Game Development

The other essential element was creating games, since that was the reason customers bought consoles, and was the profit driver for console companies. Console manufacturers made money from game sales in two ways. They sold their own games, either developed in-house or by others (first party games), or independent game publishers sold games (third party games) and paid a royalty for each game sold (typically about $7 per unit). Microsoft had in-house capability, as it developed games for the PC. For PC games, however, there was no royalty, which led to a flood of games, most of which were poor quality. Microsoft originally planned not to charge a royalty to independent game developers of Xbox games, figuring that would foster game development. However, developers actually encouraged royalties, as that was a way to limit the number of games, ensure that only high-quality games were produced, and improve the visibility of each game. Royalties also were essential to a profitable business model, so Microsoft charged royalties for third party games.

Microsoft actively recruited game developers to create Xbox games, and bought some game companies to make first party games. Third party game developers submitted their plans to Microsoft, which decided which games it would license. At the U.S. launch, there were 19 titles available, of which 5 were first party games. For each Xbox purchased between launch and the end of 2001, consumers bought more than three games, with the best selling game, Halo, selling over 1 million copies. There were many other games in development, both internally and by third party developers. (By the end of 2001, there were 220 PS2 titles available, and Sony was generating a profit.)19