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From C|Net:
Microsoft is looking to squeeze a profit out of the gaming market with a new royalty program tied to the release of its next Xbox console.
Only accessory makers that get Microsoft's blessing and fork over a slice of their sales to the software maker will be able to produce Xbox 360 game pads, steering wheels, joysticks and other controllers.
In addition, in order to ensure that only authorized products connect to the new console, Microsoft is adding a security mechanism that will be available exclusively to those who sign a deal with the company. The Xbox 360 console, announced in May, is slated to go on sale this holiday season.
With the last Xbox release, Microsoft had a licensing program in which makers of such gadgets could either pay a royalty and display an Xbox logo, or offer the products without paying the fee or using the logo.
The new royalty program could be part of Microsoft's goal of turning a profit with Xbox 360, something the company was not able to do with the prior generation console, said IDC analyst Schelley Olhava.
"Microsoft has made it very clear that it's all about profitability" with this generation of console, Olhava said. "Maybe this is a way they are looking to make additional revenue off of the Xbox." But, she said, the move could also be intended as "a way to ensure quality products make it out the door," reasoning that makers willing to pony up a share of the proceeds would be the kind of companies that make more reliable gear.
Microsoft declined to comment on the royalty structure for the program or outline how it compares with the logo-only program for the original Xbox. "We want to make sure the customers are getting the best experience possible," a company representative told CNET News.com.
According to a contract between Microsoft and Mad Catz Interactive, the software giant will get a share of the wholesale revenue generated by the accessory maker's Xbox add-ons. An edited version of the contract was filed by Mad Catz as part of the company's annual report to the Securities and Exchange Commission. The edited document does not state the percentage cut that Microsoft will get from the accessory sales.
Whatever the royalty figure amounts to, it will come on top of a variety of other revenue sources for Microsoft. These include upfront licensing fees from accessory makers, the money Microsoft gets from selling the console itself and, most importantly, the royalties the company gets from those who sell Xbox 360 games.
The decision to seek royalties from console controllers is not unlike a move Apple Computer made earlier this year, in which it sought to get as much as a 10 percent cut from iPod accessory makers that wanted to display Apple's "Made for iPod" logo. The move was referred to by some analysts as tantamount to a "tax" on the iPod economy.
The Mad Catz agreement, which refers to the Xbox 360 console by its Xenon code name, also hints at the type of security that Microsoft may use to ensure that third parties work with it to produce Xbox 360 add-ons.
"'Security Feature' means Microsoft's proprietary protocol used to validate authentic devices on the Xenon platform as implemented in a Xenon Chip or other implementation method designated by Microsoft in writing," according to the Mad Catz agreement.