A former Microsoft senior executive broke his silence on some of the age old secrets behind the OS giant revealing the main reason the company got into the video game business. Joachim Kempin, a former senior vice president who was responsible for the sales of the Windows operating system tells all in his new book titled, “Resolve and Fortitude: Microsoft’s “SECRET POWER BROKER.”
I don’t think it’s a secret that Microsoft really entered the video game console space to stop Sony from taking over the living room. This has been rumored to be the main reason for the launch of the Xbox despite strong opposition from the board and senior management at the company. There is a general belief, that while on the face of things Microsoft is bullish about its Xbox business, there has always been internal strife within the organization to dump the division to focus on Windows and Microsoft Office.
Kempin was apparently opposed to entering the video game console market fearing that the company would have to sustain huge losses made on hardware manufacturing considering Microsoft is a software company relying on high profit margins. This is still the case today as the profit margin on each Xbox manufactured is peanuts in comparison to something like Windows or Office.
In an interview with IGN, he stated:
I went out to several PC manufacturers and tried to beg them to do the Xbox thing and keep the device manufacturing out of Microsoft. The guys were smart enough not to bite, because they studied the Sony model and saw that Sony could not make money on that hardware model, ever. So they supplemented it with software royalties, and Microsoft copied that model.
Kempin indicated that Microsoft was never really able to replicate how Sony was able to supplement its PlayStation division with software profits from its games as the company could only rely on the Halo franchise, so they turned to services eventually.
Microsoft is the only company that charges a subscription fee to play online via Xbox Live and have gated many of the services such as Netflix, Hulu and even video game demos behind a pay gate.
First, every developer who now has an Xbox game pays a small royalty to Microsoft for the honour of having it on that system. The other way they make money is that they finally got their act together on the services and actually that’s where the money is being made. So they’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft.
He also stated that the decision came from Bill Gates at the time to stop Sony as he felt that the future of the PC could be in the living room. With Sony dominating the living room, Gates felt that Sony could put Microsoft out of the Windows business. According to Kempin, Gates strongly believed that the living room console would eventually metamorphosis into an alternative PC.
While this clearly did not happen (yet), Microsoft did miss the boat on the transformation we have witnessed with personal portable computers in the form of smartphones and tablets.