Microsoft Xbox, Kinect Factor into Overall Strategy

Microsoft is pushing a variety of Xbox-related games and devices at E3 in Los Angeles, including Kinect, a unit that allows users to operate their digital avatars without a controller. While gaming seems a world away from Microsoft's business-related endeavors, including the recently released Office 2010, the recent shakeup in the Windows maker's Entertainment and Devices division suggests that consumer devices such as smartphones and the game-friendly platforms that run on them are increasingly important to the software giant's overall health.

For any company, a major release like Office 2010 would be considered its dominant news of the week. However, Microsoft's consumer rollout of the productivity suite June 15 seems somewhat eclipsed by the announcements coming from the Electronic Entertainment Expo in Los Angeles, where the company is revealing its new Xbox-related products.

That may be due to the legendary fanaticism of the gaming community, and its online buzz. In addition, the details of Office 2010 have long been known, while projects such as the newly announced Kinect "controller-free gaming device" have the sparkle of the less familiar. Whatever the reason, the prominence of Microsoft's wares at E3, held June 15 through 17, suggests gaming's importance to the company-not only for its ability to contribute to the coffers from which Microsoft draws resources to develop platforms such as Office, but also for its effects on future endeavors in areas such as smartphones.

In addition to a variety of games, Microsoft is hoping to challenge Nintendo and Sony with Kinect, a unit that plugs into the Xbox 360 console and uses a three-dimensional-video camera to track 48 points of movement on the user's body; the user's digital avatar then mimics his or her real-world movements. Picture swinging your arms, and having your onscreen Jedi mirror that movement with a lightsaber. The rumor mill suggests that the device will debut on store shelves sometime in November, with a price set below $200. Microsoft seems to be learning lessons from Nintendo, which sold millions of Wii units thanks to a combination of innovative controls and easygoing games for casual players.

Gaming constitutes an important element of Microsoft's overall financial picture. The company's Entertainment and Devices division contributed about 11 percent of Microsoft's $14.5 billion revenue in the first quarter of 2010. Those numbers were up slightly from the same quarter in 2009, when the global economic recession reduced consumer spending on electronics. Microsoft's other verticals have also seen their revenues rise in recent months, with the exception of the Microsoft Business Division, which dipped slightly.

While the division overall seems healthy, its product lines have achieved decidedly mixed results. Although the Xbox franchise has begun to generate revenue after years of losses, other products such as the Zune portable media player have not attracted the same level of consumer attention. The Zune HD portable media player, although praised by critics for its design, never accrued the sales numbers that would put it in viable competition with Apple's iPod line. That weakness has led some analysts to downplay the division's ultimate value to Microsoft.

"This has been a vampire division since its inception. A vampire division is one that lives off the value created by the rest of the company and, from a corporate perspective, does more damage than good," Rob Enderle, principle analyst of the Enderle Group, told eWEEK in May. "Its profit, which wasn't much, was massively offset by the economic cost it caused to the corporation and it needed to be rethought."

Indeed, at the end of May, the division seemed to undergo a massive shakeup, with the company announcing the departures of both Robbie Bach, the unit's president, and J Allard, its senior vice president of Design and Development. Bach's exit-officially characterized as a retirement-came as a surprise to many, although there had been rumors for weeks that Allard was planning to leave.

CEO Steve Ballmer issued a May 25 statement praising both executives' contributions to Microsoft. "For the past 22 years, Robbie has personified creativity, innovation and drive. With this spirit, he has led a division passionately devoted to making Microsoft successful in interactive entertainment and mobility," Ballmer wrote. "J has brought a game-changing creative magic to Microsoft for years, from Windows to Xbox, from Zune to Kin."

In a purportedly leaked memo that found its way online, including onto tech blogs such as Gizmodo, Ballmer said, "Concurrent with Robbie's retirement, I am making several organization changes to ensure [that] we have the right leaders in the right positions as we set ourselves up for the next big wave of products and services."

Those leaders apparently include Senior Vice President Don Mattrick, who heads the Interactive Entertainment Business, and Senior Vice President Andy Lees, who heads the Mobile Communications Business. Both executives will apparently report directly to Ballmer beginning July 1.

That "next big wave" includes Windows Phone 7, which Microsoft pushed at its recent TechEd conference in New Orleans as the next big smartphone platform for developers. Despite Ballmer's recent admission of company missteps in the mobile space, Microsoft is putting Windows Phone 7 up as competition for Google and Apple products-despite the lack of compatibility with Microsoft's previous smartphone franchise, Windows Mobile, and its rivals' substantial head start.

Instead of the "pages of applications" model that defines the user interface for Apple iPhone and Google Android devices, Windows Phone 7 devices consolidate mobile applications and Web content into a series of "Hubs" organized by subject, such as Office or Games. And therein lies the need for Microsoft to maintain its presence in the gaming community: More gamers pulled to its smartphone platform for Xbox-related features translates into more users overall.

If Microsoft can score a consumer hit with Windows Phone 7, and continue to maintain its user base for the Xbox 360, then it can better compete against Apple, Sony and its other rivals in the space. In turn, that helps the company's bottom line-and benefits, however indirectly, its more enterprise-focused pursuits.