Marketing the Xbox 360: Where it Went Wrong

John Porcaro is one of the guys on the marketing team at Microsoft for the Xbox 360, and has a blog post where he tries to explain how difficult it is to create a marketing campaign for a product like the Xbox 360. This was in direct response to the complaints about Microsoft continuing to promote the product as if it were still available.

To his credit, Porcaro comes right out and admits that this is his own opinion, and is dredging up things from business school, and that we’ll probably teach him a thing or two. But here are the points he lists about the challenges in creating such a marketing campaign, followed by my analysis (as a marketing student myself):

1. The product has a multi-year sales cycle with forecasts into the tens (hopefully hundreds) of millions of units.
2. The product is a follow-on to a product that’s been successful, and requires ongoing sales of consoles and games for the first generation
3. The product doesn’t hold market majority, and competes against a product with significant market share advantage
4. The product relies on follow-on sales (games) and licensing fees to be profitable
5. Your product is roughly equivalent in technical terms
6. Your company’s main competitive advantage is significantly better software (especially Xbox Live)
7. Coming out too early allows competitors to build their plans/product reacting to ours
8. Coming out too late means our competitors have first-mover advantage, and can build games portfolio and customer base
9. Focusing on one region means leaving the others out, creating product and customer vacuum
10. Focusing on all three regions means sharing already constrained resources
11. Launching with too few units, you’ll create too much demand.
12. Launch with enough supply, and create significant inventory costs and high opportunity costs
13. The customer who made your system successful (hard core gamers) is passionate, enthusiastic, and vocal
14. Hard core gamers are “early adopters” in the “Crossing the Chasm” terminology: There’s already high demand from this group
15. The customer you need to reach in the future has almost no awareness of your brand
16. To significantly grow the market, the product needs to appeal to a new customer base

Focusing on the short-term (the first six months), Number 1 is largely irrelevant. You need to have a long-range plan, but you also need to have short-range plans so that you can adjust to changes in the marketplace. Microsoft’s current plan isn’t adjusting to market realities. They continue to spend thousands of dollars promoting a product that people can’t buy. Ordinarily, this would be cutting into the company’s profit stream, but Microsoft can afford it. In any other company, they’d be drastically cutting the marketing budget in order to preserve cash.

Number 3 shows a bit of a loss of focus. Xbox 360 is creating a new market, and that’s the way you need to approach it. Viewing PlayStation 2 as a competitor is a big mistake, Xbox 360 will have 100% market share for the next-generation gaming market until the release of a competitor. Number 4 is also irrelevant, as is number 5 (until a competing product is released). Number 6 should essentially be the overriding theme of the campaign, and it appears that’s what’s happening. “Jump In” is tied to Xbox Live, which is Microsoft’s killer app for Xbox 360.

Numbers 7 and 8 are the same point … timing is everything. In this case, Microsoft was able to launch a product with a solid lineup of software, and beat the competitors to market. Personally, I think they were a bit too early, and that too much emphasis was placed on being available for the holiday shopping season. I’ll explain why in a bit.

Number 9 … oh, where do I begin? Microsoft may not want to admit it, but what they were looking to avoid was a strong import market from other territories importing US Xbox 360 units and selling them at a high profit margin, and they drastically overestimated the importance of this factor. Unfortunately, we live in a global market place, and this simple can’t be stopped (the phenomenal sales and markup of units on eBay is a great example). Microsoft’s problem is that by trying to make sure that THEY were filling the vacuum in other territories, they couldn’t get the job done in the US, leaving a vacuum here. Number 10 should have been the clue that focusing too much on Number 9 would cause a PR disaster.

Numbers 11 and 12 are also tied as the classic supply and demand problem. Correctly anticipating and managing demand is important, as is ensuring proper supply levels so that there are no unnecessary costs associated with shipping, warehousing, etc. This was also disastrous, as Microsoft set expectations with retailers incorrectly, did not adjust those expectations in a reasonable timeframe, but most importantly, did not adequately manage demand from the customers, leading to a backlash from Number 13. The exact people they should not have pissed off were the ones that got pissed off. Why? Because a significant amount of the supply didn’t get into these people’s hands … it ended up with opportunists on eBay, celebrities, and random people through contests.

Number 14 is really part of 11 and 12, but let’s just say that Microsoft saw the pre-order numbers from this group, and wasn’t able to meet the demand (some might say specifically chose not to meet this demand by launching across three territories at the same time).

Number 15 is irrelevant in the short-term, but there is a fundamental misunderstanding here. The Xbox brand is remarkably strong, to the point where even non-gamers are aware of it. How far do you need to extend the brand when you already have awareness that is this broad? Likewise, Number 16 is tied to getting these people who are already aware of the brand to find enough value in it to purchase it. That’s never going to happen at a $300-400 price point, and is irrelevant in the short term.

So that’s John’s list. What’s really startling is how much is missing from the list, like the simple reality of the game industry that if you have a strong brand and compelling software, you will sell out of your initial allotment. It’s a slam-dunk, even Dreamcast sold out based on the strength of one game, as did the Nintendo 64. So why wouldn’t you want to do this? Cost … considering how much money Microsoft is losing per unit, cost is a major consideration. Ship the units now and satisfy demand or slow production until you can lower costs and get the product out the door cheaper? By Microsoft’s own admission, they have manufacturing capacity that isn’t scheduled to start until 2006, and this is despite knowing that they couldn’t meet existing demand. Cost must be playing a factor here, but Microsoft can’t come out and say that. So the company line is that they had no idea how successful it was going to be, and that they’re getting product out as quickly as they (meaning their existing manufacturing capacity) can.

There’s also the fact that people waiting in line and a hot holiday product no one can get is sexy from a media standpoint. For consumers, it sucks, but in a world where there is no such thing as bad press, Microsoft is the darling of the evening news. Unfortunately, the media also has a short memory (all that talk about high gas prices, and no mention of them now falling steeply), and while launch day was a huge media blitz, now there’s nothing but people complaining. Microsoft continues running Xbox 360 ads as part of a PR campaign … advertising the brand and projecting an “all is well” image to deflect from the negative press. Did Microsoft focus too much on launching in time for the holiday shopping season? Yes, but with a good reason. Could they have better served the customer by holding off another quarter, shoring up supply and launching with numbers that would have satisfied the demand? Sure, but they would have lost out on free press coverage and it would have cost them more in the long run.

John’s not stupid, and he knows these things, and he admits to a lot of it in his blog. But from a marketing standpoint, their job is to promote the product in a multitude of ways in order to reach all potential customers. It’s working, but the problem is that there’s no way to capitalize on it. John says that it takes years to make a product a cultural brand. Sorry John, but you’re already there. Isn’t that what Xbox 1.0 was designed to do? That’s typical Microsoft strategy. Yes, it’s hard to start and stop a media campaign at will, but it’s doable. Microsoft is simply choosing not to do it, and it’s no wonder we’re all confused as to why Microsoft seems to be continuing to sell a product, make us want it, then tell us we can’t have it. There’s been a lot of blame shifted in recent weeks, but it’s pretty clear that everything is being carefully calculated. I simply have major concerns over whether or not its intent is being realized.