Flashing the Cash Article

A fair bit of attention has been focused, in the last few days, on an article which appears in this month's Esquire magazine. Penned by one Scott Stein, it suggests that the billions of dollars which Microsoft is proposing to spend on Yahoo! would be better spent on a tactical acquisition of Sony - which he views as the best way for the two companies to step up to the challenge presented by Nintendo's Wii.

Let's dismiss the possibility from the outset. It's a ludicrous concept, one which totally ignores the fact that Microsoft's entire business is threatened by the rise of Google and other similar Internet firms. It's not that the Xbox isn't important to Microsoft, but right now, its battles with Sony and Apple over home media pale in comparison to the fight with Google over the future of computing - a future which threatens to be independent of operating systems and software platforms, the markets which are the basis for Microsoft's success.

Moreover, it ignores the fact that Sony is, of course, a lot bigger than Sony Computer Entertainment. It incorporates the world's largest movie business, one of the world's largest music businesses, and a vast consumer electronics business - not to mention the countless closely associated subsidiaries and partner companies which make up the ecosystem that surrounds any large Japanese corporation.

The concept of a Microsoft buyout of Sony is, therefore, absolutely out of the question - and a merger is equally unlikely, given the vast differences between the corporate cultures of the two firms. This article's tagline is a rhetorical question, really; given the question of whether Microsoft should be repurposing its Yahoo! millions to buy Sony, the answer is obviously, vehemently, "No".

However, it's not that the firm hasn't previously considered major acquisitions as a shot in the arm for its games business. Before the original Xbox launched, one of Microsoft's considered routes into the games market was an acquisition of Nintendo - impossible now, given the Kyoto-based firm's huge market capitalisation and enormous growth, but very much on the cards back at the turn of the millennium.

Bearing in mind that history, Mr Stein's piece is an interesting conversation starter. With a one-year head-start in the market, an installed base lead that may be as high as 8 million units and an unprecedented half-year profit from its Home and Entertainment Division, why on earth are we talking about Microsoft needing to throw billions into an acquisition to shore up the Xbox right now?

On some fronts, the Esquire article is utterly wrong, and demonstrates a disappointing lack of understanding about the games business - which, in itself, offers an opportunity to clear up some common misconceptions. The major misconception is that the recession which is expected to hit the United States this year (with knock-on effects for the rest of the world) is seriously bad news for games.

It is, of course, bad news for every aspect of the economy - but of all the "luxury" markets, videogames are the least likely to suffer a negative effect. The peaking of this generation of consoles, combined with falling prices of hardware, will more than counteract any negative effect from an overall slump in consumer spending. While, as Mr Stein argues, games are luxuries that nobody "needs", they are generally seen by consumers as cost-effective luxuries. Recession will mean people staying at home more rather than going out, or going on holiday, and videogames, which offer many hours of entertainment in return for their initial investment, will help to fill that gap in people's leisure time.

As such, I don't believe that Sony and Microsoft need to be quaking in their boots over the fear of recession - not just yet, anyway. The problems which these two industry giants need to be tackling right now are those which are internal to their offerings and to the industry as a whole; the macro-economic situation is likely to bite this sector a lot less hard than almost anywhere else.

It's those internal problems which the Esquire article touches on a little more effectively - or rather, it offers an interesting view of how those problems are perceived by those outside the daily cut and thrust of the games industry.

Stein focuses on a number of key issues which, I believe, have made their way into the thinking of the mass-market - some with more underlying justification than others. He highlights the Xbox 360's appalling record on hardware failures, which is now so widely reported that it is almost certainly damaging the system's uptake among non-hardcore consumers. Equally, he highlights the PS3's weak online system - which has certainly improved since launch, and which can at its best offer users a service comparable with Microsoft's (subscription-only) Live Gold, but which is cemented in the minds of consumers as being second-best.

Other perceptions which have, for the most part, disappeared from discourse within the industry and among hardcore gamers are also to be found here - indicating that it's going to take a lot longer to shift them from the minds of more casual players (and commentators). For instance, the PS3 is seen as sporting an abundance of features players don't need - although equally, I've recently seen indications that consumers are starting to rail against Microsoft's hidden costs, which it dresses up as "choice" by offering overpriced peripherals for Wi-Fi or for recharging controllers while you play.

What is increasingly clear, both from sales figures and from the input of relatively mainstream commentators such as Stein, is what effect all of these perceptions are having on the next-generation console market. Neither Sony nor Microsoft is picking up the advantage; efforts on the part of both parties to spread fear, uncertainty and doubt about their opponents' products have backfired completely on them both.

Instead, consumers are doing exactly what they have done in the next-gen DVD format war - they're sitting back, backing neither side, and waiting for an outcome. In the meanwhile, the Wii and the PS2 are the real winners. The Wii is vacuuming up support from gamers who don't want to commit to an expensive new console with an uncertain future, while the PS2's lifespan has been greatly expanded by consumers' unwillingness to move to the next generation.

In this, at least, Stein is correct. The battle between Microsoft and Sony has only produced one victor thus far - Nintendo. Both firms need a strong focus on changing how they're perceived in the mass market if they're to change that in the coming year.