Microsoft has made it clear from the system's first announcement that the 360 will be profitable for the company, or the system will be their last. Recent news surfaced that the company has instituted a new royalty model on all peripherals would certainly seem to further that goal, but not without risks.
According to reports by Cnet, Microsoft is instituting a royalty policy for all Xbox 360 peripherals. This means that a peripheral manufacturer would have to pay Microsoft a fee for every 360 peripheral sold. This system, which is similar to the deals licensed third-party software manufacturers make with Sony or any other console maker, is unprecedented in its all-encompassing nature for hardware.
This information comes courtesy of Mad Catz and their quarterly financial statements. While the company and a host of others are currently set to make devices for the 360, the ramifications for third-party peripheral makers could change the future of their business.
Quality Control or Revenue Generation?
The primary argument in favor of such a plan would be that of quality assurance. Every device or product for the 360 would have to be scrutinized by Microsoft. Thus, Microsoft could theoretically exclude all the peripherals that did not live up to a preset standard. A Microsoft representative told Cnet, "We want to make sure the customers are getting the best experience possible."
While quality control is undoubtedly important to Microsoft, the revised policy would also generate increased 360 revenue. By ensuring that every third-party hardware manufacturer had to go through the company and pay a licensing fee, Microsoft will have created a whole new stream of revenue.
"Microsoft has made it very clear that it's all about profitability," said IDC analyst Schelley Olhava to Cnet. "Maybe this is a way they are looking to make additional revenue off of the [next-generation of] Xbox."
Limiting Peripheral Makers
In order to ensure that this new royalty program works, Microsoft is planning on instituting a new security feature into 360 peripherals. A "Xenon" Chip (named after the console's codename) will use a protocol to make sure only authorized devices are allowed to interact with the 360 hardware.
Some might look at this plan and wonder why something like it was not implemented sooner. The answer is that this system is not without potential pitfalls. Typically, third-parties offer products cheaper than the official console manufacturer. With this system of royalties in place, it may cut into opportunities for companies like Mad Catz, Logitech and Pelican to make a profit.
"There could be less opportunities for third-party peripheral makers, just because the market opportunities may not be there, because they cannot bring out products that are priced low enough," commented Olhava.
There is another detail of Mad Catz' agreement with Microsoft that may be the most telling: Microsoft dictating what peripherals can be made. Mad Catz is only allowed to make arcade sticks, dance pads, flight sticks, gamepads, and steering wheels and only of the tethered (read: not wireless) variety. This means Mad Catz cannot make cheat devices, hard-disc drives, light guns, memory devices or any sort of wireless controller. It's is unknown if any third-party will be granted a license to manufacture these devices.
This move is a calculated risk by Microsoft, one with high rewards and very real risks. While the deal may provide a new stream of revenue never fully tapped by console makers in the past, the licensing agreements may also alienate third-parties and drive them into supporting the PS3 and Revolution with increased vigor.