http://www.ign.com/articles/2013/02/06/why-microsoft-got-into-the-console-business

Microsoft only entered the console market because Sony refused to work with them, according to a former Microsoft exec.

Joachim Kempin, who was VP of Windows Sales at Microsoft for 20 years starting in 1983, made the claim in an interview with IGN that will be published in full on Friday.

When asked why Microsoft decided to enter the console space, he asserted that, "The main reason was to stop Sony. You see, Sony and Microsoft…they never had a very friendly relationship, okay? And this wasn’t because Microsoft didn’t want that.

"Sony was always very arm’s length with Microsoft. Yeah, they bought Windows for their PCs but when you really take a hard look at that, they were never Microsoft’s friend. And Microsoft in a way wanted them to be a friend because they knew they had a lot of things we could have co-operated on because they are, in a way, an entertainment company, you know? I mean, at least a portion of Sony is and they had some really good things going there, but as soon as they came out with a video console, Microsoft just looked at that and said 'well, we have to beat them, so let’s do our own.'”

This decision supposedly came right from the top of the company, with Bill Gates himself even chipping in. Despite initial reservations, Kempin claims that Gates always had qualms that the living room computer would, at some stage, metamorphosise into an alternative PC that could threaten Microsoft's dominance of the traditional market. As a result, it was eventually felt the company had to try and tackle Sony head-on.

While with hindsight we can see this worked out for the best, a huge amount of teething issues were encountered along the way. Kempin explained that the main problem that still exists today is the huge loss made on hardware manufacturing. This means companies like Microsoft and Sony are reliant upon software sales to make a profit.

Having witnessed Sony experience this issue at the time, Kempin went out in pursuit of a PC manufacturer willing to take on the burden of making the Xbox in a bid to spare Microsoft the financial apocalypse that accompanied it, but was unsuccessful.

He recounts, "I went out to several PC manufacturers and tried to beg them to do the Xbox thing and keep the device manufacturing out of Microsoft. The guys were smart enough not to bite, because they studied the Sony model and saw that Sony could not make money on that hardware model, ever. So they supplemented it with software royalties, and Microsoft copied that model."

According to Kempin though, Microsoft never really managed to nail the whole software-supplementation thing, with Halo ending up as the only exclusive software franchise they could depend upon. This meant in the end they had to look elsewhere.

"There are actually two things," he explained. "First, every developer who now has an Xbox game pays a small royalty to Microsoft for the honour of having it on that system. The other way they make money is that they finally got their act together on the services and actually that’s where the money is being made. So they’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft."

For the full interview with Joachim Kempin, which deals with long-rumoured acquisitions and the Xbox 720's interface, be sure to check back on IGN on Friday.

interesting read, can you put the source in the OP?

Oops, sorry for overlooking that. It's been added now.

A lot of that sounds a bit silly. Because Sony didn't want to be friends? Were they supposed to wear matching cell phone straps? Sounds way, way over-simplified.

I kind of expected them to finally have been pulling in an appreciable annual profit by now, with that taking a nosedive as R & D for the new console ate up cash. That they've always still been at thin profit margins, even with a seven-year old console that's selling decently and the receipt of $50/year for offering something that's free elsewhere, was not what I expected.

When they say "didn't want to be friends" they mean "wanted to use the PlayStation as a trojan horse to gobble up our market, without giving us a cut." It's spelled out in the paragraph that mentions Gates by name.

what Rol said and the article seems to repeat the "Sony and MS were never really friends"

So MS fans should be thanking Sony for getting MS into the console business. That's what I gathered from this.

Without MS, we'd still have had Halo, and all the third party games would be on a much stronger PS3 platform. So only Gears of War and Xbox Live Gold wouldn't exist, really.

Its a matter of perspective surely. The Xbox division could never compete against Windows and Office for profit but the signs are there that they do make money now while pushing Microsoft further into peoples homes. Weird as this pretty much states what we knew already, will be interesting to see what he has to say in the next article though.