The Kinect Camera Is Still a Problem for Microsoft's Xbox One

Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Microsoft (NASDAQ: MSFT) is one of the biggest companies in the tech industry. Its software helped to spur the personal computer revolution and the establishment of the Internet age.

The company plans to debut a successor to its popular Xbox 360 console this fall, the Xbox One. The soon-to-be-released console has gotten off to a turbulent start, having to reverse course on a number of features, policies, and strategic visions in order to quell consumer outrage. There are lingering issues that could plague the device, however.

Going through the motions

In 2011 Microsoft released the Kinect, its camera hardware for the Xbox 360. Despite an array of predictions suggesting the device would be a flop, it debuted to considerable success and became a growth driver for the Xbox 360 installed base. The Kinect and its associated software proved attractive to the casual audience and younger gamers.

The Kinect was so successful that Microsoft was moved to make motion-tracking technology a major feature of its next console. In doing so, the company could ride the wave of casual gaming and endow the Xbox One with a new version of Kinect that would make the device more appealing and capable for multimedia and interface management. It sounded like a good plan.

Unfortunately for Microsoft, the market has changed substantially since it began finalizing (the first time around) what the Xbox One would become. Sales of the Kinect and Kinect bundles for the 360 have declined sharply, while software sales have all but evaporated. With the casual market having largely migrated to smartphone, tablet, and web-based gaming, it will be necessary to appeal primarily to the enthusiast crowd during the early years of the cycle.

Tracking costs

In reversing its DRM features, anti-used game policies, and 24-hour check in requirement, Microsoft drastically altered its vision for the device. As embarrassing as that may have been, however, I suspect that the company may have been better off if it had moved to de-emphasize the Kinect and offer an SKU that ships without it. When the Xbox One launches against Sony’s (NYSE: SNE) PlayStation 4, consumers are sure to notice that Sony’s device is $100 cheaper whether or not they know that the PlayStation 4 has more powerful hardware. The fact of the matter is that much of Xbox One’s $499 price tag can be attributed to the Kinect 2.0.

In a recent Reddit AMA, a Microsoft employee revealed that the new Kinect costs almost as much to make as the Xbox One hardware. Sony already made the mistake of launching a console at too high of a price point ($499 and $599 for the PlayStation 3 at launch), paying dearly for it in lost market share. Microsoft now stands to be punished for repeating it Sony's mistake. 

What’s more, in light of the NSA spying scandal and Microsoft’s role in gathering and providing data, there is reason to believe that a device that, in its default state, is always on and always listening could frighten off consumers. Microsoft has recently reversed yet another policy and announced that the Xbox One will be able to function without Kinect, but I doubt that this will fully allay the existing stigmas. What it will do is ensure that the majority of future software only utilizes the Kinect in a minor or supplementary fashion. 

Failure to connect

Sony stands to gain from Microsoft’s Xbox One missteps. The company has the potential to position PlayStation 4 as the sales winner of the generation and create new streams of revenue as it better establishes its online offerings. The system that winds up with the largest installed base will likely wind up with the most profitable online service. This would be terrible for Microsoft, as Live has been tremendously successful for the company and has helped to shape its direction in the home entertainment space.

What does look to be clear is that Nintendo (NASDAQOTH: NTDOY.PK) will not be a factor in this generation of home console hardware. The extent to which the Wii U is failing all but guarantees that the there will be a contraction in this segment of the market. Nintendo recently confirmed that the system’s $299 and $349 SKUs are still selling at a loss. This puts the company in a difficult position, as it would surely prefer to spark Wii U sales with a price drop but risks an investor revolt if the company falls far short of its projected 100 billion yen operating profit for this fiscal year. In light of this, I posit that there is no way that Nintendo can cut the price deep enough and quickly enough to save the device.

Final thoughts

The failure of Wii U leaves Microsoft and Sony to battle it out in the console sector. With Microsoft management in a state of transition, a $499 Xbox One, and lingering controversies still tarnishing the system, it’s a fight that the company is not likely to win. That said, you can expect the company to jettison the Kinect 2.0 if the Xbox One underperforms. Even if that move is made early, however, it may already be too late.

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Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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