Microsoft (MS) Xbox Project Mist 8990 - Revenue Management

1. Microsoft (MS) Xbox ProjectMist 8990 - Revenue Management Presented by: Earl James Gobin Kishore Jayaraman Sara McMahon Veena Paidipalli March 29, 2002

2. Agenda • Background • Market and Competition • Analysis of the Problem • Major Challenges • Market Problems • Competition/Market Segmentation Analysis • Understanding the Value Cycle • Solution: Demand Based Supply Planning • Major Recommendations • Revenue Management Core Concepts • Implementation

3. Background • Microsoft plans to transform its new Xbox console into a general home device that handles everything from e-mail to video recording to analysts who follow the company. Xbox was launched on November 15, 2001. • Why did MS want to enter the Video game industry? • 20B$ Industry • Penetration strategy in the home market • 2001 Forecast - 10M • 2002 Forecast - 15M • Why did MS only produce 1.5 Million units? • Production constraints • Increase demand & visibility

4. Market & Competition • Hottest Markets: • North America - Buys both!! • Europe - Buys more hardware • Japan - Buys more software • Target Markets: • Southeast Asia • Mexico • Targeted Customers: • Existing Nintendo & Sony Customers • Older Males & Aged Gamers • Major Competitors: • Nintendo - Gamecube • Sony - Playstation

5. Major Problem:When Xbox was launched;there were huge shortages all over North America!!!! Product Flow Retail Store Distribution Center Manufacturer Plant Carrier Consumer Information Flow Distribution Challenge

6. Major Challenges • Microsoft (MS) is unknown in the Games World • Console is big and bulky • Anti Microsoft sentiments • Retailer frustration with Microsoft • Microsoft (MS) tried to create a unique brand with Xbox • Current Microsoft Litigation • Pricing • $299 is perceived very high!! • $100 Unit loss for MS • MS forecast to breakeven in 2004 • A standalone computer with Xbox’s features - $700

7. Market Problems • Demand was there, the product was not • A Black Market was created • Customers were dissatisfied • Manufacturers and Retailers suffered • Lost sales would go to competitors • Loss of market and mind share • Advertising campaigns did not match shipments

8. Competition/Market Segmentation analysis: • Xbox hit the market at $299 • 15 Games • 30 Games at the end of the year • 1.5 Million Units - 2001 • 10 Million Units - 2002 • Nintendo GameCube priced at $199 • 7 Games • 20 Games at the end of the year • 1.3 Million Units • Sony Playstation (market leader) priced at $299 • 240 Game Titles • 8.5 Million units shipped - 2001 • 10 Million Units - 2002

9. Understanding the Value Cycle • Break the business into submarkets • Techies • Adults • Professionals • Families • Project Revenue Trajectory by stage • Stage 1 - Xbox Launch Completed • Stage 2 - Product Launch - Global markets • Stage 3 - Market Domination through Optimal Timing and price!! • Determine Optimal Time to Launch Subsequent Stages “Generate Maximum revenue by understanding the value cycle and optimally timing the availability and price of the product to each micro market segment”

10. Solution: If MS had implemented business processes and systems • High Customer Service Levels • Significant return on investment • Market penetration • Stolen market share from competitors • Retailer loyalty • Increased Revenue and Profits Demand Based Supply Planning Supplier Manufacturer Manufacturer DC Forecasting Engine Retail DC Store Consumer

11. Market-based pricing • Use Price Balancing • Focus on customer’s perception of value • Test market to find price points that are acceptable to consumers • Maximize Revenue through optimal timing • - e.g event based – Xmas • Sell to segmented micro-markets, not to mass markets • Determine the value of Xbox to each segment of the market • Focus on the segments which value Xbox highly Major Recommendations:

12. Major Recommendations: • Save Xbox for the most valuable customers • Scarcity of Xbox make owners elite • If supplies are limited - Pre-sell for a higher price - Guarantee delivery for high-demand periods (Xmas) • Continually re-evaluate your revenue opportunities • If demand continues to outrun supply, increase the price -Include accessories along with the game system; adding ‘apparent value’ to the product. - Adding additional functionality • Xbox can become more than a gaming system - Expanding the product line • Software games for all gaming systems including Playstation and Nintendo

13. Implementation: • Appoint an Internal “Revenue Management Champion” at MS • Decision Support Systems Analysts to help the Internal “Revenue Champion” with choices about information systems • Talk to customers who have used revenue management concepts successfully to drive more revenue for the company • Engage the services of a consulting firm with experience in:- • Identifying Revenue Management Opportunities • Best In Class Forecasting and replenishment Systems • Collaborative Planning Forecasting and Replenishment (CPFR) between Retailers and Manufacturers • CRM Strategy • Appropriate Technology Architecture and Infrastructure

14. Revenue Impact Model

15. Top Line growth through customer behavior prediction at the micro market level and optimized product availability and price without comprising the bottom line targets!!

16. Questions ?