Microsoft Diversification in Xbox

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Microsoft is a world leader in the PC industry and has $36.2 billion of cash. However, sales of PC would not last forever! The PC industry which is in its fourth decade shows signs of saturation and maturity (exhibit 13 in case). Launching XBOX allowed Microsoft to drive a revolution in digital entertainment and deliver the future of experience. The decision taken by Microsoft lead to its diversification in gaming consoles and online gaming industry. The diversification allowed Microsoft to utilize the economies of scope of the two industries.XBOX diversification satisfies the three essential tests to be applied in deciding whether diversification will truly create shareholder value.| The attractiveness test: The gaming industry which includes PC games, online games and gaming consoles is attractive for XBOX to diversify from the PC industry for reasons given below: * The recent exit of a respected competitor made the industry attractive. * The growth of the industry till date and its projected growth (given in table below) prove the attractiveness of the industry on the whole. 1. The hardware and software growth of the gaming industry was significant. According to Bank of America, the hardware and software together account for $18.7 billion in revenue in 2001. US market itself has $8.1 billion in 2000. 2. The video game market also has been predicted to grow by $40 billion. 3. One third of the internet users play online games and industry of online gaming forecasted to grow from $270 million in 2001 to $4.6 billion in 2005. * At the moment the market is a duopoly with only two players Sony and Nintendo at present have 70% of the market share for gaming console out of which 50% is with Sony. This increasing the opportunity of another company to establish its footprint in the market. * The future share of online gaming in entertainment would increase to 75%. Hence the increasing consumer preference towards online gaming would affect the...
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