Update: Rob Enderle responds over here! Thanks Rob! :)
Disclaimer; I have no idea if it's preferred as "Xbox360" or "Xbox 360" or whatever. I use a space.
So, some backgrounder. Rob Enderle says that Microsoft shouldn't be in Console Gaming. Greg Knieriemen agrees with him, Microsoft should not be selling hardware. John Obeto says that Microsoft HAD to enter console gaming. Jay Livens shares his own Thoughts on Microsoft and the Xbox as well. So of course, I have to chip in my two cents - especially given that one, I'm an Xbox 360 owner. Two, I'm a Zune owner. Three, I run Windows on the desktop and have for nearly 20 years.
First, let's look at what started this whole discussion: a graph showing where Microsoft gets their profits. You can find it right over here. People drew the conclusion that Microsoft's entertainment business is a drag on their profits, which looking at just that chart, would give that impression. But it's also not true, in my opinion.
Microsoft needed to jump in, because PC gaming isn't going anywhere - by both definitions.
I'm a PC gamer, yes. And let's be blunt, and let's be honest. It's not going anywhere, and it's doing it very quickly. And I very much mean in all senses of it. When was the last time you saw a truly innovative game only available for PC? PC gaming outside of MMOs is a pretty stagnant market for a variety of reasons, a few of which I'll cover in this post. But it's not dying either, contrary to what others might say. But with DRM that is increasingly customer-hostile (hello Ubisoft, looking at you! Hi SecuROM, you too.) and the plethora of problems that come from the fact that PCs are not a stable platform. In my personal experience, more users are turning to consoles for non-exclusive titles.
They want the game, they just want to buy and play, rather than wait for a "beta" patch with no permanent fix ever offered. See most specifically, the ordeal with The Saboteur from EA and developed by Pandemic Studios. PC users have been plagued by severe problems from day one and have yet to receive any support whatsoever. Players who purchased the Xbox 360 version have raved about the game and reported few problems.
The Xbox 360 gives Microsoft their one - and only - stable platform.
Ever looked at an EMC Interoperability chart? People talk a good game, but the fact is that PCs are just as bad as that, if not worse. This sound card may or may not work with this motherboard. These drivers aren't compatible with this game. To say nothing of game and OS interoperability issues, ranging from the "just isn't supported" to "this one impossible to find setting buried deep in the registry causes this game to crash constantly." To say nothing of the myriad ways one can merrily screw up settings on a Windows system - and most gamers usually do. Windows Mobile isn't even close to a stable platform - look at how many Windows Mobile devices there are, on how many completely different processors and architectures.
Xbox 360 has none of these problems. It's a true stable platform. Microsoft controls the OS, drivers, and UI software. User settings are limited. There's a bunch of accessories - all tested and known compatible. By maintaining this tight control and limiting adjustment, Microsoft gives themselves a way to control the overall experience, which brings me to my next point...
The Xbox 360 gives Microsoft a way to control the quality of the experience.
Face facts; Microsoft has no control over the systems people install Windows on. They can control the logo stickers, but that's it. If Joe Blow ships a poorly built system with junk parts running misconfigured Windows 7, users are going to complain about Windows 7 being utter crap - even though it's entirely Joe's fault.
Xbox doesn't have this problem, and probably never will. Microsoft isn't just preventing Joe Blow from making things miserable for end users, they're taking responsibility and ownership of any issues. This extends into the games themselves - Microsoft is the final arbiter of whether or not your game gets released on their system. If they have concerns about the game crashing every two hours, they can prevent release. If they have concerns about the quality of the game, they can prevent the release. And they've done this to games before.
This extends to supplemental products - like Windows Extender and Zune - and brings me to my next point...
The Xbox 360 gives Microsoft a core for their integration strategies.
You can argue Windows is at the core - but it's not. Windows "sort of" is at the core; Windows Extender, Zune, these depend on Windows but get driven to your Xbox 360. But here's the thing - which is more likely to already be in your media center, the Xbox 360 or an HTPC? The Xbox 360 becomes the core because everything is being driven to it, regardless of what it runs on. Rather than fighting the limitations of it, Microsoft has chosen to embrace the limitations and use those limitations to drive other products.
You buy an Xbox 360, you want to watch movies on it - so you now upgrade to Windows 7 so you can use Windows Extender. You like music and have your good stereo downstairs; Zune lets you play your collection on your Xbox 360 that's already there. This is what damages the argument that Xbox 360 is a losing proposition - this integrate and extend mentality allows Microsoft to upsell other products alongside the Xbox 360. Don't forget about the continually evolving Games for Windows LIVE interface as well.
Ultimately, it all ties together around what the Xbox started with the Live Marketplace; everything goes back to Live Marketplace.
You Can't Do That - Yet, But Soon.
Microsoft first released the Xbox in 2001. It was huge. The controllers were too big. Initial sales were disappointing and in some ways, downright depressing. They had to create a smaller controller to replace the almost unusable controllers. It was widely considered a flop and a failure. Microsoft quickly set to work on fixing the various issues, but they had one thing going for them - their online play system, Live. They also had a winning launch title - Halo. Project Gotham Racing also was a well received title at launch, but the system was repeatedly delayed and criticized for difficulties in developing for it.
If there is nothing else Microsoft is good at, they learn from their mistakes.
The Xbox 360 has had it's own mistakes. Most widely known is the Red Ring of Death. Microsoft owned up to the problem and handled that very poorly. They resolved it by performing a major revision of the hardware - which virtually ended the RRoD plague in one swoop. The Xbox interface has been marked much like the Xbox itself, by a process of continual improvement. From the original Xbox to the Xbox 360 to the Xbox 360 "NGE" interface, Microsoft has continually added features and fixed complaints. They listen to the users, and they act on it.
The Xbox 360 extends and embraces Microsoft's attempts to be the go-to place for developers, and succeeds.
Bet you didn't think I'd use that line ever in my life. SURPRISE! A good friend of mine is an independent game developer, and has console development knowledge. I've personally done research and some programming for the Cell BE which powers the PS3. Let's be very blunt and to the point: programming for Cell BE is a special level of hell. Seriously. It's abysmal, and pure misery. Developing for the PS3 is incredibly difficult, complicated, and expensive. You need the full console developer kit, which costs thousands of dollars, and if you want to publish? Well, you need to do the same dance the major publishers do with Sony, pretty much. It is an incredibly expensive and difficult proposition to develop for PS3, and almost none of your code will be reusable.
Now let's say you want to develop an Xbox 360 game.What resources do you need to buy and invest in? An Xbox 360 Elite and an XNA Content Creator account, oh, and Visual Studio - but that's actually optional. Congratulations, you are now fully equipped to develop for the Xbox 360. But what about publishing your game? Through Live, Microsoft has a solid reliable and well marketed distribution channel for independent developers. Independents can put up their latest creation, and start making money in short order. Microsoft is very active about promoting quality titles from XNA.
You want an example? No problem! Check out Xbox Live Indie Games. How easy is it to get your game up and making you money on Live Marketplace? Here's my friend J's Pendoku on Xbox Live - developed over a few weeks - and here's the free Flash version. Putting it on Marketplace was as easy as uploading and going through a few menus to publish, then waiting for approval, which usually takes around two weeks I believe. It's very easy. Which is what independent developers not only want, but need - lower barriers.
The Xbox 360 is not meant to be a profit powerhouse.
This is probably the most important point here. Since when has Microsoft ever thrown good money after bad for so long? The answer is; never. Microsoft has an internal and very secret set of goals for Xbox 360, and externally they seem to be rather pleased with them.
I'm going to wager a guess on what one of them is; be more popular than PS3, or at the minimum be perceived as such. In that respect, they're doing just fine. Take a look at this ArsTechnica Look at 2009 Console Sales - the Xbox 360 runs ahead of the PS3 almost all of 2009. 4.77 million units last year, while Nintento absolutely dominates the more casual market. But that's not the entire picture, oh no. Remember what I said about it being so easy to publish on Live Marketplace? Here's some sales statistics on Indie Games from GamerBytes. See for yourself; 160K copies sold of "A GAM3 W1TH Z0MB1ES" developed by James Silva. That's huge and more than some major publisher releases! This increases visibility, increases popularity, and encourages more independent developers.
It all translates into one thing; Microsoft has never really planned for Xbox 360 to make them billions of dollars in profit. Game consoles just don't. Instead, they planned for a specific goal and seem to be very happy with their results this far. They know as well as I do that there is no chance of Game or Entertainment segments becoming replacements for Windows or Office. Think about it rationally - how many offices do you know that put an Xbox 360 on everyone's desk? Now how many put a PC on everyone's desk. That's why Xbox 360 is tiny compared to Windows and Office. But that "tiny" number as perceived by others, appears to be making Microsoft very happy overall. If it wasn't, they'd change their strategy, and there's no sign of that. Instead they're continuing on their combination of extending and improving with things like Project Natal, going for a differentiation from the PS3 and maintaining a strong lead in Online.
So ultimately, I'm entirely behind Microsoft's entry into the gaming console market. Let's be blunt here - if you play any sort of "violent" game, Wii is not for you, period. Nintendo has the strictest content policies out there; so bad that they've blocked some games, and forced Dead Rising to be almost totally rewritten to meet Nintendo's content guidelines. Independents want nothing to do with Nintendo - getting a game approved is a nightmare process, and also requires a huge investment in hardware.
Sony has lead in innovation, and could be said to still have a substantial lead there in some areas. The problem remains that the PS3's initial release was a disaster in all ways, and Sony chose not to correct it aggressively. In fact, they sat on it and did nothing to deal with it. Their innovation has cost them titles and the cost of development has cost them exclusivity agreements. It's hard for publishers to make money on PS3 games, and indie developers haven't steered clear as much as been tossed over the high cost fence with a 'kick me' sign on their back.
Microsoft is the only company out there right now that is bringing multiple areas together, and doing a damn fine job of executing on it. Think about it - it has franchises like Halo, a violent FPS that caters to the 12-24 male segment. But they also have games like Lego Rock Band, which is decidedly a family title - especially given that Lego has strict content guidelines like Nintendo. Add to this, they have a whole raft of not just hardcore but casual and family friendly games from independent developers. They're winning the hearts and minds battle, because when those developers can (and do) make money from putting their games on Live Marketplace, they tend to become vocal supporters. The Xbox 360 provides them with a stable platform to ensure a quality experience that users may not be able to get on their PC for any number of reasons.
Microsoft absolutely needed to enter the console market, and now that they've been here a while, it's blatantly obvious that they not only intend to continue but deserve to continue. Say what you will, but the fact is that Microsoft isn't winning the hearts and minds battles in the console space purely on marketing muscle or dollars spent. They're winning it because they came to the game with an attitude that they were going to change the game, and deliver a seamless, solid experience. They've stuck to that aggressively positive attitude, and it's delivered not just for Microsoft, but for users as well.
MANDATED DISCLAIMER: I own a Microsoft Xbox 360, two Microsoft Zunes, a Zune Marketplace subscription, a couple Windows XP and 7 licenses - all at my own expense. I also will be buying a PS3 the day Gran Turismo 5 is released - sorry, Microsoft. Forza doesn't do it for me like Gran Turismo does. Also, a good friend is an XNA CC member, as mentioned above.
That said, these people STILL won't give me free stuff! What gives? ;)