Gaming-Age Forums - On Xbox 360 Backwards Compatability and pricing...

"Microsoft Press Briefing

The most important announcement at this event was the demonstration of the Xbox 360, planned for release this holiday season. Company management stated that the Xbox 360 would be backward compatible for “most top selling Xbox games”, and pledged “support “ for the current generation Xbox “well into 2006”. Two weeks ago, we noted our
concern that the Xbox 360 may not be backward compatible with Xbox software due to a change in graphics processor chipset manufacturers from Nvidia to ATI. In a separate meeting with Microsoft management, we confirmed that the company has agreed to pay a small royalty to Nvidia to allow the Xbox 360’s ATI chipset to emulate the performance of the Nvidia chipset in reading certain Xbox games. For games written in a single layer
(management assumes that this is a large percentage of Xbox games), the hardware emulation should perform well.

For games written in multiple layers, a further emulation must be provided. The company intends to create software “patches” (i.e., separate emulation programs) for top-selling Xbox games written in multiple layers, and intends to sell the Xbox 360 with a hard drive that is pre-loaded with these patches. We presume that the majority of Xbox games will be backward compatible, and the company assured us that it intends to add patches should consumer demand warrant such action.

We are less confident about Microsoft’s intentions regarding the current generation Xbox. The company’s pledge of “support” is broad, but we believe that it does not equate to “manufacture” of Xboxes. Rather, we believe that the company has stockpiled a number of Nvidia chipsets, and is prepared to manufacture current generation Xboxes through the end of 2005, and perhaps for a few months beyond. The implications of this are difficult to assess: on the one hand, it is likely that the company will focus all of its marketing efforts on the rollout of the Xbox 360, and phase out the Xbox rapidly, resulting in a rapid ramp in sales of the new hardware; on the other hand, it is possible that Microsoft will be unable to satisfy demand for the 360, and may experience a decline in demand for current generation Xbox software, resulting in lower overall industry sales growth this year. We believe that the latter scenario is likely to occur, and note that it could impact overall industry sales growth by approximately 100 bps in 2005.

One final takeaway: Microsoft did not discuss pricing for the Xbox 360, but assured us in our meeting with management that “neither you nor consumers will be shocked” at the price. This implies to us that the device will be priced below $400, and may possibly be priced at $350. As discussed below, we expect Sony’s entry to be priced higher, potentially providing Microsoft with an additional competitive advantage."