Xbox 360 Third Party Peripheral Manufacturers Subject to Microsoft Royalties

Quarterly financial filings from peripheral manufacturer Mad Catz Interactive have revealed that Microsoft intends to implement a royalty-based system for the manufacture of third party peripherals for its next generation Xbox 360 console. Such a system has long been in place for third-party software manufacturers, but this is the first time a royalty policy has been implemented for hardware manufacturers.

Analysts have speculated that this move has been driven by Microsoft’s desire to make the Xbox 360 a profitable venture, considering that the software giant failed to turn a profit on the Xbox 1. In an interview with CNET news, IDC analyst Schelly Olhava stated, “Microsoft has made it very clear that it’s all about profitability with this generation of console. Maybe this is a way they are looking to make additional revenue off of the Xbox.”

Microsoft itself has claimed that the Xbox 360 royalty scheme is essentially a form of quality control, designed to ensure that third party peripherals for the video games console meet certain standards. A Microsoft representative commented to CNET news that, “We [Microsoft] want to make sure the customers are getting the best experience possible.”

According to the Mad Catz documents, Xbox 360 third-party peripheral manufacturers will have to purchase a “Xenon chip”. This chip will execute a protocol with the Xbox 360 video games console to prove its authenticity as an officially licensed product. Peripherals without the chip will not be able to correctly execute the protocol, and will thus be unable to connect to or work with the Xbox 360 console.

The Mad Catz contract also appears to specify that the firm will only be able to produce wired controllers for the Xbox 360 console, which would preclude it from manufacturing other peripherals such as wireless controllers, memory units or add-on hard drives. At this stage, it’s unclear whether Microsoft will allow other third parties to make a more expansive range of peripherals for the Xbox 360, or if these accessories will be available as first-party versions only.

As Businessweek states, “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.”