A Tale of Two CEOs

Hirai and Nadella come out in support of their respective consoles; but the context of their statements couldn't be more different

This week saw two of the most interesting "business as usual" statements that we've seen in the games industry for a while. Sure, that sounds like a contradiction in terms - "business as usual" is rarely a terribly interesting thing for an executive to announce - but the comments made by Microsoft CEO Satya Nadella and Sony CEO Kaz Hirai about their respective games businesses were a little more than that. On the surface, both men were reaffirming their company's belief in games as a part of their business, but given the very different positions in which Sony and Microsoft find themselves, such affirmations carry very different weight.

For Sony, after all, this isn't a hard thing to say. The PS4 continues to sell strongly and unless there's a major change to the trajectory, will likely double the Xbox One's overall sales within the coming months. It's by far Sony's most successful product launch of recent years - arguably the most successful thing the company has done since the PlayStation 2, in fact, and Hirai made a deliberate point of comparing PS4 to the extraordinarily successful PS2 rather than to its more disappointing (though ultimately not unsuccessful in its own right) sibling, the PS3.

To reaffirm Sony's support for the PS4 is simply logical; it's the best thing Sony has going for it right now. Hirai noted that PS4 is at the heart not only of Sony Computer Entertainment, but of Sony overall; it's the core device that's going to drive the company's network strategy, a strategy which Sony desperately needs to work if it's going to rescue its status as a consumer electronics company. Bridging the gap from "successful games console" to "heart of a consumer entertainment network strategy" is still a very big ask, but Hirai, at least, understands what both of those things mean - and his company is on track to complete the first part of the task, namely actually having a successful games console.

"Short of a price cut (which would drive hardware back into loss), expect Sony to promote and sell the PS4 even more aggressively in the rest of 2014. No wonder Hirai feels confident"

This is worth noting not least because it's such a contrast with Sony's leadership a few years ago. Former boss Howard Stringer came from the content side of the company, and his grasp on Sony Computer Entertainment and its business was often tenuous. For years, under his leadership, talk of building a Sony strategy around PlayStation circulated, but it never seemed credible when the man in charge struggled to name key game franchises or explain the details of the PlayStation business. It often seemed that to Stringer, Sony Computer Enterainment was a black box which was obviously doing quite well, despite its struggles with turning around the PS3, but whose workings were a mystery.

Not so to Hirai, who can confidently talk about contrasts between the PS4 and past platforms, discuss PlayStation's role in Sony's network strategy, and describe Sony Computer Entertainment as being at the heart of Sony's business and actually sound like he means it. Moreover, Hirai's confident statements about PS4 come at a very interesting time for the console; the company has also confirmed that it is no longer making a loss on hardware units, which is a significant milestone that has been reached very early in the device's lifespan.

It's possible to read too much into that milestone, of course; hardware profitability is a notion bounded by a very limited definition. PS4 itself, as a project, remains in the red; it will be some time before the significant launch and R&D costs of the hardware are paid back (note the large loss SCE took in the past quarter, which included a large chunk of the launch costs). Moreover, gross profitability on hardware only means that Sony is selling the console to retail for less than the components and manufacturing costs; all manner of other costs (most notably marketing) aren't included in that calculation.

Even with such caveats, however, hardware profitability is a very major milestone. For one thing, it makes it much, much easier for Sony to actually reach overall profitability on the console, and with any luck should contribute to solid financial figures for SCE in the near future. Perhaps more importantly, though, it frees the company up to make certain strategic decisions that would otherwise be impossible or at least unpalatable. When console hardware is still losing money on each unit sold, platform holders have to carefully balance their sales strategy. If they push too hard and sell too many units, it will actually create serious operating losses - losses which need to be weighed up against the importance of rapidly building an installed base. That calculation is far from being a no-brainer; installed base doesn't always win. Nintendo, for example, supply-constrained the Wii in its launch window; that strategy was not in order to create sales hype, as it was often accused of, but rather because the device was losing money on each unit sold. Had Nintendo fulfilled demand completely, it would have taken a huge operating loss. By waiting, it got to hang on for manufacturing costs to fall before supplying the demand in the market.

There's no evidence that Sony has been constraining its supply of PS4 up to this point; supply shortages for the console were minor, and easily explained by the stockpiling required for launches in other territories. Any shortages which exist now are supply chain errors rather than a widespread lack of stock. However, even without making a move as drastic as cutting back supply to retail and creating artificial shortages, a manufacturer still takes moves to limit sales when consoles are losing money. Key games are held back or slowed down; marketing budgets drop; promotional plans are held back. Once the console is breaking even on hardware sales, though, options open up - the company is freed, financially, to pursue installed base with no further limitations. Short of a price cut (which would drive hardware back into loss), expect Sony to promote and sell the PS4 even more aggressively in the rest of 2014. No wonder Hirai feels confident.

"honestly, it's pretty hard to see how Xbox even fits in to the overall direction of Microsoft at the moment, let alone being at the heart of the business"

What of Microsoft, then? Of course, statements of confidence from the Xbox leadership team haven't been thin on the ground, but while Phil Spencer's enthusiasm for the Xbox One is welcome and unquestionable, it hasn't dispelled question marks both over the performance of the console and over how the rest of Microsoft regards it. Stephen Elop, former Nokia boss and new head of Devices & Services at Microsoft, has said before that he'd sell off Xbox; Bill Gates said he'd support such a move, if it happened, though it's unclear whether he meant he actually agrees with the logic behind it, or that he'd simply support new CEO Satya Nadella in whatever decision he made.

Well, Nadella sounds like he's made a decision, telling the Code Conference in California that he's going to stay the course on Xbox, and won't be doing "anything different" with the division - including, presumably, selling it off. That's not to say the option hasn't been investigated; everything we've seen and heard in recent months suggests that it's been thoroughly investigated. For now, though, it seems to be off the table - Xbox is secure at Microsoft for the time being. We might have guessed such, in fact, when the company announced that it was making Kinect optional. Much of the attraction of Xbox One for proposed suitors like Amazon would have lain in Kinect, a device designed as much to be a control centre for media of all types as it is to be a game controller (hence much of the lukewarm reaction to it from gamers, of course). Unbundling Kinect makes the Xbox business less attractive to many suitors while making the Xbox One much more attractive to many consumers, so it's a pretty solid affirmation of what Nadella was saying.

All the same, I hope Nadella wasn't being too literal about not doing "anything different", because it's clear that Xbox does need to do quite a lot of things differently. Xbox One's sales even in its native USA don't stack up spectacularly well against Sony's, while in every other global territory, it's a disaster. It's early days yet and unbundling Kinect to price match the PS4 is a good start, but the extent to which Microsoft trails Sony in this round of the console wars is truly significant and will take a lot of repair work. That's not to say Microsoft can't pull this off; bear in mind that PS3 eventually matched the sales of Xbox 360 in the past generation, and its disadvantage at launch was arguably even worse than Microsoft's now.

I do wonder, however, about the difference in tone between the two CEOs. Hirai is a CEO of a consumer electronics company who understands the PlayStation business intimately and talks about putting it at the heart of his firm's future. Nadella, though, is the CEO of a company that's largely focused on corporate software and services; he has no personal experience of the games business and honestly, it's pretty hard to see how Xbox even fits in to the overall direction of Microsoft at the moment, let alone being at the heart of the business. Of course the company wants to retain its consumer-facing brands; not just Xbox but Windows, Surface and now Nokia and Lumia as well; but how exactly those tuck in alongside a company whose future overall looks increasingly enterprise-focused is slightly hard to fathom. I don't doubt Nadella's commitment to maintaining the Xbox business; I do wonder how much support and understanding Xbox is going to get from the rest of Microsoft as it seeks to turn around a pretty underwhelming launch and build a long-term business on Xbox One.

Two CEOs, two statements of support for games; yet two very different tones and two very different contexts. It's extremely positive that Xbox looks to be settled at Microsoft for now; a move to another company like Amazon could also have been positive, of course, but the uncertainty over the future of the division needed to be resolved more than anything else. However, for now, it remains Sony's star that's in the ascendant. With Nadella's apparent blessing and the Kinect millstone removed from its neck, we now get to see if Microsoft can do what Sony has learned afresh in recent years - being a plucky, innovative challenger that uses its underdog status to great effect. It did it once before, with the original Xbox and the early years of the Xbox 360. If it can recapture that attitude, Xbox One still has plenty of potential - and the industry as a whole will be in for a very interesting few years.

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Latest comments (9)

Rick Lopez Illustrator, Graphic Designer 6 years ago
For what its worth, wether you support Microsofts or SONY products, we need both companies and there products. Rivalry drives up competitive edge and quality. With each company trying to raise the bar over the other company in terms of what can be done, if type of thing keeps occuring in the industry it can only mean not just good, but GREAT things.

But when you have one company that controls everything, they start becoming arrogant, Draconian and overly obsesive about controlling their products and how people use them. This is what was happening to microsoft

So yeah, Im a SONY (and Nintendo) fan. But I dont rule out the importance of Microsofts role in the industry. So thats why I wish them success. And for all I care, now with all their policy changes and the features they changed on XB1, Im 100% sure that down the line, maybe at some point in a few years, Ill get an XB1. Killer Instinct is that must have game for me. Im just hoping they make more high quality exclusives like that game, cuz right now whats killing Xbox is that. Its just a question of personal taste, but the Xbox exclusives just dont appeal that much to me.

But like I said, rivalry drives competitive edge, and I cant wait for this years E3...
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Nick Parker Consultant 6 years ago
Over the past year, the Xbox One strategy seems to have become one of a follower, not a leader. Consequently, they have become reactive rather than cutting edge. This may lead to a lack of confidence and early strategic changes rather than holding course on what may be slow to start but which could define gaming. The Kinnect drop was a market share grab to compete on hardware pricing and provide leeway to make a decision on how to execute a KInnect strategy later on. Microsoft need more USPs to take back the lost ground and price is not everything and even great games may not work. Brand and consumer perception is key.
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Martin Holm-Grevy Lead Artist 6 years ago
To me it always looked like Microsoft already lost momentum at the end of the Xbox 360's cycle/lifetime, and that has carried over to the Xbox One.
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Caleb Hale Journalist 6 years ago
Despite its history as a purveyor of a wide assortment of mass market electronics, I think Sony realized the product of theirs most likely to be found in a consumer's home these days was a PlayStation. They were smart to develop the PS4 with gamers so intently in mind. That's somewhat of a departure from the PS2 and PS3 era, where a portion of their pitch banked on the machines not only being gaming consoles but bargain DVD, Blu-Ray players, respective to what was on the market at the time of launch.

Now, there was a fair bit of luck involved in Sony realizing all this at the same time Microsoft was falling flat on its face as it entered the room touting Xbox One as the overstuffed and somewhat intrusive console that would manage all your media needs from now on, provided you pay them for the privilege of using your other subscription services. (Still don't know how that went on for as long as it did.)
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Nick Wofford Hobbyist 6 years ago
Yeah, I don't think MS considers the X1 a failure if it's selling better than its (very successful) predecessor.

As for selling the Xbox division, I'm shocked at how many journalists seem to think that Gates was calling for a division of his company to be sold so lazily. His statement was very clearly (apparently not) meant as a statement of support for the new CEO.

About that CEO: Nadella is a Cloud guy. So why would a Cloud-focused console not fit in with their company vision?

I'm just not sure the author of this article had a good grasp of their point. It seems they got a catchy headline in their head, and ran with it. The reality is that BOTH Sony and MS have very good people in charge of their products right now, and that's very exciting.
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Problem for sony is, they've so focused on their gaming console, that they've forgotton gamers like and have got used to the the media features found in prior consoles, they've yet to add an official control, support 3rd party ones like Harmony, and the ps4's media playback and blu-ray player capacity is poor at best in comparison with the ps3 entirely down to software, they're providing Microsoft an opportunity to equalise here, now with equal pricing, though 3d blu-ray support is still lacking from both companies, frankly a pretty shocking omission, the hardware isnt lacking its the software, so theres really no excuse, its generating bad-will with consumers on both sides.

Sure 3d wasnt as successfull as some might have hoped, mostly due to issues with glasses, which may long-term disappear but there is by this point still a fair number of exactly the kind of people who buy new consoles, with a fair sized 3d blu-ray collection, who are being completely neglected by the new console's, there's no good reason for it on either side.
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Richard Browne Head of External Projects, Digital Extremes6 years ago
I actually think Hirai's concept that the PS4 will outsell the PS2 is one of the most outlandish statements ever made.
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Rupert Loman Founder & CEO, Gamer Network6 years ago
Richard: I think he said that it could be more profitable than PS2, not that it will outsell it... citing network services (ie. PlayStation Plus) as a key part of that potential (rather than just unit sales).
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Brook Jones Programmer, United Front Games6 years ago
@Rick, citing Killer Instinct as your personal must-have console exclusive gave me a sudden flashback to 1995... :)
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