Why Microsoft Can Win the Living Room

Steve Wildstrom / May 22nd, 2013

As Ben Bajarin pointed out in his post here yesterday, Microsoft’s Xbox One is a whole lot more than a game console. Of course, the Xbox has long been the leading edge of Microsoft’s effort to dominate digital home entertainment. But a combination of clever new hardware and Microsoft’s unique positioning with respect to the entertainment industry could propel it to victory–and reverse in faltering fortunes in consumer businesses.

Of course, the hardware still has a lot to prove. The ultimate goal of the digital living room is a single box that can deliver all your entertainment desires. On paper, at least, the Xbox One comes closer than anything we have seen before. But features on paper, or even in a demo, are one thing and real life is another. Even Google TV looked sort of good in a demo before flopping with consumers.

The biggest challenge facing the Xbox One is the promised integration with cable set top boxes. Success will depend on the new Xbox’s ability to control the set top box through an easily set up HDMI connection. It needs to banish the cable box to irrelevancy for everything except accessing and decoding content, ultimately becoming your DVR and your gateway to video on demand. That would make it a huge breakthrough. But if it needs IR blasters to control cable, it will go the way of Google TV. Microsoft is so far silent on which boxes from which cable operators the Xbox will integrate with.

It also remains to be seen how well the gesture and voice control will work to replace traditional remotes or controllers. Again, these are technologies that often demo better than they work, but successful elimination of the need to use hardware to control the box would also be a huge step forward.

So it looks like Microsoft will have a hardware edge when the Xbox One ships “later this year.” The real challenge is to build on what already appears to be a slim lead in the availability of content. Here Microsoft can built on two advantages. One is that it has been a technology partner of both studios and and cable and satellite operators for years. For example, AT&T U-verse service runs on Mediaroom IPTV technology developed by Microsoft (the division was recently sold to Ericsson.)

If Apple ever announces that unicorn of tech unicorns, an Apple television, it will have to get over a bar that has been raised by Microsoft. It’s been a long time since we could say that about any product.

But a more important reason, and an odd one given Microsoft’s history as the big bully of the tech industry, is that Microsoft is the company that Hollywood is not afraid of. Microsoft’s leading rivals in the living room are Apple, Amazon, and Google (Sony could claw back into contention, but it has fallen a long way behind.) Each of these competitors inspires fear and loathing in the studios. Apple is the company that ate the music business. Amazon is the company that seems to destroy value in every market it enters–good for consumers, but torture for producers. And Google is a company whose ambitious are scarily unbounded. Apple and Google TV effort has been hobbled by lack of cooperation from content owners and distributors’ Google so far has restricted itself to selling and streaming downloads to other companies’ devices, though it is rumored to be contemplating a set top box of its own. In this company, Microsoft can position itself as an honest broker, a neutral player with no dog in the fight.

The only entertainment content deal that Microsoft announced at the Xbox launch was an exclusive with the National Football League that will bring a lot of “second screen” content, such as stats and highlights, while watching a game on your Xbox. But there was no word about making the games available outside of the NFL’s existing deals with CBS, Fox, NBC, and ESPN. (Microsoft will also get branding on the hoods of replay stations; let’s hope that works out better for them than Motorola branding on coaches’ intercom systems.)

In the end, it is Microsoft’s ability to strike content deals with studios, networks, and sports leagues and getting cable operators to support deep integration of Xbox with their services that will determine success in the living room. At a minimum, though, it seems that if Apple ever announces that unicorn of tech unicorns, an Apple television, it will have to get over a bar that has been raised by Microsoft. It’s been a long time since we could say that about any product.

 

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Defendor

    Of the full ecosystem players (those with Cloud/Phone/Tablet/Desktop aspirations) only Microsoft has any serious presence in the living room (IMO), so it is theirs to lose.

    The problem I sense,is that I am not sure it matters to the next generation. When I visit my friends, their consoles are gathering dust and their kids now have iPads glued to their faces.

    It is nothing but my gut and anecdotes, but I expect more whimper than bang, in the next generation console sales.

    • benbajarin

      This is interesting and perhaps highly generational. My kids do the same thing, they will play iPad all day and use the XBOX via connect only minimally. More value to them with iPad.

      This is why I remain convinced Xbox is MSFT’s foundational asset to build upon. They need to tightly integrate and innovate around tablets, phones, etc, if they have a shot at staying relevant in consumer electronics.

  • Rich

    The Xbox “needs to banish the cable box to irrelevancy for everything except accessing and decoding content.”

    I’m not sure why the cable companies would allow that to happen, and that may be the reason Microsoft is silent on which boxes from which cable operators the Xbox will integrate with.

    • steve_wildstrom

      Because the are still going to get paid for delivering the content, as well as providing the pipes over which it is delivered. They would lose some control over branding, but considering how little use they make of it, that’s not too much of a loss. And it is an alternative to cord-cutting.

      The problem is that the cable companies just don;t appear to have any interest in delivering a better user experience. They’ve had plenty of chances that they haven’t taken.

      • Rich

        If I were a cable company I wouldn’t worry too much about cord-cutting. If too many of my customers did that, I’d just raise the rates for Internet access, since I believe most people have Internet access through a cable company.

  • def4

    Meh.
    There was nothing revolutionary or exciting shown at the XBOX presentation.
    Gamers will upgrade and kids will get this new version for Christmas instead of the old one.
    It changes nothing and only adds some extra features and capabilities and so it will sell around the same numbers as the current version.

    Much ado about nothing. The bar was raised another inch.
    Yawn.

    • MrHerzog

      I hope that people make an issue.
      An issue of the ALWAYS ON kinect camera and that it needs to be on to use the game box. I don’t want a camera always on in my living room watching and listening. Listening to my every word so it can know when I say XBOX ONE START or whatever commands it needs to execute an order.
      The privacy concerns here are enormous. MS isn’t exactly the best at software security

      • steve_wildstrom

        Microsoft says that there is no internet link to the always-on mic and that it is the infrared sensor, not the camera, that is always on.

        Of course, malware on an internet-connected device could access the camera and mic to spy on you. It’s been done with PCs. But that’s the case whether the sensors are always on or not.

  • jfutral

    I still don’t agree that MS has a “living room” presence. They have a game console presence which happens to be in the living room. The average person who does not have a game console will not look at this as a TV device. They will see this as a game console. All the media/tv capabilities will enhance the purchase for gamers who want game consoles, but that is it. And those numbers are shrinking YoY.

    And I am still amazed at how many people aren’t even turning to their TVs for TV content. So here is another potential obstacle for XBox being a “living room” device. I walk into my living room and see my family watching TV on their laptops. Keep in mind I have a Mac Mini connected to our TV, even as our TV with EyeTV and two HDHomeruns. So they could get the same content on a larger screen, but they aren’t.

    And as I’ve said before, the number of 20 and 30 somethings I know that own a TV is surprisingly small, never mind the ones willing to be tied to a TV to watch TV.

    XBox needs old ways of TV experiences to sustain in order to have continued, much less increasing, relevance. That just isn’t the environment I see developing. I could be wrong, but I don’t think so.

    Joe

    • benbajarin

      You mentioned one of my favorite pieces of hardware. The HDHomerun.

  • First, Sony has sold roughly as many PS3s as Microsoft has sold Xbox360s. Last numbers I saw had Sony ahead by 2 million units. The perception is that Microsoft “won” the last round of the console wars because of its dominance in North America and the fact that it took longer for the PS3 to be sold at a profit. Sony gambled on Blu-ray which increased the cost of the system substantially. The facts that HD-DVD has now gone the way of the dodo and the Xbox One will have a Blu-ray player in it validates the move. With broadband proliferation stalling in the US, physical media isn’t going anywhere and Sony more or less controls it now.

    Second, I’m not sure putting a black box that monitors your every move is the way to make consoles mainstream. The Xbox One is overkill for non-gamers and Microsoft is going to have a tough time convincing the average consumer that a $300-$500 console is a better purchase than a $99 Roku or AppleTV. Microsoft is assuming it will at least retain parity with the PS4 but that isn’t a guarantee at all. The PS4 is more powerful (per Anandtech) and unlike past PlayStations, easy to develop for. Tie in the issues with second hand game sales and privacy issues and it’s clear that the Xbox One is on shaky ground. Sony already has the high ground with pure gamers.

    One more point is the Gaikai streaming tech Sony purchased which should allow it to deliver content and games far more easily going forward. Sony already has a massive content library; it could potentially offer complete backwards compatibility for EVERY PlayStation using its game streaming tech. It won’t be Azure but Sony has the tech to create a completely unified content infrastructure that improves efficiencies by an order of magnitude. In fact, the next PlayStation is likely to be a Roku-sized box with most intensive processing being done on the back end.

    Bottom line, I think Microsoft dropped the ball and Sony is going to be all over them this round. Microsoft needed to put Sony out of the game this go round. Not only is that not likely to happen but I think Sony is going to hammer Microsoft this time.

    • benbajarin

      I need to double check but the numbers you are referring to with the PS3, I believe are not total install base. I do believe MSFT still has a larger install base than PS3 but I have to check.

      I think the big issue here is not that consoles will go mainstream because of games but it will be because of the other things do and add value with. Both consoles have a play here but these devices appear to be the trojan horse for the time being.

      • Agree with your “Trojan Horse” remark. That’s why I like Sony’s position over Microsoft. Gamers tend to be prosumers and many of Microsoft’s moves appear to be hostile to the very group that will push the Xbox One forward, especially the way it is handling second hand sales. From what I’ve read, you can’t even lend out games to a friend without a charge being involved. Sony seems to be listening to its core constituency. Microsoft might clear a lot of the questions up at E3. I normally buy both consoles but I’m not feeling the Xbox One right now.

  • capnbob67

    Control of the living room will be an interesting fight and it is unclear if there will be any clear winners.

    I would have issue with the assertion that Apple is NOT an honest broker in its dealings with content owners. They have NO profit motive directly associated with the content itself given that their margins are at best the cost of serving the content. They want their content ecosystem to sell profitable devices. Apparently so does MS (though we might all quibble with the profitable part wrt Xbox).

    MS and Apple have the same issue for the producers and distributors that their approaches might unravel the profitable channel bundles and payments structure that keeps cable TV afloat in the US.

    If MS as any advantage it is that it is wildly unsuccessful at creating the kinds of volumes of uptake amongst its users that would make it a threat to the established order. If XBL Gold memberships (video enabled accounts) are about 50% of XBL users (~50M users) that is no more total users than AppleTV. Big whoop. XBox is also very US-centric so is unlikely to be a player in non-US markets.

    It is also unclear that MS brings high-value users to content providers in the way Apple obviously does with its dominance of paid music, video and app downloads.
    The Xbox also doesn’t seem to offer the access to the iDevices or even Android devices that have the content owner apps on them and are using HDMI or airplay to stream to the TV, an increasingly popular way to view video content.

    I don’t see MS’ advantageous position overall but I agree that it will be interesting to see how it plays out.

    • steve_wildstrom

      It’s true that Apple has no reason to favor one content producer over another. But the studios distrust and fear Apple because of what they perceive as Apple’s effect on the music business. As far back as the iPod’s “Rip Mix Burn” campaign, Apple was seen as a company that wanted to destroy the profits of the entertainment industry.

      • jfutral

        Plus, my perception is Apple is unwilling to share any profit made from hardware. For instance, even today, the music industry gets a share of each blank CD or cassette sold. They get nothing from iPods, hard drives, or any part of a computing device as hard as they try. I vaguely recall something similar with VHS and possibly DVDs, but I am not certain. Apple in essence told the music industry they have to make money strictly from their content. That is a vulnerable position for them.

        Joe

        • lucascott

          Apple shouldn’t share those profits. The hardware is their IP and it is their right to profit from it and control who else does. The studios have their IP and the same rights and exercise them firmly even now, much of it in rather dumb ways with quality, timing etc restrictions that are encouraging torrents and such. But legally those mistakes are their right

  • lucascott

    Sorry but I don’t agree that a bar has really been raised that high here. Perhaps if this Xbox removed all need for a separate cable box, that would be a start.

    Apple’s STB is coming closer to winning the living room as their app collection removes the need for that box. Yes it sucks that HBOGo doesn’t allow me to directly subscribe but with the app is there that I could use it rather than my cable box. If more channels and collections of channels go that way it will only strengthen Apple’s standing. Games for iOS are getting better and better with more supporting AirPlay with multiplayer screens etc. And many games are starting to come out for standard console and mobile devices. Add any one of several Bluetooth 4.0 controllers and its game on. A rework of Apple’s media store for something closer to the blu-ray experience via those downloads and many folks won’t care about the lack of an optical drive

Protected by Gerben Law