Microsoft has always been big about online gameplay as a key feature of its Xbox systems. In fact as far as console go Microsoft are the responsible for bringing online play to the mass market. The multi-billion dollar investment in the Xbox Live online game service is what is supposed to distinguish Microsoft systems from the competition. Xbox Live hit the ground running without any serious online console competition for six years. So would it be fair to expect Microsoft to always be ahead in this department?

However, with the current generation of game systems, the PlayStation 3  has done a great job of playing catch-up and the Nintendo Wii at least has online features so in turn it is getting harder to distinguish the competitive advantage provided by a service like Xbox Live, especially one you have to pay for.

Microsoft must have pinned a lot of it’s hopes on the launch of the “New Xbox Experience.” But the New Xbox Experience does not really change the online game play experience, but is instead about enhancing the interface and community-building features of Xbox Live. This is part of Microsoft’s long struggle to expand the appeal of the Xbox 360 beyond the core action game fan.

With Xbox Live, Microsoft has clearly been focused on making the service a direct revenue generator. In fact they have even said multiple times that Live is their money maker, not the console itself. In addition to the annual subscription required to play games online, Xbox Live’s big focus has been on getting people to spend money in Xbox Live Marketplace.

In contrast, Sony (and Nintendo) have focused on making online connectivity a free value added feature. The services were not as robust or feature full as Xbox Live, but they are free and most casual consumers could not really tell the difference. Based on the installed base of the PlayStation 2 versus the original Xbox, having the best online game service was clearly not a key driver. With the PlayStation 3, Sony has significantly increased its online offerings, and unlike Microsoft is not charging for online play. That is why it is good to see Microsoft focusing on adding value without looking to directly generate revenue.

It is clear that the New Xbox Experience is focused on extending the community by enhancing the user interface. There is very little that is targeted to the hard-core user that is probably perfectly happy with the current system. The goal is to broaden the user base and in that sense the new Xbox Live seems like a step in the right direction.

There are some indications that the Xbox 360 may slowly be expanding its demographic appeal, at least in the U.S. With a recent price drop and a new interface, the Xbox 360 has surprisingly become the system with the freshest value proposition for holiday 2008. It’s also the cheapest system here in South Africa with Arcade bundles retailing for as low as R1599 with games, these holidays.  Most importantly, the Xbox 360 now has a great deal of content to appeal to consumers that DON’T play violent shooting games. But is it all a little too late?

Casual games and social games are quietly becoming a big part of the Xbox 360 experience. Games with more mass appeal, like PopCap’s Bejeweled and Zuma titles, are available on Xbox Live arcade for around R80 or less. Other products like the SceneIt? party trivia games are designed for the whole family. The Netflix partnership could prove to be particularly lucrative as it allows users to get living room access to stream an unlimited number of movies for a set monthly fee. Not for us here in South Africa however.

With online console games in today’s marketplace, it is important to focus on building consumer loyalty and extending product life cycle as opposed to build a major direct revenue source. Compared with the traditional retail business, the revenue from console online games is minimal.

Microsoft claims Xbox Live has generated over $1 billion in the three years since the Xbox 360 launch. However, when you look closely at those numbers it is clear that the bulk of this revenue has come from the $50 a year membership fee. There have been 12 million hours of video content served on Xbox Live. This sounds like a lot, but revenue generated is at most a couple of bucks an hour. The usage will need to grow exponentially for Microsoft to generate any real revenue. So hoping that Microsoft would reap in the money and Live may become a free service in the years to come is unlikely. However offering more free content and especially Gold subscriber specific content is a good way to build loyalty. I dunno about you but I like free stuff and exclusive stuff and I’ll stick with a brand if it rewards me for doing so.

With the New Xbox Experience, Microsoft is trying hard to stay ahead of the online curve. At the same time, Sony has very ambitious plans for its PlayStation Home (PS Home) service and has been making major improvements to all its online offerings. However, PS Home has been delayed in beta and its appeal is unproven. Meanwhile the promised features for the Xbox 360 are mostly here today. The main question is: will consumers care? Online games are an important part of the mix, but only one of many deciding factors. On paper, point for point  the online services the Xbox 360 clearly has the current lead. However, this is only apparent after taking the time to make a close assessment. I wonder how many consumers will make that effort?

The other issue to consider is whether online games can help Microsoft on a global basis. The Xbox 360 will do significantly better in markets like North America and it’s been growing in the U.K. but as for rest of the world Microsoft have a lot to prove. So at the end of the day, although the New Xbox Experience may be a nice leap forward, will it really make a difference to the average casual consumer?

I don’t see the New Xbox Experience making the impact on the consumer that Microsoft hope it will. I honestly don’t think the casual gamers cares what the online experience is like, and Microsoft has a fight on their hands getting people to believe that their service is worth paying for, compared to the PS3 and Wii’s free offerings. All the work on the Avatars, party chat and completely revamped interface means nothing if you can’t get controllers into perspective buyers hand and let them test the service for themselves.

Sources: Edge online, DFC intelligence