Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

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Network Issues

On Thursday, November 15, 2001, Microsoft CEO Bill Gates introduced the video game console, Xbox. Many questioned the decision to launch this new entry in a market that was then dominated by Sony and Nintendo, and that also included Sega, another firm with a sizable installed base. Today, however, the Xbox brand is still very much alive. The Xbox 360 (introduced in 2005) is the best-selling video game console in the world and claims a 47 percent share of the North American market—well above rivals Sony (PS3) and Nintendo (Wii). Sega has exited the market altogether. All of the current ten best-selling games from Mass Effect to Kingdoms of Amalur to Just Dance are available in Xbox format. In 2011, Xbox consoles sales totaled $2.1 billion alone, and Microsoft earned an additional $4.6 billion from sales of games and accessories. Current estimates imply that 67 million Xboxes have been sold since that November 2001 launch.

The Xbox, of course, is just one of many computer-based success stories associated with Microsoft. Unlike most of these, however, the Xbox is a hardware product. Rather than Microsoft, the major providers of the software that runs on the Xbox platform are game development firms such as Electronic Arts and Activision Blizzard. Indeed, both the game developers and Microsoft are tied in a sort of “chicken-and-egg” relationship. There is no way to market Xboxes successfully unless developers produce games for that console. Yet there is no reason for ...