Fans line up around the world for the newest gaming consoles and

products. But there's one place that's never seen a reaction like

this for Xbox.

Japan. In the early 2000s, when Microsoft launched the Xbox, Japan

was the gaming juggernaut of the world.

Japan was home to three big console makers — Nintendo, Sega and Sony.

And Japanese game developers were considered the best and most

revolutionary on the planet.

Around the time of the launch of the Xbox, Japanese game developers

were the most important in the world.

The success of any new game platform depended in large measure on

whether or not you can get the best Japanese game developers and

their titles, more importantly, on your platform.

So when Microsoft launched the Xbox in 2001, the gaming world was

suspicious of an American console made by a company known for its

software, not its hardware.

They were kind of perceived as the bad guy coming into the Japanese

market, kind of invading the homeland and competing with Sony and

Nintendo. All three launches of the Xbox were a total failure in

Japan. But at the same time, since its debut in 2001, the Xbox has

become one of the biggest consoles globally.

The release of the Xbox One in 2013 was a huge success for Microsoft.

For the three years following its release, the Xbox One was the

world's second-most popular gaming console of its generation.

The Xbox One has sold almost 46.9

million units worldwide through the second quarter of 2019, but only

a tiny fraction of global sales — just 0.3

percent — have been in Japan.

So why has the Xbox never caught on in Japan, despite its worldwide

acclaim elsewhere? When Microsoft started developing the

Xbox in 1999, it wasn't known as a gaming company.

Its reputation was all about PCs, its office products and a big

antitrust lawsuit. Microsoft had a PC gaming business in the late 90s

known for Microsoft Flight Simulator and Age of Empires.

Developing the Xbox was all part of Microsoft's plan to bring its

technology into consumers' homes.

Sony was the leader in the consumer electronics market in the early

2000s. Its PlayStation 2 was considered a threat to Microsoft for its

potential to replace PCs as a way to get Internet access at home.

Bill Gates's motivation was more about maintaining Microsoft's

dominance and position and ecosystem of software.

Bill really got it because games are software that is entertainment

that can stand right alongside a movie.

Denise Chaudhari, a designer who worked on the original Xbox,

remembers that Microsoft got into gaming as a challenge to Sony.

Bill Gates wanted to get Microsoft technology into Sony consoles, so

he went to Japan and suggested a partnership.

Microsoft, Bill Gates specifically, saw an opportunity to take

something that was established that Sony was already doing the

PlayStation and sort of integrate technology and software that

Microsoft was the master of, which was home computing and kind of

bring that together. Sony was not interested.

Sony was basically like, thanks, but no thanks.

And Bill Gates said, okay, then I'll do it myself.

Video game journalist Dean Takahashi thinks companies were wary of

working with Microsoft because of its antitrust lawsuits.

There were already antitrust cases

happening against Microsoft and everybody knew that if you sort of

let them in the door, it was kind of like a Trojan horse.

You might lose control of your business the way say the P.C.

makers like IBM had lost control of the business.

This wasn't the first time Microsoft would hear a no from a Japanese

company on the Xbox.

Chaudhari says Mitsumi, the company that made circuit boards for

Sony's PlayStation controllers at the time, refused to make a circuit

board for Microsoft.

Mitsumi could have jeopardized its relationship with Sony by giving

Microsoft the same technology.

Mitsumi didn't respond to CNBC's requests for comment.

So Chaudhari had to use a larger circuit board for the Xbox

controller. Microsoft moved quickly to launch the Xbox.

The consoles hit shelves in the U.S.

in November 2001 and in Japan in February 2002, later than expected.

Microsoft has released three consoles in the Xbox series, the Xbox,

the Xbox 360 and the Xbox One.

While all three console releases failed in Japan, the Xbox was a huge

hit elsewhere in the world.

Microsoft eventually secured the coveted No.

1 spot in the global market from 2011 to 2012 with the Xbox 360.

Nobody expected we were going to be a hit product in Japan and we

understood what the playing field was like and we were just trying to

not embarrass ourselves.

Sega, Nintendo and Sony dominated the video game market in Japan when

Microsoft came onto the scene.

Before the Xbox launched, Sony and Nintendo devices accounted for

basically 100 percent of the global video game market and not much

has changed since then.

As of 2019, sales of the Xbox don't even begin to rival that of the

PlayStation 4 or Nintendo Switch.

There are three main reasons the Xbox console didn't sell well in

Japan. Today,

game developers are from all over the world.

But in the early 2000s, most of the best developers were Japanese and

at the time the Xbox launched, Japanese game creators were hesitant

to put their content on a console that wasn't popular in Japan.

Japanese gamers and developers favorite role playing games over the

shooter style games that were more common in the U.S.

In order to convince gamers to switch to Xbox, Microsoft needed big

name Japanese developers to defect from Sony and Nintendo.

And developers saw pros and cons in defecting to Microsoft.

The graphics power of the Xbox and its ability to create realistic

games exceeded other consoles at the time.

We're pretty successful

convincing them that Xbox represented a platform would enable them to

do new and interesting things and most importantly, would enable them

to sell those games to a Western audience.

But for many developers, the disadvantages outweighed any potential

upside. Some game creators like the XBox's hard drive, which was

faster than the PlayStation CD-ROM.

But they worry the high cost of Microsoft's technology would drive

consumers away. And then there was loyalty.

It was really difficult to convince a developer who'd already had a

relationship with Sony and Nintendo to take a gamble on Microsoft's

unproven Xbox.

The second problem is that the Xbox was just too big.

It was huge and Japanese homes were small.

That was sort of one of the first things that made the Japanese

people wonder, does this company know what it's doing?

The controller was another problem.

PlayStation used a folded circuit board made by Mitsumi in its

controller. It was a single circuit board cut in half and stacked so

that it was smaller than a typical circuit board.

Microsoft's team asked Mitsumi for the same circuit.

And Mitsumi simply said, no, they would not budge.

They would not give us the same circuit board.

Since Microsoft couldn't get the folded circuits from Mitsumi, it had

to make do with large circuit boards, meaning the controller was

bulky. That controller never actually launched in Japan, so we can't

know how Japanese consumers would have reacted to it.

The Xbox team instead expedited production on a smaller controller

called the controller S for the Japanese launch, Chaudhari says.

Even Microsoft's own team in Japan refused to endorse the Xbox

because of its bulky design.

Finally, timing was also a problem for Microsoft.

The company delayed its Japan launch to February 2002. That meant

that the console and game developers missed the crucial holiday

period in Japan when kids got money from family members to celebrate

the New Year. The Xbox 360 was Microsoft's most successful console

with Japanese consumers.

So what made it less of a flop in Japan?

With the Xbox 360 Microsoft tried to address a few problems it had

with the Xbox. First, Microsoft planned to launch the console ahead

of the holiday season and before Sony launched its competitor, the

PlayStation 3. Microsoft also worked with a Japanese design firm on

the new console and collaborated with Japanese creators to make games

for the Xbox. But that didn't make a dent in PlayStation's hold on

Japan. Sales in Japan of the PlayStation 3, which launched in 2006,

vastly outnumbered sales of the Xbox 360, which launched one year

earlier. Microsoft's next console, the Xbox One, also had a strong

start when it was released in 2013.

Microsoft sold more than 2 million of the Xbox One consoles globally

in 18 days, breaking a record for the company.

But in Japan, the Xbox One saw yet another lackluster response.

Of the 46.9 million Xbox Ones sold worldwide through the second

quarter of 2019, less than half of a percent of them have been in

Japan. For comparison, PlayStation 4 has sold 99.8

million units globally through Q2 2019, with 8.6%

of them in Japan. In a statement to CNBC, Microsoft said Japan

remains an important part of our global gaming community and a major

contributor to Microsoft's future plans.

We're committed to bringing innovative and homegrown content from

Japan's leading game creators to a global audience.

But Microsoft's inability to appeal to Japanese consumers may be the

least of its problems right now.

Global sales of the Xbox One have been lackluster as users shift more

to mobile and streaming games.

Analysts say it's a problem impacting all console makers.

In Microsoft's earnings release for the quarter ended June 30th,

2019, the company said Xbox hardware revenue declined 48 percent,

primarily due to a decrease in volume of consoles sold.

Experts say Microsoft is adapting to a video game future that's not

dependent on hardware sales by selling subscriptions to game

libraries. Why is the Xbox 360 doing so well or why's or other

people's things doing well?

It's that software capability and that's a bet that we made at the

beginning of the company. In fiscal year 2018, gaming revenue

increased 14 percent compared to fiscal year 2017, driven by Xbox

software and services growth.

Microsoft noted that Xbox hardware revenue was lower.

Microsoft's 2018 annual report shows its shift away from hardware

dependency. The surge in popularity of streaming gaming has

fundamentally changed Microsoft's relationships with one of its

longtime rivals.

Microsoft and Sony made a surprising announcement in May 2019.

They're working together to develop game streaming technology using

Microsoft's cloud.

Cloud gaming allows players to use any device with an Internet

connection to play games.

And Microsoft has made several big moves in the space, including

plans for a new cloud streaming service called Project xCloud that

would allow users to stream their entire Xbox One libraries to mobile

devices. The partnership comes as giants like Google are getting into

gaming by developing its own cloud gaming service.

That represents a seismic shift in video games.

With faster Internet speeds, games can be played without a console on

a cell phone or a computer.

Cloud gaming is projected to be less than 2 percent of the forecast

total games market by 2023.

But Japan is poised to be a leader there.

In 2018, Japanese consumers accounted for about 46 percent of the

$387 million consumers spent on cloud gaming worldwide.

Microsoft knew Japan was going to be its most challenging market, but

Blackley says sales figures aren't the only way to measure the market

in the long run. Microsoft didn't need Japanese consumers to make

billions of dollars.

When the console launched, it was crucial for Microsoft to get

Japanese game developers on board.

But Japanese consumers were less of a priority.

The issue with Japan was never the amount of revenue that it

represented. The issue was the amount of revenue that the games from

Japanese developers represented.

Blackley says the Xbox changed the philosophy on game development.

One of the things about game consoles prior to Xbox was that the

hardware is arcane. Xbox had a different philosophy.

I really had the idea that the biggest market can be addressed and

can be captured by Microsoft through democratizing game development,

through making the tools of game development widely available and

easier.