Study of S

Padmashree Dr D.Y Patil University Department of Business Management

An Economic and Market Study of Xbox

SUBMITTED TO PROF
SUBMITTED BY: KALYAN MUKHOPADHYAY ROLL NO- 011183 MBA CORE (C)

: FATHER PAUL

Industry: Consumer Electronics

Consumer electronics are electronic equipment intended for everyday use, most often in entertainment, communications and office productivity. Radio broadcasting in the early 20th century brought the first major consumer product, the broadcast receiver. Later products include personal computers, telephones, MP3 players, audio equipment, televisions, calculators, GPS automotive electronics, digital cameras and players and recorders using video media such as DVDs, VCRs or camcorders. Increasingly these products have become based on digital technologies, and have largely merged with the computer industry in what is increasingly referred to as the consumerization of information technology. Consumer electronics are manufactured throughout the world, although there is a particularly high concentration of headquarters, factories, research and development activity in East Asia, especially in Japan. The latest consumer electronics are previewed yearly at the Consumer Electronics Show in Las Vegas, Nevada, at which many industry pioneers speak.

Market trends:
One overriding characteristic of consumer electronic products is the trend of ever-falling prices. This is driven by gains in manufacturing efficiency and automation, lower labor costs as manufacturing has moved to lower-wage countries, and improvements in semiconductor design. Semiconductor components benefit from Moore's Law, an observed principle which states that, for a given price, semiconductor functionality doubles every two years. While consumer electronics continues in its trend of convergence, combining elements of many products, consumers face different decisions when purchasing. There is an ever increasing need to keep product information updated and comparable, for the consumer to make an informed choice. Style, price, specification and performance are all relevant. There is a gradual shift towards ecommerce web-storefronts. Many products include Internet connectivity using technologies such as WiFi, Bluetooth or Ethernet. Products not traditionally associated with computer use (such as TVs or Hi-Fi equipment) now provide options to connect to the Internet or to a computer using a home network to provide access to digital content. The desire for High definition (HD) content has led the industry to develop a number of technologies, such as Wireless HD or ITU-T G.hn, which are optimized for distribution of HD content between CE devices in a home. The Market Force study showed that consumers own a wide variety of electronic devices from the relatively new tablet PC and electronic reader, to the requisite computer and printer. Virtually everyone surveyed owns a computer (98%), printer (97%) and digital camera (95%). The majority of homes (two-thirds) have an HDTV and 15% have gaming systems. Meanwhile, the adoption of Blu-ray players was relatively low (about 15%), despite prices dropping significantly in the past year.

Demand for Consumer Electronics Continues to Increase

It was surprising that, even in this difficult economy, 90% of consumers reported purchasing at least one electronic device either during the first half of 2010 (16%), in the last half of the year (62%) or immediately following the 2010 holidays (12%). By contrast, only 10% said they did not purchase any consumer electronics devices in 2010. The iPad topped the list of being most sought after electronic, followed closely by HDTV/TV upgrades in second place and smartphones in third. Finally, even though 98% of homes already own computers, 14% of respondents said they want a new desktop, laptop or Apple computer.

Most Sought-after Consumer Electronics

Category: Gaming
Sixty percent of families on a survey have a gaming console in their homes today and 12% plan to purchase one in the next six months. The desire to own the coolest and latest technology is the top reason (cited by 33%), followed by 24% who plan to do so because their children want one and 19% are influenced by the actual games that are available on various gaming consoles. The survey also looked at the factors influencing gaming purchases. Referrals from friends and colleagues topped the list with 58% of the mentions, with 51% citing consumer product reviews and 43% saying they are swayed by media reviews. Xbox 360 and Nintendo Wii will continue to capture strong sales, but analysts predict that Nintendo Wii sales will slow which points to an open window of opportunity for competitors. For instance, PlayStation3 is sought after by 19% of consumers and there is a small segment (5%) who would like a computer specifically built for gaming.

Most Sought-after Gaming Consoles

Games are becoming a household staple, based on the study findings. The majority of homes (80%) own more than five games, but a respectable percentage (35%) report owning more than 20 games. In addition, almost half of households have downloaded a video game within the past three months. Seventy-nine percent of consumers will purchase consoles at retailers. Mass merchandisers (such as Target and Walmart) will dominate, with about one third of consumers indicating they are likely to purchase from this channel. Meanwhile, 41% will purchase consoles from a specialty retailer such as GameStop or Best Buy, and 21% will purchase online.

Market performance:
The games console market is a volatile industry with changes of market leadership happening frequently as new consoles and games are released. As of 2005, the most significant console manufacturers in the industry during the 128-bit era were Sony (PlayStation 2), Nintendo (Nintendo GameCube), and Microsoft (Xbox). Of these three, Sony remained worldwide market leader with Nintendo and Microsoft roughly equal in second place, each dominating the competitor in its home territory. Two years into the seventh generation era, Microsoft has grabbed an early lead with the release of the Xbox 360 in North America on November 22, 2005 and the continuation of its revolutionary Xbox LIVE service. The release of the PlayStation 3 in Japan on November 11, 2006, and Wii in North America on November 19, 2006, saw gamers snub the pricey PS3 in favor of the more accessible Wii, despite its inferior graphical capabilities compared to the other two. The Wii remains in high demand (outstripping supply in some areas) and has surpassed the Xbox 360 while PS3 lags behind with less than half the worldwide sales of either competitor. Industry analysts caution that it is too early to call for final standings, with all three consoles anticipating new titles from major franchises for the holiday season of 2007 and Spring of 2008. In addition, the inclusion of a Blu-ray Disc player and the end of the hi-def format war has given the PS3 a recent boost, vaulting it past the Xbox 360 in the North American, European, and Japanese markets in monthly sales, although it has yet to catch the Wii's sales or either of the other two console's total sales numbers.

Pricing:
Microsoft and Sony currently use a loss leader strategy, pricing their consoles lower than the production cost to increase the market for more profitable sales of related software. Competition between the two companies in 2002 has caused them to further reduce the prices of their consoles, the then prominent Xbox and PlayStation 2 respectively. The latest Xbox 360 and PlayStation 3 consoles still use this strategy. Nintendo's Wii console, despite being several hundred dollars cheaper than the Xbox 360 and PlayStation 3, generates profit from every sale because of its lower production cost compared to its counterparts.

Industry Growth:
A forecast report from technology advisory firm Gartner Inc suggests video games will pull in $74 billion this year alone and are projected to rake in a staggering $115 billion a year by 2015, thanks in large part to mobile gaming. "As the popularity of smartphones and tablets continues to expand, gaming will remain a key component in the use of these devices," said principal research analyst Tuong Nguyen. "Mobile

games are the most downloaded application category across most application stores. For this reason, mobile gaming will continue to thrive as more consumers expand their use of new and innovative portable connected devices." Because of this, Gartner surmises that 2011 will see stronger sales of software than hardware (with online revenue coming in third), a pretty ballsy call considering Sony will launch its PlayStation Vita later this year and that in 2011, we saw the launch of the iPad 2, Nintendo's 3DS, some Android tablets and the Xperia Play.

Indian Gaming Industry:

The Indian Gaming Industry has traversed a rather interesting route, right from India being termed as an anti-gaming culture to the would-be next destination for International Gaming industry. Ever since the early 1970s, when Atari released the first popular arcade video game Pong, video gaming has become another favorite pastime and has had a profound economic and socio-cultural impact in many countries across the world. And this popularity of video games has been further fueled with advancements in digital technology, mobile communications and the fast penetration of the Internet in the 90s. Gaming can be categorized into five classes: PC gaming, Console gaming, Wireless gaming, Multiplayer gaming and Massive Multiplayer Online Role playing Games (MMORPG). In India, mobile gaming and console gaming are the most popular forms of games followed by PC gaming and MMORPG. The advantage with PC Gaming is that it offers rich multimedia experience and easy usability. The Indian gaming market is very small when compared to other developed countries such as US. As compared to developed markets like US, where revenues earned through sales of retailing of video games (including console and portable hardware, software and accessories) touched $10.5 billion in 2005, the Indian gaming consumer market was quite insignificant. In 2005, an ACNielsen report estimated the Indian gaming consumer market to be around $50 million ($15 million for PC gaming and $35 million for console gaming). In-Stat, a leading provider of research reports, stated that the mobile gaming market in India was worth $26 million in 2004 and was predicted to grow to $336 million by 2009. Many industry analysts opined that these low figures were indicative of the enormous potential for growth of the gaming market in India. This also highlighted the vast untapped potential in India. With the increased penetration of mobile phones and personal computers in smaller towns and cities, industry experts estimated the gaming market to grow in the near future. The penetration of cell phones in India is higher when compared to personal computers; hence more people are likely to get their first gaming experience on a cell phone. Moreover, a large proportion of youth are today keen to try out new games. Cellular service providers such as Hutch and Reliance have capitalized on the popularity of mobile gaming in order to attract more subscribers by offering games for download through their web sites. The online gaming sector in India is being driven by the increasing number of Internet users, increase in disposable incomes, and propensity to consume amongst the youth. The growth of Internet cafes such as Sify I-Way and Reliance

Web-World, who have installed online games to attract more consumers, has also contributed to the rise in online gaming in India. The PC gaming segment in India mainly consists of youth and college students. The growth in this market is being propelled by the growth in the personal computer market. PC sales in India have increased on account of the decrease in prices due to decrease in import duties on hardware components and increased competition. Forecasting: The Indian gaming industry is expected to grow 32% at Rs 3,100 crore by 2014, a top industry official said. Indian gaming industry is expected to grow at a Compounded Annual Growth Rate (CAGR) of 32% to Rs 3,100 crore by 2014 with factors such as a young population, rising disposable incomes, increasing wireless users and proliferation of developers and publishers, Maya Academy of Advanced Cinematics (MAAC) Business Head Kumar Warrier said. The size of the Indian gaming industry was estimated at around Rs 790 crore in 2009, compared to Rs 650 crore in 2008, implying a growth of 22% during the period. The console gaming industry in India is expected to grow at a CAGR of 19% from Rs 580 crore in 2009 to Rs 1,160 crore by 2014 on the back of increasing disposable income and favorable demographics, Indias largest Gaming Company Gameshastras Vijaya Raghavan, said. According to various industry estimates, there are about 3, 00,000 handheld consoles in India and the segment is witnessing a year-on-year growth of around 35%. The focus is now on developing a talent pool and leveraging costcompetitiveness. India already offers a significant cost advantage in animation and game development, as compared to other outsourcing destinations such as Taiwan and South Korea. In India's growing gaming world, localisation is the new joystick. While 13-year-old Sriram loves Tinkle comics' popular characters Suppandi and Shikari Shambu, he would rather play with them online rather read the book a clear pointer that local gaming is here to stay. The change is being fuelled by huge growth numbers India's gaming industry is set to grow from Rs 4 billion in 2007 to a projected Rs 14 billion in 2011. "Games like NBA, FIFA and Rally that used to dominate the Indian gaming industry till about two years ago are being swept aside by India-flavored games. According to an estimate, the typical Indian gamer is a male from the top eight metros, has an average age of 26 and belongs to the affluent section. The average gamer has been playing on an average since 18 months now. The average person plays games three times a week and his usual gaming sessions last an hour in length. He also spends less than Rs 150 per month on gaming, Warrier said. The top four metros, especially account for 59% of these gamers, which indicates that availability of games and reach to target audience is still limited.

Product: Xbox
The Xbox is a sixth-generation video game console manufactured by Microsoft. It was released on November 15, 2001 in North America, February 22, 2002 in Japan, and March 14, 2002 in Australia and Europe. It was Microsoft's first foray into the gaming console market, and competed with Sony's PlayStation 2, Sega's Dreamcast, and Nintendo's GameCube. The integrated Xbox Live service launched in November 2002 allowed players to play games online. Xbox's successor, the Xbox 360, was launched in September 2005. The Xbox was discontinued in late 2005 in Japan, late 2006 in Europe and early 2007 in North America.

History:
In 1998 four engineers from Microsofts DirectX team, Kevin Bachus, Seamus Blackley, Ted Hase and DirectX team leader Otto Berkes, disassembled someDell laptop computers to construct a prototype Microsoft Windows-based video game console. The team hoped to create a console to compete with theSony's coming soon PlayStation 2, which was luring game developers away from the Windows platform. The team approached Ed Fries, the leader of Microsofts game publishing business at the time, and pitched their DirectX Box console based on the DirectX graphics technology developed by Berkes team. Fries decided to support the teams idea of creating a Windows DirectX based console. During development, the original DirectX box name was shortened to Xbox. Microsofts marketing department did not like the Xbox name, and suggested many alternatives. During focus testing, the Xbox name was left on the list of possible names to demonstrate how unpopular the Xbox name would be with consumers. However, consumer testing revealed that Xbox was preferred by far over the other suggested names and Xbox became the official name of the product. The Xbox was Microsoft's first video game console after collaborating with Sega to port Windows CE to the Dreamcast console. Microsoft repeatedly delayed the console, which was first mentioned publicly in late 1999 during interviews with then-Microsoft CEO Bill Gates. Gates stated that a gaming/multimedia device was essential for multimedia convergence in the new times. When Bill Gates unveiled the Xbox at the Game Developers Conference in 2000, audiences were impressed by the console's technology. At the time of Gates' announcement, Sega's Dreamcast sales were diminishing and Sony's PlayStation 2 was just going on sale in Japan. Concentrating on making a big splash in Japan, Microsoft delayed its European launch, though Europe later proved to be the more receptive market. Some of Microsoft's plans proved effective. In preparation for its launch, Microsoft acquired Bungie and used Halo: Combat Evolved as its launch title. At the time, GoldenEye 007 for Nintendo 64 had been one of the few hit FPS games to appear on a console, some of other ones

being Perfect Dark and Medal of Honor. Halo: Combat Evolved proved a good application to drive the Xbox's sales. In 2002, Microsoft made the second place slot in consoles sold in North America.

Sales:
On November 15, 2001, Xbox launched in North America and quickly sold out. The Xbox has sold 24 million units worldwide as of May 10, 2006, according to Microsoft. This is divided out to 16 million units sold in North America, six million units in Europe, and two million units sold in Japan. Overall, the Xbox was a success especially in North America. Sales were also positive in Europe, but Japan saw poor sales, with only 2 million units sold there.

Successor:
The Xbox's successor, the Xbox 360, was officially unveiled announced on May 12, 2005 on MTV and released in North America on November 22, 2005. Nvidia ceased production of the Xbox's GPU in August 2005, which marked the end of brand-new Xbox production. The Xbox was discontinued in Japan in 2005 immediately after 360's launch, due to poor sales in the country. Sales were much better throughout Europe and North America where the console was discontinued in late 2006 and early 2007, respectively. When equipped with a removable hard drive add-on, the Xbox 360 supports a limited number of the Xbox's game library through emulation. As the architectures of the Xbox and Xbox 360 are different, software emulation is the only way to enable compatibility without including hardware from the original Xbox. Emulation adds support for anti-aliasing as well as upscaling of the still standard definition image. These emulators are periodically updated to add compatibility for older games and are available free through Xbox Live or as a file download to be burned to a DVD-R from the Xbox web site. These updates are also available monthly as part of the demo disc that comes with each issue of Official Xbox Magazine.

Sales:
The Xbox 360 began production only 69 days before launch. As a result, Microsoft was not able to supply enough systems to meet initial consumer demand in Europe or North America and many potential customers were unable to purchase a console at launch. Forty thousand units appeared on eBay during the initial week of release, 10% of the total supply. By year's end, Microsoft had shipped 1.5 million units, including 900,000 in North America, 500,000 in Europe, and 100,000 in Japan.

At E3 in May 2006, Bill Gates announced that Microsoft would have a head start of 10 million units by the time Sony and Nintendo entered the market. Microsoft later specified that goal and estimated shipments of 10 million units by the end of 2006. Cumulative sales from the system's launch until June 30, 2007 were predicted to reach 12 million units, down from 13 to 15 million units estimated earlier. Being released one year ahead of its competitors, the Xbox 360 was the market leader throughout the first half of 2007; however, on September 12, 2007, it was reported by the Financial Times that the Xbox 360 had been surpassed by the Wii in terms of worldwide home console sales. On October 4, 2007, after the launch of Halo 3, Microsoft stated that Xbox 360 sales had more than doubled compared to the previous average. According to the NPD Group, the Xbox 360 outsold the Wii for the month of September in the United States, helped in part by the spike in sales seen after the launch of Halo 3, which sold 3.3 million copies in the US in a 12-day period. The Xbox had sales of 528,000 units for September, while the Wii had sales of 501,000 units. Despite the relatively strong sales figures, Microsoft's gaming division was losing money. Through 2005, the Xbox gaming division had lost over $4 billion, However, Microsoft expected the console to start making money in 2008. due to a loss leader market strategy of selling consoles below cost in order to obtain market saturation and gain profits on software and peripherals with a much higher profit margin. Additionally, Microsoft took a charge of $1 billion dollars on its June 2007 Income Statement to account for the cost of replacing bricked Xbox 360s. In Europe, the Xbox 360 sold 2 million units in 2006 and 1.9 million in 2007 according to estimates by Electronic Arts. In 2007, the Xbox 360 sold 4.62 million units in the US according to the NPD Group, and 257,841 in Japan according to Enterbrain. In 2008, the Xbox 360 sold 317,859 units in Japan, according to Enterbrain. On February 13, 2008, Microsoft announced that the Xbox 360 suffered shortages in the US in January 2008, possibly continued into February. Prior to the release of the NPD Group's video game statistics for January 2008, the Xbox 360 was in second place behind the Wii in US sales for most months since the Wii and PS3's release. On May 14, 2008, Microsoft announced that 10 million Xbox 360s had been sold and that it was the "first current generation gaming console" to surpass the 10 million figure in the US. In the US, the Xbox 360 was the leader in currentgeneration home console sales until June 2008, when it was surpassed by the Wii. In the first seven months of 2008, the Xbox 360 has sold 154,000 units in Canada, being outsold by the PlayStation 3 and Wii; the Xbox 360 has sold a total of 870,000 units in Canada as of August 1, 2008. In Europe, the Xbox 360 has sold seven million units as of November 20, 2008, according to Microsoft. In Japan, the Xbox 360 has sold 866,167 units as of December 28, 2008,

according to Enterbrain. In the United Kingdom, the Xbox 360 has sold 3.9 million units as of June 27, 2009, according to GfK Chart-Track. On May 13, 2008, Microsoft stated that there will not be a release of a newer version of the Xbox 360 in 2009. Microsoft representative says, "While we [Microsoft] don't normally comment on rumors like this [release of newer and smaller Xbox 360], we can tell you that we have no plans to release a new console in 2009". On May 28, 2009, Microsoft announced that sales have surpassed the 30-million unit-mark, stating that 2008 was Microsoft's "biggest year in history" also due to the increase of Xbox Live users. On January 6, 2011, Microsoft stated that the Xbox 360 sold over 50 million units worldwide during their CES 2011 conference. In addition, they stated that the Kinect sold about 8 million units, 3 million more than initially predicted, during the product's first 60 days on the market. It was also announced that Xbox live had more than 30 million users, making 2010 the best year to date for the online service. Edge magazine reported in August 2011 that initially lacklustre and subsequently falling sales in Japan, where Microsoft had been unable to make serious inroads into the dominance of domestic rivals Sony and Nintendo, had led to retailers scaling back and in some cases discontinuing sales of the Xbox 360 completely. In 2009, Imagine Games Network (IGN) named the Xbox 360 the sixth greatest video game console of all time, out of a field of 25.

Xbox Timeline

Product competition: Console Wars

"Console wars", also known as "System wars" is a term used to refer to periods of intense competition for market share between video game console manufacturers. The winners of these "wars" may be debated based on different standards: market penetration and financial success, or the fierce loyalty and numbers of the fans of the system's games. The term itself does not strictly denote a clear winner in each case, though. The outcome of a console war may however determine whether or not a manufacturer remains a part of the video games industry. Due to different manufacturers releasing consoles at different times, the wars described below are not exact definitions and do not necessarily have firm beginning and ending dates. Also, these wars had different years and combatants on different continents, since traditionally the four main marketsEurope, Japan, Australia and North Americahave been treated as separate entities, with machines and games released at different times or even completely different games being released. This situation is not as apparent as it was in the past, but remains in some respects, particularly with regards to Japan when compared to the other three markets.

Sixth Generation Consoles:

Segas Dreamcast, the first sixth-generation console, debuted in Japan on November 27, 1998. As the first console to feature a built-in modem, the Dreamcast offered players a new console gaming experience; users were able to play games with one another via the Internet. The Dreamcast was the sole sixth-generation console for over a year, until Sony released the PlayStation 2. In early 2001, however, Sega announced its discontinuation of the Dreamcast; it adjusted its company strategy to abandon the console industry and focus on third-party development. Therefore, the Dreamcast left the market as the sixth-generation competition began to increase. On March 4, 2000, Sony released the PlayStation 2 in Japan. The console featured a 294.912 MHz processoran improvement over the Dreamcasts 200 MHz processorand promoted backward compatibility with PlayStation games. Unlike previous consoles, the PlayStation 2 could play DVDs, creating additional value for consumers interested in purchasing both a DVD player and gaming console. Within two days of the PlayStation 2s release, Sony set a new record by selling 1 million consoles. The initial supply did not meet the demand; there was a shortage even among those who preordered, which led to inflated reselling and reported thefts. Although the PlayStation 2 did not originally focus on Internet connectivity, Sony developed an external adapter that enabled online gaming for select titles after the Xboxs release. Nintendo released the GameCube in Japan on September 14, 2001. Unlike previous Nintendo consoles, which used game cartridges, the GameCube used optical discs similar to MiniDVDs. The size of the discs, however, restricted users from playing regular DVDs and CDs on the

console. With an introductory price of $199, the GameCube cost approximately $100 less than the PlayStation 2 and Xboxa selling point for price-conscious consumers. The console offered signature family-friendly games, such as Luigis Mansion, in addition to third-party titles, including the more mature games Eternal Darkness: Sanitys Requiem and Resident Evil 4. On November 15, 2001, Microsoft entered the console industry by releasing the Xbox in North America. The Xbox featured internal storage capacity, allowing users to save games and download content directly to the console. Like the PlayStation 2, the Xbox also played DVDs; however, it required an external add-on. The release of Xbox Live, a subscription-based online gaming service, allowed users to play compatible titles online. Within two months of Xbox Lives release, 250,000 users had subscribed, exceeding the companys projections. Overall, the sixth generation expanded gaming consoles into a broader entertainment experience, whether through online gaming or the ability to play DVDs. As seventh-generation consoles overtook the market, Nintendo and Microsoft discontinued the GameCube and Xbox. Sony, on the other hand, continued to produce the PlayStation 2 after the PlayStation 3s release in 2006. In 2009, Sony announced that PlayStation 2 production would continue until demand decreases. Therefore, sustained PlayStation 2 purchases continue to increase the consoles lead in sales. Worldwide sales figures: 1. 2. 3. 4. PlayStation 2 150 million as of 31 January 2011 Xbox 24 million as of 10 May 2006 GameCube 21.74 million as of 30 September 2011 Dreamcast - 10.6 million as of 6 July 2002

Seventh Generation Consoles:

Home system: All three consoles have had major shortages both at their launches and directly afterwards, with the Xbox 360's continuing for months after release and Wii's still continuing after two holiday seasons; the PlayStation 3 saw high demand for its first week of release, but it did not continue, being in stock at most major retailers shortly after release. Home entertainment: The seventh generation is best known for major consoles branching out into other types of media rather than solely focusing on games, making them "true" entertainment systems. All three consoles offer basic abilities such as photo-viewing, listening to music and browsing the web (excepting the Xbox 360), as well as the ability to connect to external memory such as USB flash

drives and SD cards. The Xbox 360 originally boasted a higher quality DVD player and music player, and over the years has released other features such as an external HD-DVD drive (now a dead standard), Zune downloadable content, Netflix streaming and Last.fm internet radio. PlayStation 3, on the other hand, has Blu-ray, Netflix streaming, and Qriocity which has unlimited music. The seventh generation is best known for major consoles branching out into other types of media rather than solely focusing on games, making them "true" entertainment systems. All three consoles offer basic abilities such as photo-viewing, listening to music and browsing the web (excepting the Xbox 360), as well as the ability to connect to external memory such as USB flash drives and SD cards. The Xbox 360 originally boasted a higher quality DVD player and music player, and over the years has released other features such as an external HD-DVD drive (now a dead standard), Zune downloadable content, Netflix streaming and Last.fm internet radio. PlayStation 3, on the other hand, has Blu-ray, Netflix streaming,and Qriocity which has unlimited music. This new generation for the first time has all of the major consoles focusing on online integration. All three have their own connection services: Wii's Nintendo Wi-Fi Connection, Xbox Live, and PlayStation Network. Competition has branched now from simply offering the best games to the best online content; smaller games can now be purchased and downloaded from online stores within the consoles, and extra applications such as Netflix streaming and Facebook connectivity are heavily supported. Almost all games sold in retail have online support, including online multiplayer and downloadable content for bug patches and new features, potentially increasing replay value in certain games for even years. Another notable feature in current-gen gaming is the use of avatar characters. Nintendo first introduced Miis with the Wii console, caricatures of players that could be created and used in flagship titles such as Wii Sports; however they lack the ability to customize that Xbox's avatars have, as clothes and accessories can be purchased online or unlocked in games played. PlayStation 3, instead of an in-game character, offers PlayStation Home, a social simulator where avatars can talk and explore, and customize their homes based on games played. Worldwide sales figures 1. Wii 89.36 million as of 30 September 2011 2. Xbox 360 57.6 million as of 4 November 2011 3. PlayStation 3 56 million as of 2 November 2011

Japan sales figures 1. Wii 11,534,590 as of 1 April 2011 2. PlayStation 3 6,341,950 as of 1 April 2011 3. Xbox 360 1,448,665 as of 1 April 2011 Europe sales figures 1. Wii 24.9 million as of December 2010 2. PlayStation 3 19.7 million as of December 2010 3. Xbox 360 13.7 million as of December 2010 United States sales figures 1. Wii 30 million as of 10 August 2010 2. Xbox 360 18.6 million as of 31 December 2009 3. PlayStation 3 - nearly 12 million as of 14 April 2010

Xbox Sales Growth:

Despite their commercial appeal, gaming consoles have not historically been big moneymakers for the tech industrys biggest firms. Sonys PlayStation business was famously unprofitable for years, as was Microsofts entertainment and devices division anchored by the Xbox. But if the past several months are any lasting indication, the gaming markets tide may finally have turned for good. Microsoft reported that its entertainment and devices division (EDD) revenue grew 45 percent during fiscal 2011, with profits from the division surging 114 percent. And the growth is apparently speeding up: During the companys fourth quarter, which ended June 30, EDD revenues were 30 percent higher than they had been during the same quarter last year. Microsofts EDD division covers the Xbox 360 entertainment platform (which includes Kinect for xBox 360), Internet protocol television software Mediaroom and the Windows Phone. In the recent quarter, the EDDs revenue increase was mostly attributable to sales growth in the XBox 360 platform business, the company said. Microsoft has released data showing continued sales success for the Xbox 360, which has now sold over 55 million units worldwide, and the Xbox Live service, which now has over 35 million members. Xbox unit sales have "changed the tail" for a typical hardware cycle, Microsoft says, with gains in its fifth and sixth year of availability, including a 29 percent year-over-year sales increase so far in 2011.

Comparative Sales Chart

"2011 will be another record year for Xbox 360 and no other console in history can make that claim six years into their lifecycle," the company boasted in a press release, sharing a graph of recent system sales trends (below) to illustrate the point. Microsoft cites the increasing variety of non-gaming entertainment options available through Xbox Live as a key driver of growth in both hardware sales and Xbox Live adoption. Xbox Live users now spend an average of 60 hours on the service every month, contributing to a combined 2.1 billion monthly hours of Xbox Live use monthly. That includes roughly 30 hours of nongaming video consumption per user. "Xbox used to be solely in the games business, but the business is on a different trajectory now," the company said. "What was launched as the ultimate gaming machine has quickly evolved to become an all-in-one entertainment device with something for every member of the household." This sector of the company is responsible for the Xbox 360, PC Games and the Windows Phone (amongst over things), and saw a 30 percent in growth during the fourth quarter and 45 percent for the full year, to $1.49 billion and $8.9 billion respectively. Microsoft shipped 1.7 million Xbox 360s in the fourth quarter, up from 1.5 million last year, and 13.7 million consoles during the full year, up from the previous 10.3 million. It said in a statement that Xbox 360 was the topselling game console in the US over the past 12 months. But this increase in console sales doesnt count for the 29 percent growth that the 360 experienced in revenue growth; Microsoft also has higher Xbox Live revenue to thank for that. For the year, Xbox 360 platform revenue grew $2.7 billion or 48%, thanks to increased volumes of Xbox 360 consoles, sales of Kinect sensors, and higher Xbox Live revenue. Revenues for all of Microsoft were up 8 percent for the period, year-over-year, with the company singling out the Xbox 360 entertainment platform as one of the primary catalysts for its growth. With all this good news, Microsoft can also claim that they have the top-selling video games console in North America for 12 of the last 13 months so its easy to see why Xbox 360 is doing so well for Microsoft.

Xbox Economics: Demand and Supply

The social science of economics tells us that supply, demand and price are closely related to one another and have a significant on how much of a particular good is purchased and the rate at which it is purchased by consumers. The XBOX 360 phenomenon is a solid example of the impact that changes in supply, demand and price have on the marketplace and the rate at which goods are purchased.

Supply and Demand and Price

The law of demand tells us that "Quantity demanded rises as price falls, other things constant, or alternatively, quantity demanded falls as price rises, other things constant (McGraw 2004). The XBOX 360 phenomenon that took place in 2005 is a good example of this economic principle at work. Microsoft's XBOX 360 gaming console was released into the U.S. market on November 22nd 2005. The release came after a great deal of advertising and media hype that ensured that the demand for the product would outweigh the supply. Quite simply, there were more consumers wanting to purchase the product than there was product available. The retail price for the gaming system with a hard drive was $399. Many consumers, however, paid a great deal more than the $399 sticker price to acquire the system. On the morning of the U.S. release, retailers across the nation sold out of the product within just a few hours of opening their doors to consumers. In the weeks that followed however, many consumers purchased the unit from sellers on on-line auction sites and even from individuals in parking lots for as much as $1500. The reason for this was that the supply was significantly less than the demand for the product. In some cases, parents who wanted to ensure that their children received and XBOX 360 for Christmas in 2005 were willing to pay well over retail for the hard-to-acquire system. In other cases, video gaming enthusiasts wanted to be among the first individuals to own and play the system. News reports across the nation showed footage of people lining up days ahead of November 22nd in order to secure a place in line at retailers that would have the product available on the release date. In some cases individuals pitched tents and resided in parking lots for as many as 7 days to ensure that they would be able to purchase this system. This type of behavior and willingness to pay prices that were well over retail continued through the holiday season at major retailers across the country. In these cases, social pressures, wants, desires and a lack of supply led individuals to pay high prices for the highly-demanded product.

A Shift in Supply
By April 2006, well after the holiday season of 2005, reporters in the consumer electronics industry were reporting that the supply of the gaming console would continue to be scarce into the Spring of that year (Baig 2006). At that point, camping in front of retail stores was no longer taking place for several days at a time, but consumers could still be seen lining up for the product as many as 8 hours in advance of a store opening time on a day that the product was to be in stock. By April 2006, pricing had also leveled off. While internet auction sites still featured the XBOX 360, the going price for the system remained fairly constant around the $399 retail price. This occurred for two primary reasons. First, many of the gaming enthusiasts who wanted to be one of the first to own and use the product had been able to acquire the system during the first few months following the release date. Second, parent who had wanted to purchase the system as a Christmas gift for their children were no longer experiencing the social pressure and/or pressure from their children to acquire the system by Christmas since the holiday season had passed. These two changes led to a decrease in demand which, in turn, led to a decrease in price, despite the fact that supply had still not truly improved.

End of the Phenomenon

By the Fall of 2006, Microsoft caught up with the demand and plenty of gaming consoles were available in the U.S. During the holiday season of that year, however, there was a fluctuation in demand as the need for Christmas presents became a concern again. While the demand was not as high as it had been the previous years, stores did sell out of product in the last few weeks prior to Christmas and XBOX 360 systems could be seen on internet auction sites again for price that were well above the retail price, although not as high as what was seen during the initial launch. While the item continues to be sold at retailers across the country, the demand and supply have both steadied. Today the XBOX 360 is easily found and purchased by any consumer that is willing to pay the retail price of $399.

Conclusion
A lack of supply, media hype and social pressures created a demand for the XBOX 360 in 2005 that, at that time could not be met. As a result, the gaming consoles that could be acquired were often acquired at a price that was well above retail. Many consumers paid money, time and effort to acquire the system. As the trend slowed, the pressures of the holiday season were removed and the supply was replenished, the demand for the product slowed and the price was reduced. This phenomenon clearly demonstrated the relationship between supply and demand.

Xbox: Oligopoly Structure

After couple years of preparation, Microsoft is finally entering into videogame industry on November 15th. Since its popularity boosted, the videogame industry has been oligopolistic, in which the market structure consists of only couple firms producing videogame devices. On the other hand, Microsoft has been dominating whole computer software market, and it is now entering into a new market as an oligopolistic firm. According to the economical concept, entry into the oligopolistic industry is supposed to be not easy; however, economists are expecting that demand for Microsofts new product, the Xbox will be very high. Furthermore, presence of the Xbox will contribute to the balanced oligopoly in videogame industry, which has been primarily dominated by Sony for last five years. A year after the release of the Xbox, the videogame market share is expected to be almost equally divided between Sony, Nintendo, and Microsoft. Factors that contribute to successful outcome of Microsofts new entry into oligopoly are product differentiation, brand loyalty, and advertising.

First, Microsofts product differentiation of typical video game device was distinctive from any other firms attempt. According to the Wall Street Journal, the Xbox looks just like a typical computer that has a hard drive and a 733-megahertz processor produced by Intel Corporation. By just transforming a PC into a video game machine, Microsoft was able to start up a new business easily. This way, game developers, who are producing complementary goods, can easily write Xbox games, since Xbox is so similar to PCs. Because of the product differentiation in video game industry, the staff reporters of The Wall Street Journal, Guth and Tran say that, the software developers were forced to devise separated versions of a game for each machine. And, as a new competitor in a market, Microsofts approach to use a PC as a video game machine would attract more software makers to create games for Xbox. Another approach taken by Microsoft in product differentiation is to include a high-speed internet connection. The economists expect that this feature would assure Microsofts success in product differentiation because online gaming has not been attempted by any other competitors and it will attract significant number of consumers for sure. With online features and PC-based model, Microsoft has differentiated its Xbox clearly. Another factor that attracts video game customers to Xbox is peoples brand loyalty to the brand, Microsoft. Since its beginning, Microsoft has been seizing every single part of the computer software and online service market, so that everyone knows how big Microsoft Corporation is. Also, people are expecting that the Microsoft will eventually seize market share in this market. That is why consumer surplus for the products of Microsoft and Sony is higher than that of Nintendo, one of the major competitors in video game market. Nintendos expected increase in market share is lower than Microsofts even though Nintendos new product, GameCube, is hundred dollars cheaper than Microsofts Xbox. Also, most game developers will consider creating games primarily for the Xbox because they too, have brand loyalty.

The best effort done by Microsoft to increase its revenue is its advertising. Advertising is one of the ways to really boost up the sales of the products; therefore, it reduces elasticity, especially in market of oligopoly. It can persuade consumers to switch brands without lowering price. So, for Microsoft, which is selling its Xbox at higher price than its competitors products, Nintendos GameCube for example, should invest on advertising if they want increase the market share and still make a profit. During the next eighteen months after launch of the Xbox, Microsoft plans to spend 500 million dollars for marketing. This is enormous amount for marketing of video game device whose primarily function is gaming; moreover, the analysts estimate that Microsoft will lose 125 dollars for every Xbox sold. However, this advertising will really help Microsoft in increasing revenue in the future, since the demand for the Xbox will be more inelastic. Therefore, Microsofts decision to plan heavy expenses on marketing will take effect in long term, after average total cost is lowered and economies of scale are reached. Although entry into oligopoly is not easy, Microsofts Xbox is expected to bring up its market share in a short time because of many advantages Microsoft has compare to other firms in the industry. From this issue, it can be seen that profit maximizing is not the best choice for expanding a firm. However, the firm has to risk itself to raise market share, and promote its products through advertisement in order to succeed in a long run. Microsoft has been following this rule rather than profit maximizing for a short run. In oligopoly, the firms in the market are interdependent, and depending on the companies marketing and products, survival is determined; therefore, good understanding of economics is high demanded for controlling an efficient business. Thus we can conclude that Xbox is in an oligopoly market as: - There are only a few companies selling/producing the product. - There's a strong interdependance among them. For example, if Microsoft decides to lower their prices, it can greatly influence whether Sony and Nintendo will or need to lower theirs as well. Also, even though there is product differentiation, if one adds a significant feature, the others are almost certainly forced to follow suit. - The companies have the ability to maintain long-run profits. - The barriers to entry are high for new competitors. - They literally could become a cartel or become targets of anti-trust lawsuits. Highly unlikely in this case, though unless one or two of the big three go out of business. - The big three control almost 100% of the gaming console business.