The debate, Should Microsoft be in the Console Gaming Space continues, as Greg Knierieman joins us.

The Scoreboard so far:

• #1 My points
• #2 Rob Enderle’s rebuttal
• #3 Jay Livens’ rebuttal of Rob’s post
• #4 Rob then rebuts Jay
• #5 Greg Knieriemen is sure Jay and I are wrong, and his salvo is over at iKnerd. Can’t wait to read that.

Below is my reply to Item #2 above.

A little backgrounder
A couple of weeks ago Harry McCracken and Rob were sharing some analysis (on Twitter) on Microsoft’s financial performance which showcased http://www.businessinsider.com that the Microsoft was largely living off of Office, Windows, and their enterprise businesses. Their entertainment business appeared to be more of a drag on the company than a benefit, and Rob suggested they should have likely never entered the gaming market.

I disagreed with them, stating here my reasons why.

Rob has been kind enough to rebut me, and this is my follow-on to his rebuttal.

Jay Livens, of SEPATON, the leader in Virtual Tape Libraries, will also be guest-blogging his points on this debate here.

I love this, debating with my betters!

Rob’s contention is that Microsoft should not compete with its partners, and that they should have defined/created the game console for its hardware OEMs to produce.

Thou shalt not compete with Partners
This business-success precept, not to be taken lightly, should be the mantra for any business.

And Microsoft shouldn’t, in any way, be competing with partners.

However, looking at the PC gaming landscape, Microsoft technically was not competing with partners. For its partners were producing gaming rigs costing an average of a couple of thousand dollars just for an entry unit.

Moreover, none of the partners had shown any interest in entering that market.

Furthermore, none of the partners, HP* excluded, have since then shown any interest in expanding their horizons beyond pushing their boxes or lappers.

Microsoft should have a consumer-facing product, or product lines, especially in consumer electronics.

If we take the above statement as a fact, I don’t think Microsoft’s entry into the gaming console space with a Microsoft-branded product should have been seen as an affront to its partners at that time.

Create a reference system for OEMs
If there has been a part of the well-oiled PC machine that is broken, it is the shameless cowardice of Microsoft’s OEMs to take a proffered gift and run with it.

In gaming consoles especially, you can see the lack of interest in OEMs to produce anything other than PCs. Actually, maybe I should correct that to

Right now, Microsoft’s non-creation of an OEM reference gaming console looks weak. However, we must look at the historical backgrounds of these companies at that time to see if they were ready to take on such a rôle.

For this I will only look at the top players in PC computing back then, namely Acer, Dell, Gateway, IBM, and HP.

Top PC Players 2001

• Acer: In 2001, Acer, while having a lot of clout overseas, was a so-so-player in PCs in the US. Moreover, tit did not have any strategy to move beyond PCs. It is just now moving into the home CE market with the Acer Windows Home Server line.
• Compaq: Liked the PC, and the PC (+server) business only. They were in death throes, just before their sale to HP.
• Dell: Had problems of their own. Moreover, Dell is probably that company that Microsoft loves to hate: it is just sufficiently successful enough to get great pricing – before the EU took that away, but disloyal enough to make several flights of fancy, such as the feel-good forays into Linux – how does less than 1% of segment revenues amount to anything, and deserve the attendant ink. Also, Dell had shown no willingness to enter into any market unless everything was prepped, and handed to them on a platter. If I remember correctly, at that time, Dell’s annual R&D investment was about 1% of sales. Or some other ridiculous number.
• Gateway: Gateway, in those days, was in the process of passing through a gateway portal into, well, oblivion, or that netherworld is that sits between life and irrelevance. After their foray into TVs failed they were never heard from again. Supposedly, they are still around.
• IBM: They wouldn’t help Microsoft even if US competitiveness depended on it. Why? IBM PC, IBM PS/2, Micro Channel Architecture, OS/2, Open Software Foundation, and that paragon of computing, IBM PCjr.
• HP: HP was about the only company that had the bandwidth to try. However, at that point in time, HP was doing the (Carly) Fiorina dance, and wouldn’t find its way for a few more years.

I also think the dynamics of the game industry, where the profits are in the gaming software, not the consoles, would not have appealed to these guys. Since, they wouldn’t control the software, and therefore, the profits.

To them, a $299 or so device, must have seemed insane. For 2001.

Furthermore, Microsoft had to keep the console production in-house because of the following:

1. Forking of the design with OEM customizations. Can you imagine what could have resulted from the balkanization of the Xbox if Microsoft had offered it to two OEMs? In their rightful quest for customizations in order to differentiate their products, can you imagine what the delivered products would have looked like? Now, imagine Xbox hardware from five OEMs. Actually, please don’t!
2. Forking of the software with OEM customizations. See above.
3. A wide price range. Both of the above concerns would have led to such a wide range of prices based on the included functionality in each vendor’s product, leading the end user product back to being a souped-up PC. A situation that would have defeated the purpose, and basically crowned Sony.

Right now, especially in this rev of the Xbox 360, Microsoft is able to do more.

As a Media Center Extender, it adroitly manages TV and video, music, and with applets like the Netflix app, you can stream movies, Tweet, etc.

One of the two concerns I see going forward is whether the Xenos GPU and Xenon CPU are being improved enough to provide headroom for the 1080p future.

Also, can the Xbox 360 cost of materials be brought low enough for it to be an impulse purchase?

* HP has the MediaSmart Home Servers, the Media Center Connector line; tried TVs, etc.