Banks and other companies looking for a case study in how firms can quickly alienate customers and shred their public image should take a long, hard look at Microsoft (MSFT).
The Redmond, Wash., company announced late Wednesday that it was abandoning controversial policies related to its new Xbox One video game console due out this fall, barely a week after executives gave details on its plans. The reversal was shocking in part because it was a complete capitulation to angry customers, many of whom had threatened to take their business to Sony, Microsoft's biggest gaming competitor.
It was also a powerful warning for any company about how it unveils new products and changes to its policies, demonstrating what can happen when a firm appears indifferent to its own customers.
Microsoft's mistakes were not unique, and many other firms, including Bank of America (BAC) and Coca-Cola, have made similar errors when implementing changes to their business strategies. But by virtue of the tech giant's size and influence, its unveiling of Xbox One is likely to go down in history as one of the bigger and completely avoidable public relations disasters.
There are key three reasons Microsoft's strategy backfired:
Mistake No. 1: Microsoft took its customers for granted.
Microsoft won the last round of console gaming with its hugely popular Xbox 360 system and perhaps as a result, the company assumed much of its existing base would be anxious to pick up the Xbox One, no matter what new policies were being implemented. Shortly before presenting at the Electronic Expo conference last week, executives released a boatload of information about the new system, including that it would have to connect with the Internet at least once a day and did not allow the purchase or sale of used games. Sharing a video game among friends, meanwhile, required a chart to understand.
The backlash was as intense as it was predictable. Even before the details were formally unveiled, gamers had been fuming about potential "always connected" policies and restrictions on used-game sales. Microsoft executives claimed they tested their policies in focus groups. But it was hard to see who outside of Microsoft's boardroom would support these changes.
Making the situation worse, executives, such as Don Mattrick, Microsoft's president of Interactive Entertainment Business, made a series of tone-deaf remarks to the gaming press, including the suggestion that anyone who didn't like the new policies could simply stick with the Xbox 360. He might as well have said, "No, we don't your business anymore."
The result was a new console that many gamers saw as hostile and company executives who came off as arrogant.
Mistake No. 2: Microsoft couldn't articulate the benefits of its strategy
Some of the new policies were smart. The company was clearly positioning itself for a more digital-focused future, where gamers could play their games even while at a friend's house without bringing a disc. The new system also allowed for effortless switching between games, TV and the Internet, among other things.
The problem was that no one at Microsoft could adequately convey any of these advantages. To customers, it seemed like their rights were being taken away they couldn't sell games once they were done with them but they were receiving nothing in return.
It was a classic blunder.
"If you are going to make changes, explain them in terms that at least seem to be advantageous for your customers," says Billy Pidgeon, an independent market analyst specializing in video games and social media. "Don't say 'we are doing this because it's good for the industry.' People don't care about the industry. They care about themselves."
Mistake No. 3: Microsoft underestimated the competition
Microsoft's mistakes were numerous, but they were made more obvious by the shrewd decisions of Sony executives. When Sony unveiled its own gaming lineup at the E3 show last week, many had expected it to adopt policies similar to Microsoft's. Instead, it went the opposite direction, expressly repudiating Xbox One's restrictions. As the gaming website IGN put it, "Sony responded with some cool-looking games of its own followed by a series of slow-motion punches to Xbox's groin."
Sony took full advantage of Microsoft's errors, mocking the Xbox's policies with a hilarious "instructional" video demonstrating how to share games on the Playstation 4 (you hand a game to a friend, a much simpler process than the Rube Goldberg scheme required for Xbox One). It helped that Sony also underpriced Microsoft by $100, asking a retail price of $399 for its new console compared with the Xbox One's $499 price tag.
"Microsoft gave Sony a great opportunity and Sony ran with it," Pidgeon says.
In many ways, Microsoft's mistakes were strangely reminiscent of the unveiling of New Coke or, more recently, B of A's 2011 decision to charge customers $5 a month for using their debit cards. In the latter scenario, the bank made virtually all of the same missteps as Microsoft. It implemented a change that counted on customers not switching banks, it couldn't articulate any consumer benefit from the switch, and it allowed competitors to effectively paint the institution as anti-consumer even if there were legitimate business reasons behind the new fee. Like Microsoft, the bank was also forced to eventually abandon its plan, acknowledging its mistakes. Although Microsoft and Bank of America spun their reversals as just "listening to customer feedback," both companies should have been well aware ahead of time of the firestorm their decisions would cause.
Ultimately, Microsoft may recover from this debacle. By changing policies so quickly after announcing them, it has months to restore its public image before Xbox One is officially launched around November. It is also a big enough company that it can absorb some early losses and eventually rebuild customer trust.
But banks and other companies that fail to learn these lessons may have a harder time living down such colossal bungling. Given all the industry's problems rising regulatory costs, tight interest margins, a collective reputation stained by the crisis the last thing any financial institution needs is its own Xbox One.
Rob Blackwell is the Washington bureau chief of American Banker. The views expressed are his own.