Console launches are always an exciting time for the games industry. Retailers hold midnight events, gamers get excited by the prospect of new software and developers are eager to take advantage of a new platform. Tomorrow, Microsoft will launch a new console, and yet it's not the start of a new console generation, so both consumer expectations and platform positioning fall into a bit of a grey zone. Microsoft is drumming up hype for the Xbox One X as "the most powerful console in the world," but a number of pundits have claimed that the $499 price tag will seriously limit its appeal. On top of that, at a time when the console cycle often broadens to include more casual players, it would appear that Microsoft is doubling down on the core gamer with a super powerful niche machine.
Albert Penello, Senior Director of Xbox Console Marketing at Microsoft, tells me that assuming the Xbox One X is just a core-focused console would be a mistake, however.
"One of the things we've observed throughout the history of Xbox is that people who buy Xbox tend to gravitate towards the premium products," he notes. "We've done a lot of specializations and limited editions over the years and those products always do really well regardless of when they came in the life cycle. And I totally understand how it's easy to segment a product like Xbox One X as 'for the core' but I would argue there are a lot of people buying 4K TVs, there are a lot of people who want the premium product, there are a lot of people who want to be future proofed.
"I would argue there are a lot of people buying 4K TVs, there are a lot of people who want the premium product, there are a lot of people who want to be future proofed"
"And they don't necessarily clearly segment themselves by casual and core. Certainly, a lot of the hardest core, most engaged gamers are going to be interested in a product like this but I also think there are new people that are entering the console space every day, people that are migrating from Xbox 360, people who are turning 13 and want their first console and that does not have anything to do with being hardcore or casual. And I think the knowledge that we've got this product that's really going to drive that new 4K TV set that maybe you're going to get for Christmas, and that it's a great value with 4K Blu-ray...has appeal beyond the typical core and casual segments."
He adds, "So I always say Xbox One X is for gamers who want to play the best versions of games, where that is the most important thing to them. And if that's not the most important thing to you, if value is the most important thing to you if you're on a budget, if you're not going to get a 4K TV any time in the future, then Xbox One S does a lot of great things. It's a great value, it has a huge lineup of games and when and if you're ever ready to upgrade then Xbox One X is there for you."
Indeed, throughout the interview, Penello stresses to me that Microsoft is giving gamers "two great options." It must be an odd feeling to launch a brand-new console, try to hype the world up about its release, but not care as much about how quickly customers are buying it. The Xbox One S is more than $200 cheaper at $279, making it an affordable option even when compared to the red-hot Nintendo Switch, and it's undoubtedly going to sell many more units than the One X this holiday season. Wedbush Securities analyst Michael Pachter is estimating sales of about 3.5 million units for the One S this holiday on a global basis. It also makes sense for Microsoft because the One X will not be sold at a profit whereas the One S likely makes some money for Xbox.
"You're right that they are better off selling the more profitable SKU," Pachter tells me. "The fact is that they don't make much money on hardware at all, but the LTV of a customer is quite high (Xbox Live and game purchase royalties). Thus, they should prefer to sell two Xbox One S [units] instead of one Xbox One X, because they would have greater LTV. I think they're indifferent whether the unit sold is an S or an X."
That's certainly the feeling I got from talking with Penello, and it's the message that Xbox boss Phil Spencer has shared with us for some time now: monthly active users on Xbox, the number of Xbox Live players, is the true metric of success. How that consumer enters the Xbox ecosystem doesn't matter all that much.
"It's really only game consoles that have existed in this [mode of] one platform for many, many years and then everything resets and you go to a new platform. But that's not really how people make technology decisions anymore"
"Phil's totally right," Penello says. "I can imagine it seems flippant but it's really not. Lots of customers have choice in technology today. It's really only game consoles that have existed in this [mode of] one platform for many, many years and then everything resets and you go to a new platform. But that's not really how people make technology decisions anymore. I think having people who want the latest and greatest wait years and years or a decade for the latest and greatest is kind of an old way of thinking.
"At the end of the day it is choice. Instead of just saying, you have to wait, we're saying if you care about this we have an offering for you and if you don't that's fine. There isn't a bad choice. There are two good choices and both products will be supported, both products will be 100% compatible, we're not doing exclusive games on the X. All the games will be available on both consoles and I think that is a strong message for people who are considering picking up their first console, with a reason to pick an Xbox. Which one they choose, either is fine with me."
Ever since the Xbox One X was announced (as Project Scorpio), Microsoft insisted it wouldn't make true exclusives for the machine. But if all goes well for the platform, couldn't it effectively become a next-gen system if developers unlock its power from the ground-up? Penello disagrees.
"There are parts of this launch that behave like a new console and parts of this launch that don't. Just having sat with the product as long as I have, it's sometimes more obvious to me which side of the argument you get to make. The argument about exclusives on X being able to take advantage of more power, I generally tend to say that's not really true in this case," he says. "I understand why people think it would be, but we didn't actually build the box to be a different product. It is an Xbox One. I like to use the [Nvidia] 1060 vs 1080 example. No one says, 'if only developers could make games only for the 1080ti, PC games would be so much better if there wasn't a 1060.'
"In this day and age, game developers build engines that are inherently designed to scale across a bunch of different performance levels. So Xbox One X development isn't held back at all by Xbox One S. They use the same engines, they use the same tools. One is just a more powerful version of the other one. So even if the developer went to create an exclusive Xbox One X game, they would still get an Xbox One S version. That's just how we built and architected the system. I'm encouraged by how much performance developers have been able to extract given that the development kits have only been out since E3. So we haven't really seen people take advantage, they haven't even had a full year on the console yet. So I feel like there's a lot of untapped potential that has nothing to do with Xbox One S compatibility."
So Microsoft clearly doesn't want us to think about Xbox One X as a new console era for them, but behind closed doors you can bet that engineers are already thinking about what's next.
"Really that question of extending the life cycle and not just stretching it out but bringing new tech in and making it easier for developers and customers was kind of the genesis of the idea around Project Scorpio"
"My own personal joke is that it's funny that at every console launch one of the top questions is 'When's the next console launch?' It's like when you have a kid, and then your family wants to know when you're going to have the next kid," Penello says with a laugh. "What's going to happen in the future is not set. Certainly, we're going to observe how this launch goes, and obviously Sony has arrived at a similar solution with the PS4 Pro. So we're going to monitor how customers and gamers sort of feel about this.
"The one thing we do talk a lot about is games compatibility and the fact that we've made a huge investment in infrastructure to support compatibility across devices with things like Play Anywhere and going back and supporting original Xbox titles," he continues. "And that's really what I think modern gamers look at more than the device. I think people are used to the device that they're on being somewhat upgradeable, especially if you look at phones. I'm not advocating that we go to a yearly cycle - I don't think I could survive launching a new console every year - but the idea that really matters [to players] is that 'Hey I just spent a ton of money on games, and I don't want that investment to have to go into the closet or a garage sale on Craigslist in order to take advantage of the latest and greatest tech.' That's really the idea that we're teasing out with Xbox One X is that you can have tech faster and have compatibility and that's the investment we're making in the future."
Effectively, these mid-cycle upgrades, whether Xbox One X or PS4 Pro, are enabling both platform holders and publishers to continue benefiting from the established ecosystems without having to reset everything with a brand-new generation.
"Console generations are very disruptive for the business," Penello remarks. "They're exciting, I love them, it's a thing I live for. Especially being a guy working on the hardware, I love [new] console generations. But it is tough. It's tough on the business, it's tough on developers, it's tough on customers. And really that question of extending the life cycle and not just stretching it out but bringing new tech in and making it easier for developers and customers was kind of the genesis of the idea around Project Scorpio. That was the question we were posing to ourselves that led to this product."
From my perspective, the marketing push for Xbox One X has been perhaps a little subdued so far, but Penello assures me it's just ramping up for the holidays, and he also sees the effort as a significant one for a console that's not starting a new generation.
"We were on the World Series, we were on The Walking Dead premiere, we kicked off a pretty huge campaign last week on NFL," he notes. "The marketing just started kicking in. I feel like this is every bit as energetic a console launch considering that it's not a next-gen console launch. If you were to compare this to the launch of a different SKU like the Xbox One S, there wasn't this level of energy that we're seeing at launch around Xbox One X. From my perspective, I think we've shown we can have almost the same level of energy around a mid-generation upgrade as you can for a new console launch. I think you're going to see a pretty significant push from us actually for both products this holiday."
Along with that marketing push, Microsoft is expecting a fair number of purchases for the Xbox One X. Not only did the company report record preorders back in August, but Xbox UK boss Harvey Eagle has also warned of shortages. Microsoft isn't saying how much supply is going to enter the retail channel, but Penello promises me that there's absolutely no holding back allocation.
"When you're producing a device that's very state of the art, you do run into some similar early production things that happen with any new product launch, so there is a limit to how many of these we can make at launch, just because we are pushing the envelope of tech," he says.
"What we didn't want to do was sort of artificially manipulate where units went; we're going to ship everything we can make. As we are making them we are shipping them out. The comment about shortages is really that I'm getting the sense that demand for this product is going to be surprising people. And so we are saying that if you see one and you want one it's probably a good idea to pick it up because I do think demand will outstrip how many we can actually make. But we're not doing anything in particular to artificially have a certain share or have a certain number of units."
"I don't think people realistically are making a decision between a 4K TV and an Xbox One X and a Switch. They're just different products with different audiences and different value propositions"
The comment about demand surprising people could play out to be true. Initially, Wedbush Securities was calling for about 1 million units of the Xbox One X to be sold this holiday, but Pachter just recently boosted his estimate to 1.5 million. That said, Microsoft has all but ceased reporting unit sales, so we may never know exactly how many are sold this Christmas. Regardless, in order to get the consoles flying off shelves, Microsoft will have to present the right software to customers. I'm hard pressed to identify one surefire "system seller" that could drive adoption in the way that Super Mario Odyssey will for Nintendo Switch, but Penello believes PlayerUnknown's Battlegrounds could incentivize many more customers than you might expect. It's a fair point: Microsoft has the console exclusive for a massively popular PC shooter that's already generated over 15 million copies sold.
"I would definitely go to PUBG," Penello responds when asked about a system seller. "PUBG is going to be huge. I know it's an Early Access game, but the fact that we're giving it a retail release - this is a case where early access was more about features they want to include than game balance. That game is a full game. It is a functioning, clearly heavily played PC game, and I think the difference is that there are still more features and more worlds and maps and things that they want to add, but the fundamental gameplay, as witnessed by the number of PC players, is really great. So PUBG is going to be a huge title on console. It's great that we're going to have an Xbox One and One X enhanced version available this holiday."
Beyond PUBG, Penello sees a diverse offering of titles coming from the Xbox camp. "We've got Forza Motorsport 7 that came out, we've got a bunch of great family titles, and this is that point in the life cycle where you do get more casual gamers - so titles like Lucky's Tale and the Disneyland titles that are coming out. At $279 and the deals you're going to see on Xbox One S on Black Friday, those types of games are super important to the new audiences that you're trying to go to.
"And then of course we've got like 160 Xbox One X enhanced titles, so for people who are buying Xbox One X, they're going to get free upgrades and it's going to make them want to go back and experience all the stuff that they've already played again, with new visuals. So I think we've got a great lineup. I feel really good about the games. I think developer support has been outstanding. We've got titles for families, we've got Game Pass, we've got backwards compatibility - there is more stuff to play than time to play it on Xbox. I don't think that's a stretch."
Speaking of families, that's always been Nintendo's bread and butter. With Switch doing so well, and with Super Mario Odyssey receiving nearly perfect scores across the board, isn't there some concern from Microsoft that people will opt for Switch and Mario over either of the Xbox options? Penello concedes that Nintendo is doing really well, but the potential impact on the Xbox business doesn't keep him up at night.
"The only thing you can do in a case like that is you put your best foot forward," he says. "You do the best you can to talk about what your product does. They have a different value proposition. I have a lot of friends at Nintendo - those guys, God bless them, they march to their own beat. I think that's great and what they're doing is awesome. Mario Odyssey is on my list of games that I've got to get too. It's a good thing I have a long plane ride and that I can take my Switch on the road with me. That's just a fundamental decision about the types of games you want to play and does portable versus [home] console matter to you.
"I don't think people realistically are making a decision between a 4K TV and an Xbox One X and a Switch. They're just different products with different audiences and different value propositions. I'm so happy for my friends over there that are having success with the Switch."
There are only so many entertainment dollars to go around, whether for gaming or anything else, but in the end, Penello believes the Xbox message will draw consumers into the ecosystem.
"I think that we have shown that our commitment to content, and our commitment to our fans means that your dollar goes farther when you buy on Xbox," he says. "You get PC versions, you get backwards compatibility with titles you bought years ago, and we've got the world's best online multiplayer service, we've got innovative things like Game Pass and EA Access. There is an unbelievable amount of value in the Xbox ecosystem. So regardless of which console you choose, you're going to get a lot for your money."