, virtual reality. The company will be talking about the array of games and entertainment offered by the Xbox One, and will no doubt introduce some new titles or provide significant new information about upcoming titles already mentioned (*cough*Halo*cough*). The larger questions are about Microsoft's marketing strategy. Who is Microsoft going after with the Xbox One now that the very hardest core fans have already grabbed one? How will Microsoft reach this next audience, and how will they convince them to buy an Xbox One? Is Microsoft going to be pitching games more strongly, or original video entertainment, or pro sports?

Look for the answers in Microsoft's presentation, the videos they show, and the booth display. Sure, the press releases are interesting, but you can see a clearer picture of Microsoft's priorities by seeing how the company is spending its money. What does the exclusive Xbox One game lineup look like for the rest of this year, and into next year? That will tell us a great deal about the prospects for the Xbox One going forward. Can a new Halo possibly be as important a driver for Xbox sales as it has been in the past, particularly with Bungie's Destiny out there on multiple platforms? E3 should help us begin to answer that question, and many more.

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