[Kernel Kev]

One common theme on the internet right now is that the Xbox360 will only have a 4 year life while the PS3 will have a 10 year life. While both of these arguments carry some weight through public statements by their corporate drivers and history, both are off target.

In this editorial, we will examine the Xbox system and Microsoft and try to get to the heart of why MS released the 360 only 4 years after the original Xbox. We will also try to determine when Sony is likely to launch the PS4 assuming MS remains a strong enough competitor to be a factor in their potential launch date.

Recently MS raised the price of the original Xbox by $30 to help offset the remaining losses occurring on the project. Raising the price of a console is virtually unheard of, but there was no further ways MS could cut the cost due to several bad decisions way back in the day. These decisions included including a HDD with every system, agreeing to exclusive production and IP ownership by nVidia, not designing with miniaturization in mind, and frankly rushing the production of the system.

Shortly (within about 18 months) after the release of the original Xbox, MS realized that they would never profit on it. In addition, they realized that Sony would most likely want to release the PS3 six years after the release of the PS2. Putting its release likely around March 2006 in Japan and Holiday 2006 in the US.

Taking that data, MS decided that they needed to make a new system using the lessons they had learned. One that would ship at approximately the same time as the PS3 would ship. One that could be profitable within a year, be miniaturized, and that they owned the IP for.

They targeted Late 2005/Early 2006 as the release of the system. They knew this would cut the life of the original Xbox to 4 - 5 years, but that it would also cut their long term losses from hardware by about $500 Million and accelerate their rise to profitability.

So, even realizing that it could cause a short term impact to reputation by launching a new system within just 4 years, they also realized this wouldn't hold long term unless they did it twice. Which they had no plan to do.

So, in roughly January of 2005 they talked with their software and hardware partners and determined that Holiday 2005 was the best time for release. At this point, it was also widely assumed that Sony would launch the PS3 around April of 2006. They moved ahead on their plan to launch in late 2005.

They also began to look at other factors that affected their console's profitability leading up to the 360 launch. If they wanted backward compatibility, they were going to have to pay nVidia royalties on the system that could equal what they paid with the original Xbox and thus prevent profitability below the $200 price point. They also realized that the COGs associated with including a HDD in each system would impact their future ability to cost reduce below $200 per system. The 2 combined could easily cause a permanent impact of $75 per system alone. That would leave only $25 to cover the rest of the hardware, shipping, retailer profit, and support/return expenses. This was unacceptable.

This is where the 2 SKUs come into play. By release the Core system, MS has set themselves up to have a $100 SKU on the market in the future. This is a vital price point in the Console industry that MS will never be able to hit with the original Xbox. Realistically they never should have dropped the original Xbox to $150 due to the fact that they would never be able to cost reduce production sufficiently to profit at that price. Since a HDD would be required for backward compatibility with the original Xbox, and they could not afford to put a HDD in the core system and plan to hit a $100 price point, they were able to work out the deal so that the nVidia royalty needed for backward compatibility would only have to be paid on systems that included the HDD or on separate purchases of the HDD.