Commentary > Game Over
Trouble ahead for Xbox Live?
Microsoft may face rough road in transitioning players to a pay-to-play model.
April 3, 2003: 9:46 AM EST

NEW YORK (CNN/Money) - By just about any measurement, the last four-and-a-half months have been good ones for Microsoft's Xbox Live service. Since its November 15 launch, the online console gaming service has snagged 350,000 subscribers in North America and received nearly universal praise for the service's features and quality.

As the launch euphoria fades, though, Microsoft is turning its attention to retaining those subscribers and that might be a tougher job than anyone expected.

Once Xbox Live hits its one-year anniversary, many gamers who haven't thought of this as a pay-to-play service will be asked to cough up a regular fee or find themselves booted from the servers. (The retail kit included a one-year subscription to Xbox Live in the retail price.) As it tries to determine how much those gamers will be willing to spend, Microsoft also needs to continue expanding the service's online customer base in order to cover its costs.

Curiosity and a low entry price have helped Xbox Live sales so far. The software catalog hasn't had a true standout, though. Microsoft hoped to counter this by releasing the eagerly anticipated (and online-enabled) "Halo 2" right around the time initial subscribers came up for renewal - but development delays have pushed that game into 2004.

Looks nice, huh? Unfortunately,  
Looks nice, huh? Unfortunately, "Halo 2" won't come out until 2004.

Gamers are disappointed, but the delay could conceivably work in their favor. Analysts and other industry followers have been working on the assumption that Microsoft was planning to charge a $9.95 monthly fee for Xbox Live after the first year. Recently, though, a buzz has been growing that the company could alter that pricing plan, perhaps cutting the price to just $50 for a one-year subscription.

Microsoft (MSFT: Research, Estimates) said it's still trying to determine what customers are willing to accept.

"We're doing a lot of testing now for acquisition of the next wave of customers and retention as well," said David Hufford, Xbox Group Product Manager. "We're doing a lot in the areas of content and also in pricing. ... I think you'll see a mix. So consumers can have a choice from several different packages. We're looking at annual [billing]; we're looking at monthly and we're looking at multi-month packages."

The company hopes to make a decision in the next five weeks, which would allow it to make a pricing announcement at the Electronic Entertainment Expo (the gaming industry's annual trade show), but Hufford said there's no guarantee that will happen.

Analysts say a lower, annual charge might not be what Microsoft wants, but it's a move that would definitely help it retain its Xbox Live customer base.

Xbox Live's matching system has been widely praised.  
Xbox Live's matching system has been widely praised.

"An annual charge might make the household treasurers the parents much more comfortable," said John Taylor, director and analyst for Arcadia Investment Corp.

Adding to the potential troubles for Xbox Live is the noticeable lack of support from the industry's largest independent publisher. So far, no Electronic Arts (ERTS: Research, Estimates) game has been Xbox Live enabled. And while discussions continue between the company and Microsoft, the odds of a resolution look grim.

"It's an agenda item, but I'm not going to say it's toward the top of the list," said Jeff Brown, vice president of corporate communications for Electronic Arts. "Right now, it doesn't seem that EA games for the Xbox will include the online functionality."

"We're at a bit of an impasse with them right now," concedes Hufford. "They're looking for further proof that this service has legs."

EA has, however, strongly supported the online push of Sony's (SNE: Research, Estimates) PlayStation 2. To date, more than 400,000 players have registered to play "Madden 2003" and "NBA Live 2003" online.

While "Halo 2" won't be released this year, Microsoft does have a few potential big titles in its online arsenal. "Project Gotham 2", the sequel to the million-plus selling launch title, will feature a multiplayer mode. And "Counter-Strike", which has been an enormous multiplayer hit in the PC world, is slated to make its Xbox debut this fall.

Both games should do well, but neither is expected to be a system driver, say analysts.

"Counter-Strike's good," said Mike Wallace of UBS Warburg, "but it's not Halo."

More gaming goodness? Click Cousin Mario

Microsoft's not a dumb company, though. It knows that hard-core gamers aren't the future of Xbox Live. For the service to be a true success, it needs to find a way to lure casual gamers and parents of younger players.

Its first attempt to bring those players online comes later this year with the release of "Tetris World". The company's also looking at the only online PC games that have truly managed to attract a large audience.

"We're going to be trying a lot of different models to get the broad audience on Xbox Live over the next five to six years," said Hufford. "Parlor games have proven very successful on PCs, so we're looking at those card and board games."

It's a sound long-term strategy. What everyone's interested in seeing, though, is what sort of job Microsoft does in clearing the first big hurdle later this year.  Top of page

Morris is Director of Content Development for CNN/Money. Click here to send him an email.

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