The Xbox Chain Supply

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CASE: GS-49 DATE 04/14/06

EVOLUTION OF THE XBOX SUPPLY CHAIN
With the first generation of Xbox, our ambition was to change the way people think about video games. Starting today with Xbox 360, our ambition is to transform the way people play games and have fun. 1 —Robbie Bach, President of the Microsoft Entertainment and Devices Division

In November 2005, Microsoft prepared to launch its next-generation video game console, the Xbox 360. A global release was scheduled, beginning on November 22 in North America, followed shortly by Europe (December 2), and Japan (December 10). It had been four years since Microsoft had introduced the original Xbox. The first Xbox had hit the U.S. market a year behind Sony’s PlayStation2, but this time Microsoft expected to beat Sony’s next-generation system to market by many months. The Xbox 360 would provide a substantial increase in performance for gamers. Its processors were so powerful that graphics would appear virtually lifelike, and would run on high definition televisions. When used with Microsoft’s Xbox Live Web service, the Xbox 360 would enable gamers to play multi-player games online. The system could also be used as the base of a family’s home entertainment system, taking advantage of its high definition DVD player. Demand for the new system was expected to be heavy. The challenge would be for production to meet the demand. THE VIDEOGAME MARKET In 2005, the global market for video games was approximately $27 billion, consisting of $6.7 billion in console sales, and $20 billion of software (games) (Exhibit 1). Sony dominated the market, with cumulative sales through December 2004 of 102.5 million PlayStation 1 (PS1) consoles and 87.5 million PlayStation 2 (PS2) consoles. Microsoft had sold 19.9 million Xbox consoles, slightly more than Nintendo had sold of its GameCube (Exhibit 2). Of the current

Jay Greene, “Robbie Bach is Ready to Rumble: The Honcho of Microsoft’s Xbox 360 Heads for a Bare-Knuckles Brawl with PlayStation,” Business Week, November 28, 2005, p. 54. David Hoyt prepared this case under the supervision of Professors Charles Holloway and Hau Lee as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2006 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

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Evolution of the Xbox Supply Chain GS-49

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generation systems, which used 128-bit technology, (PS2, Xbox, and GameCube), Sony had 67 percent share, Microsoft had 17 percent, and Nintendo 16 percent.2 Several factors contributed to Sony’s dominance in late 2005. By the time the first Xbox was released, Sony had gained a substantial head start. Not only was the PS2 available 12 months before the Xbox in the U.S., the PS1 was also well established. As a result, there was a substantial number of games available for the Sony consoles, compared with those ready when the Xbox was released. In addition to confronting Sony’s substantial brand presence, the design of the Xbox had faced resistance in markets such as Japan, where users criticized it as unattractive and considered the game controller as too large.3 (The Xbox share in Japan was less than 1 percent, dramatically less than its share worldwide.) Microsoft hoped to overcome these problems with the Xbox 360. After four years in the market, the company had established a presence, and was no longer a...
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