Microsoft Faces Do or Die Moment for Xbox One at E3

This week, Microsoft and Sony will once again make gala presentations before crowds of gaming enthusiasts at E3, that industry's biggest and most important trade show. And while this is of course an annual event, this year the stakes are higher than ever before: At last year's show, Microsoft was soundly trounced by Sony, whose PlayStation 4 has since been widening its sales lead over the Xbox One.

To be fair, both consoles have actually sold well above projections. But as a "Wall Street Journal" chart shows, Sony's 7 million PlayStations sold is both higher than the 5 million Xbox Ones consoles Microsoft has sold and has been widening its lead over time.

But there are many things not communicated by this chart.

For example, Sony's sales are to customers, while Microsoft's are to the channel. Thus, the gap is even wider.

Sony's console is also sold in far more markets than is the Xbox One. And even after Microsoft expands sales to dozens of new markets in September, the PS4 will be available in more countries.

And then there's price. Microsoft's biggest misstep, perhaps, was pricing the Xbox One at a full $100 above the $400 price of the PS4. Both consoles are expensive, but clearly many consumers were choosing based on price alone. Microsoft originally argued that the additional benefits of the Xbox One, including its Kinect motion and voice sensor, were worth the premium. But it has since capitulated and now sells a $400 version of Xbox One without Kinect.

The big story from E3 last year, however, was Microsoft's ham-fisted marketing mistakes, which Sony gleefully and skillfully parlayed into marketing victories of its own. A key blunder: Xbox One was originally going to require an always on Internet connection, which actually makes plenty of sense in the broadband world in which expensive video game consoles sell. But when asked about how this would impact those who didn't have such connections, Microsoft's then-president of Interactive Entertainment Don Mattrick said, "hey, if I was on a nuclear sub, I'd be disappointed [too]."

Mattrick later left Microsoft. So did one-time Chief Product Officer Marc Whitten.

To be fair, the problem with Microsoft's approach to Xbox One was well understood very early on. In May 2013, I wrote in What if Xbox One is Another Windows 8? that Microsoft was perhaps trying to please too many people with the new console.

Facing complaints, the firm spent much of the year since backtracking on key Xbox One features again and again. It removed the always-on requirement, allowed used game trade-ins, and removed region locking. This year, it added that less expensive and Kinect-less console model.

The problem, ultimately, is that while Microsoft has quickly sold millions of Xbox Ones, Sony has always sold even more PS4s. There are always excuses for the sales gap, but certain milestones that were supposed to turn things around—like the release of the presumed blockbuster "Titanfall" in March—haven't helped. (Indeed, the PS4 still outsold Xbox One that month.) Now, the hope is that the lower-cost console will help even the score.

And now there's E3 2014. Microsoft's presentation is at 12:30 pm ET, with a preshow starting at 12:00 ET. You can watch the event live on Spike TV, on your Xbox One or Xbox 360 console, on Xbox.com or on your Windows Phone. Will they turn things around? Stay tuned.