Case Study: Sony

The launch of the Xbox 360 in November 2005 marked the beginning of the first console war in which Internet connectivity was a core component of all the major hardware manufacturers' strategies. Prior to Internet gaming, a major reason to purchase the most popular console was that it made it easier to trade games with friends. Internet gaming created the opportunity for a much deeper experience among owners of the same console. Users could now play together online, create groups of friends with whom they enjoyed playing, and monitor friends' progress through various games. Social networks on game consoles had never been stronger. 

Although PC gamers could play multiplayer games online throughout the 1990s, console gamers did not have an opportunity to play with each other online until the year 2000 when Sega released Phantasy Star Online, the first "massively multiplayer" online game for consoles. One year earlier Sega had launched the Sega Dreamcast with a built-in modem. This marked the first time thousands of console gamers could meet online, chat, and complete game objectives with each other. 

Sega also made a play into one of the most popular video game genres, releasing NFL 2K1, the first football title with online play. NFL 2K1 featured real players and teams licensed from the National Football League. Despite Sega's best attempts to highlight connectivity as the reason for gamers to choose Dreamcast, hardware sales lagged as a mediocre software library and the impending release of the PS2 in 2000 dissuaded gamers from switching. By early 2001, Sega announced that it would be exiting the hardware business, Dreamcast production would stop, and the company would focus purely on software development. 

Sony and Nintendo made efforts to establish online play on their respective consoles, the PS2 and GameCube, but moved hesitantly due to limited broadband penetration in key markets such as the United States where it was about 24% in 2001. Broadband Internet connectivity was the obvious choice for game companies as it allowed developers to reliably transmit more information across the network in comparison to dial-up connections. Dependable data transmission reduced the likelihood of lag or disruptions to gameplay caused when game machines needed to synchronize game data, a key attribute particularly for games involving sports or a lot of physical movement. A Nintendo executive stated in 2001 that the company was more focused on providing a good gaming experience and reaching a broad audience than being first to offer a state of the art online experience: "We still see online as a small number (of gamers). There's still lots of questions about online. For kids who are 13, 14, 15, are their parents ready to set up a broadband or modem connection? There are costs and hurdles involved". 

For PS2 owners, Sony released a network adapter, sold separately for $39.95, which allowed users to connect via dial-up or broadband. It was then up to individual game developers to provide a seamless online experience for players despite significant variation in connection speeds. Sony gave developers enormous freedom in shaping the online experience as they saw fit. Developers could integrate online play as much, or as little, as they wanted and could implement their own pricing models (although few charged users for online play). However, with great freedom came great responsibility, and for many developers designing the online components of their game was just one more substantial task that needed to be accomplished in order to complete the title. 

Microsoft, which released the Xbox in the fall of 2001, adopted a much different approach. The company wanted to unify the online experience for developers and players alike by providing a consistent experience with the service Microsoft named Xbox Live. Microsoft actively encouraged developers to incorporate online features into games to show off the features of Xbox Live. Microsoft distributed code libraries to developers, hosted online games on its own servers, and created a uniform online interface that focused on allowing users to easily build a community of "friends". Two highlights of Xbox Live were the microphone headset that enabled real-time voice communication among gamers and the ability for friends to contact one another even if they were playing different Live-enabled games. The headset was part of the retail Xbox Live package that sold for $49.99 and gave gamers a one-year subscription to the service. 

In addition to providing a unified online experience, Microsoft made the controversial decision to require broadband connectivity for the Xbox. While this decision improved online play for those with broadband Internet service, it also severely limited the number of potential users for Xbox Live. The commonly held belief, however, was that Xbox was part of Microsoft's long-term strategy to gain significant knowledge about the game industry. 

Xbox Live introduced new revenue streams for Microsoft and its partner companies. While some content could be downloaded for free, including demonstrations of new games, and stored on the Xbox hard drive, premium content such as extra levels and characters for games could be purchased for $5 to $15. A set of new multiplayer maps for Call of Duty 2, a World War II title, was priced at $15 and was one of the most popular downloads on Xbox Live in 2005. 

Companies such as Cadillac took advantage of the marketing opportunities that the Xbox Live Marketplace provided. In an effort to target the male 25-35 year old demographic, the company developed video game versions of its cars for the hit racing game, Project Gotham Racing 3. The site included a message that read: "If you're a fan of Cadillac and Project Gotham Racing 3, it's time to break out of your dancing shoes to celebrate the arrival of the new Cadillac V-Series downloadable content". 

In an attempt to appeal to more casual game players, Microsoft created Xbox Live Arcade, an area of the Marketplace where simpler games such as Pac-Man and Uno could be downloaded and played. 

Adopting a popular model from the PC casual game industry, demos of Xbox Live Arcade games could be downloaded for free with the full version available if purchased. In addition to nostalgic titles such as Frogger and Galaxian, new titles such as Geometry Wars were very popular as well. The game development community praised Arcade and were hopeful that it would hearken a return to the days of innovative, smaller, and less financially risky games. Microsoft, however, was very selective and restrictive in releasing games on Arcade, so it was unlikely that many developers could be sustained by the Xbox Live Arcade alone. 

Nintendo, with its new Wii console, looked forward to launching the first Nintendo console with well-integrated online functionality that, among other things, provided Wii owners with weather updates and email and web browsing services. Named the Virtual Console, the online service's most compelling feature was access to the enormous library of high-quality Nintendo titles dating back to 1984. Classic games for the original Nintendo, the Super Nintendo, the Nintendo 64, and the GameCube would be available for download at prices ranging from $4 to $8. Nintendo hoped that the pull of nostalgia would bring older gamers back to Nintendo. 

Sony would be entering the online video game arena with the PlayStation Network Platform, described as an "ecosystem" comparable to Microsoft's Xbox live which would be launched simultaneously with the PS3. The platform would allow players to connect to the Internet so that they could play against each other online as well as communicate through email and live voice chat. PS3 owners would also be able to purchase games although it was not known if the back catalog of PlayStation and PS2 games would be available for download. Unlike the Xbox 360, the PlayStation Network Platform would allow licensees to connect their own game servers to the network. As one analyst opined, "Sony sees online as more of a loyalty builder for their audience rather than a money making strategy. Microsoft sees it as both". 

Many industry analysts speculated that the new generation of video game consoles - the Xbox 360, the Nintendo Wii, and the Sony PS3 - would overshadow the role of the PC in many homes. As one technology analyst pointed out, the games console was becoming the focus of breakthrough technology: "It suggests the platform of growth (in home computing) is shifting away from the PC to the games machine". As the CFO of video game publisher Electronic Arts put it, "The stakes for next generation hardware leadership are enormous. It's about owning the set-top box that may ultimately connect the living room to the Internet".