The Road Ahead

Success comes in many guises. Most people would agree that 2007 was a successful year for the Xbox 360 - a year when the firm's head-start over rival Sony was used to great effect, and when the console's software line-up was widely considered to be one of the strongest the industry has ever seen.

It was the year in which Halo 3 arrived, was critically acclaimed, and sold around 8 million copies - and perhaps most impressively of all, it was the year when Halo 3 almost seemed buried in an avalanche of superb games, whereas in any previous year it would have stood astride the software landscape like a colossus. It was the year when Xbox Live user figures passed the 10 million mark, and the year when Microsoft registered its second ever profitable quarter for the Xbox division (although it almost certainly slid back into a loss in the following quarter).

A good year, then? Well - maybe. Success is multi-faceted, and it's important to look at it from many angles before you make up your mind and stick a label on something. There are other ways in which 2007 was a terrible year for Microsoft - and in some regards, the company's lacklustre showing at CES in Las Vegas last week may be a hangover from those failings.

A number of problems plagued the Xbox 360 throughout the year. The woes over failing consoles finally reached the point where Microsoft could no longer ignore the system's dismal reliability - forcing it to extend its hardware warranty and set aside a billion-dollar reserve to fund repairs.

It may not have been too little, but it was definitely too late. The mainstream media had already latched onto the idea that the Xbox 360 was badly manufactured and prone to failure - while the hardcore gamers who had been Microsoft's most staunch word-of-mouth warriors suddenly became a liability, as they started talking to friends and forums about being on their third or fourth replacement Xbox 360.

No sooner had that furore died down, than it was replaced by another - the dismal failure of the Xbox Live system to cope with demand over Christmas, which has now extended into the New Year with no fix in sight. Customers paying for a rock-solid online gaming service are getting anything but; once again, Microsoft's ability to design and create amazing products seems to be let down by its ability to deliver quality on an ongoing basis. The problems aren't remotely as serious as the "Red Ring of Death" flaw on the 360 itself, but it's exactly the kind of press the console doesn't need right now.

For hardcore gamers, these are the problems which have put a dampener on enthusiasm for the 360 even in the face of a superb software line-up. Microsoft faces an even bigger problem with the console, however, to which its reliability concerns are only one contributing factor. The problem is this; it's still simply not clear how the company is going to grow its market, and there are strong signs that growth is already slowing down.

Along with plenty of other critics and commentators, I've been pointing out for a long time that the Xbox 360 still doesn't have sufficient appeal outside of the "cars and guns" market - the same 16 to 24 year old consumers who bought the original Xbox. A smattering of Japanese RPGs and, well, Viva Pinata, does not amount to a mass-market strategy that will finally unseat the PlayStation.

The proof of this unappetising pudding? Quick dinner-napkin calculations based on Microsoft's own estimates show that in 2007, the firm shipped fewer Xbox 360 consoles than it did in 2006. It's not a huge difference - but that's not what the growth curve is meant to look like, especially not when there's such an acclaimed line-up of software on offer.

How does all of this translate to the near-absence of Xbox from the firm's keynote at CES? Quite simply, there's a feeling that right now, Microsoft's Xbox division is looking long and hard at where it stands in the market - and how it breaks out of its current position to become a credible market leader. Despite a strong start and a loyal fanbase, it is assailed with challenges that will be difficult to overcome.

On one hand, it needs to learn how to appeal to the mass market - something which doesn't seem to come naturally to the product or the company. On the software front, Microsoft seemingly remains convinced that there is a single "mass market" which can be attracted by building a handful of games in key areas. The reality is very different; the "mass market" is merely a collection of a huge number of niches, and it's this vast diaspora of tastes which Sony has been excellent at providing for.

The PlayStation consoles have played host to a bewildering variety of software for different gaming tastes, and that's why they achieved mass market success - simply funding a few JRPGs and deliberately "quirky" titles isn't going to emulate this. An overhaul of how Microsoft approaches software development for its platforms as a whole may be required to nurture that kind of game library.

On the other hand, perhaps an even more daunting challenge is keeping the faithful satisfied in 2008. Going into 2007, the Xbox 360 release list looked absolutely stunning - whereas the 2008 schedule at this point in time looks comparatively barren. If Microsoft wants to maintain its momentum, let alone building new momentum, it needs to repeat the software success of 2007 - and it needs to do it without Bioware and Bizarre, both of which developed key Xbox 360 exclusives in the past but now belong to multi-platform publishers. It also needs to do it without Bungie; not only now an independent studio (albeit still likely to work on 360 exclusives), but also highly unlikely to have another game ready until 2009.

None of this is insurmountable, but it's certainly not going to be an easy ride either. Microsoft has done an absolutely amazing job in some regards - its hardware, despite launching a year earlier than the PS3, has held its own extremely well in terms of technical prowess, and its online service continues to be the benchmark for the whole industry. In terms of software, the late 2007 line-up is arguably one of the best the market has ever seen, fuelling an incredibly strong quarter for the industry as a whole.

Continuing that success, however, won't happen just through sitting on a sack full of laurels. In 2008, Microsoft's challenges will be greater than ever before. The Wii is trouncing the Xbox 360 in the casual market; the PS3 is keeping pace with it in week to week sales, despite acres of negative press, and at present has a more appealing 2008 line-up. Reliability problems just won't go away, the mass-market remains just as elusive as it's ever been, and key developers have been lost to third-party publishers. Nobody could describe a division that's just had such a brilliant couple of quarters as being in crisis - but when Microsoft finally breaks the silence that we witnessed at CES, it had better have some great responses to the challenges 2008 brings.