LOS ANGELES (Fortune Magazine) -
Microsoft finally ran into a smaller software competitor it couldn't bully.
This week, at the annual Electronic Entertainment Expo (E3) video game conference here, Microsoft and Electronic Arts agreed to a deal that will put EA's highly popular sports games, including Madden NFL football, onto Microsoft's not-quite-as-popular Xbox Live online-gaming system.
Microsoft is making a multibillion-dollar, multi-year bet that online gaming is going to be a huge entertainment industry, perhaps someday as large as Hollywood box office receipts, recorded music sales, DVD rentals, or professional sporting events.
Online gaming also promises a more reliable and predictable revenue stream, unlike the standalone video-game business, which is highly cyclical and erratic. Subscribers to the Xbox Live service pay a monthly fee to connect their Xbox game consoles to a broadband Internet service, allowing them to play games with one or more friends either across the street or across several time zones.
But to lure millions of people to the online service, Microsoft has to have software. It has done quite well in the software business, of course, but when it came to making sports games, Microsoft discovered that, well, it wasn't quite good enough for the major leagues. So it approached Electronic Arts, whose sports games do not suck.
For more than two years, Electronic Arts refused to allow Microsoft to put its franchise games on the Xbox Live service.
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According to Electronic Arts, Microsoft didn't want to pay EA for putting its games on Xbox Live. ("It's as if they started a cable TV network and said to Time Warner that they want to put 'The Sopranos' on the air, but they didn't want to pay for it," Larry Probst, EA's top executive, said last year. "We didn't think that was fair.") Further, Microsoft reportedly clashed with EA over which company would control the relationship with customers who played EA games online.
Microsoft had created its own versions of popular EA sports games, but a few months ago the Redmond, Wash., software powerhouse announced that it would sit out the 2005 game year. At the time, I figured Microsoft had decided to divert programmers to the next-generation Xbox game console, which is expected to make its debut in late 2005 or 2006. And that may in fact be at least part of the rationale.
But a more likely explanation, in light of this week's announcement, is that Microsoft red-shirted its own sports games as a condition for getting EA to support the Xbox Live game system. And you can bet that EA is going to be able to maintain contact with and generate revenue from its Xbox Live customers.
On the flipside, EA has spent hundreds of millions of dollars developing online games and its own EA online game network, with relatively little to show for it compared to the initial investment. Microsoft's Xbox, meanwhile, is making online game play the cornerstone of its strategy. (Sony asserts that it is the leader in online gaming with 3 million connected PlayStation2 consoles, compared to 1 million for the Xbox, and that 100,000 new PlayStation2 boxes go on line every month. But the online adapter was an afterthought for the PS2, while broadband connectivity is built into every Xbox sold.) In any event, EA has just expanded its audience for online titles.
Bringing EA games to the Xbox Live platform is clearly a win-win deal for consumers interested in the highest quality of online sports competition. (EA says it will bring other, non-sports games to Xbox Live as well.)
They say it's not important if you win or lose, it's how you play the game. True gamers would say that's just plain silly. But still, I'd say EA played this one very well.
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