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Microsoft Corporation (MSFT)’s Most Important Hardware

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The Xbox One, revealed by Microsoft Corporation (NASDAQ:MSFT) on May 21, demonstrated extremely impressive capabilities not only as a game platform, but as a multimedia PC.  Xbox One’s brilliant combination of hardware and software positions it to become the center of the consumer’s living room and a certain hit this holiday season, when it becomes available.  As a demonstration of Microsoft Corporation (NASDAQ:MSFT)’s growing hardware prowess, Xbox One will put the entire consumer electronics industry on notice.

Xbox One

The post-PC era PC

In “Can Game Consoles Save AMD?” I made the observation that the game console could continue to have a place in the lives of mobile device users who otherwise have dispensed with the traditional desktop PC.  This expectation was completely confirmed by the debut of the One.  The game play footage from games such as Call of Duty: Ghosts was easily the most detailed and realistic I’ve seen, including anything on top-of-the line PC gaming rigs.

Mobile devices can’t begin to approach what can be done on the new Xbox or current generation PCs.  Here, the limiting factor is power consumption.  Whereas a tablet might be limited to 5 watts or less in order to preserve battery life, the Xbox One operates on about 100 watts, and a typical PC consumes even more.

Xbox One, as a PC substitute, is very PC-like inside, having an Intel compatible processor courtesy of Advanced Micro Devices, Inc. (NYSE:AMD), a hard drive, and a Blu-ray drive.  The Advanced Micro Devices, Inc. (NYSE:AMD) processor is in fact very similar to the Sony Corporation (ADR) (NYSE:SNE) Playstation 4 version, with an 8-core 64-bit processor and a Radeon graphics processor integrated on a single chip, the so-called Accelerated Processing Unit (APU).

In addition to the PC hardware, Microsoft Corporation (NASDAQ:MSFT) is endowing the One with a version of Windows 8.  The Xbox One OS uses a tile interface very similar to the Windows 8 home screen, and can freely mix and match games, apps and video on the same screen.  The inclusion of Windows was a master stroke for purposes of pulling in as much non-gaming functionality as possible into the One.

The main difference between Xbox Windows and Windows 8 is the substitution of voice and gesture commands for the touch-enabled UI.  An updated Kinect sensor is included with the One and recognizes the user’s face and gestures.  App starting and control are handled through voice commands, and these worked reliably in the demos.

The competitive edge

Up until now, I’ve wondered what, if any discriminators would exist between the Sony Corporation (ADR) (NYSE:SNE) PS4 and the Xbox One, given that they used similar hardware. Although we haven’t seen much of the PS4 so far, I believe that Windows in Xbox gives Microsoft Corporation (NASDAQ:MSFT) the competitive advantage.  Windows enhances the One with so much functionality, without detracting from its appliance-like convenience.  We’ll know more about PS4 when it’s finally unveiled at E3 on June 10.

Given that the game consoles have sold an average of 10 million units a year each for Sony and Microsoft Corporation (NASDAQ:MSFT), I think the market is at least that big, and first-year sales could easily be double the yearly average.  Sony and Microsoft have sold about the same number (77 million) of their respective consoles, but I suspect that this time, the market split will not be symmetrical.

With all the hardware goodness of Xbox One, including the Kinect sensor, the retail price looks to be about $500 with an ASP for Microsoft of roughly half that.  If Microsoft sells 5 million units in Q4, that would add about $1.25 billion in revenue to the Entertainment and Devices division, home of Xbox and Windows Phone, which would be a 33% increase over the EDD revenue of $3.772 billion in Q4 2012.

The stakes are similarly high for Sony.  In its last fiscal year, Sony’s game division had revenue of $7.52 billion, down 12% from the previous year.  If Sony only manages to sell 10 million PS4s in the coming year, that adds about $2 billion in revenue, or 27% of the last fiscal year.

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