Xbox

I recently bought an Xbox, and I've come to a realization: the Xbox is Microsoft's iPod.

It's not a totally accurate comparison - the Xbox unit has yet to be profitable, while the iPod has been enormously profitable - but in terms of strategy, it occupies a similar space. Microsoft has spent a lot of money creating not just a product but a platform on which additional goods and services can be built.

The Xbox is not just a game machine, but a DVD player and network media center. It's what WebTV was supposed to be and so much more. WebTV was ahead of its time; now that broadband is commonplace and third-party suppliers of media content such as Netflix exist, Microsoft can concentrate on developing a platform with hooks into other services. Add to that the lowering cost of HD televisions, and you have a device where the game play is almost an ancillary function. At half the price, I could almost buy an Xbox for everything but the gaming functions.

That being said, the Xbox is an example of a strategy I learned about in business school. A firm may spend a lot of money just to enter and exist in a market space, even if the business is not profitable. The reasoning is that the market will eventually be profitable, and it is easier to enter the market when is still being developed rather than later. Instead of letting two (or three, depending on how far back you go) other firms lock up the market - say, Sony and Nintendo - enter the market, develop your internal operations to support additional goods and services, and eventually you'll take enough market to make it all worthwhile.

I do not know for certain, but I have read that the Xbox would be profitable if Microsoft hadn't taken a $1BN charge to facilitate repairs of units that fail due to a bad manufacturing process.

In any case, the Xbox is an interesting product to watch. Compare to the Sony Playstation 3, which is similar in aspiration and scope, but a year or so behind in development (which makes sense -it came out a year after the Xbox360). Sony is still trying to develop the backend connectivity and business relationships. Watch the business, not the device.

It will be interesting to see how these firms evolve their products to fit the market.