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Xbox: Microsoft’s Big Cat In An Amazon of Digital Media

Redmond, Wash.-based Xbox, a unit of the massive, publicly-traded information ech provider Microsoft, is the purveyor of what one would call a rather “closed system.” This means that access to its much of its content cannot be made unless and until the end-user pays directly into Microsoft’s special and proprietary system (and typically access to that system’s specific content is controlled more tightly by that system operator). As such, Xbox is in a similar category with a couple of other big, wild felines, i.e., Cupertino, Calif.-based Apple, and Seattle-headquartered Amazon.

This article highlights the fundamentals of Microsoft’s Xbox subdivision.

Recent visits to many new video distributors have provided the basis for these Multichannel News write-ups (See, the first article about Netflix, in “Mixed Signals,” dated January 7, 2013). In this, the second, of more than half-dozen pieces about today’s key digital media players -- all of which have their sights set on the delivery of digital video to end-users -- Xbox shows the wisdom of the 1998 Microsoft proposal by Messieurs Otto Berkes, Kevin Bachus, Seamus Blakely, and Ted Hase, to actually have Microsoft launch the gaming device they once titled, “DirectX.” 

Strengths

Among all of today’s new digital players, only Apple has what would generally be referred to as potentially “deeper pockets” than Microsoft. That, and Microsoft’s more than 10-year gaming and media box legacy, create a huge competitive advantage for Microsoft’s current Xbox division. Those kinds of “deep pockets” usually allow just about any company to reach deeper into its risk box, in order to make something new (or old), and worthy, actually work.

In addition, the Xbox already has a large base – almost 40 million. -- of Xbox users, and Microsoft uses that to introduce other products and services aimed at those end-users. A prime example would include Microsoft’s recent effort to include the Xbox application in Microsoft’s new “Windows 8” cell phones and its “Surface” tablet devices. Because Microsoft has a youth-oriented gaming platform in Xbox (and Apple doesn’t), if Microsoft can now build a full ecosystem anywhere near as well as Apple has, that will be a substantial competitive advantage for the House That Bill Built. 

Further, both the sophistication of the Xbox, and of the content it delivers these days, is worth pointing out. For example, unlike others of its competitors, Xbox back in 2004-5 began offering the Xbox 360, which linked the console to the outside world via the Internet. This then added a social element to the Xbox, which allowed not only unique dialogue between Microsoft and its Xbox users, but as importantly ultimately, dialogue directly between the millions of global Xbox users themselves. Common sense suggests that having the choice to play a game against anyone else (or against everyone else), in the world, is a huge plus.

Speaking of Apple once more: Like with Apple’s iPad, Microsoft’s new “Surface” tablet device has allowed yet another viable piece of consumer electronics hardware into the bigger Microsoft jungle, which itself furthers the chance to grow the nearly two score mil. Xbox family that exists today. Another comparison would include Apple’s iPhone to Microsoft’s new cellphone.

In the end, many of these big digital media cats have found that thinking on a macro scale first can then lead to unique and lucrative micro determinations; in the case of Microsoft, it then first sets up what one might call the “Whole Home, Connected Device” ecosystem, after which it populates the different devices and systems within that. If done successfully, this can be a real strength for Microsoft. 

Challenges

Some recent quarterly data suggest that the gaming industry as a whole may be in a decline of sorts. But even if this is the case, it usually takes more than a few of quarters to elicit a trend. 

Meanwhile, key rivals in today’s gaming side of digital media include today Sony’s “PlayStation,” as well as Nintendo’s “Wii” units. Enough said.    

Also, as noted above, Microsoft is challenged with the task of successfully following in the footsteps of companies like Apple, to create that ultimate and all-inclusive world of Microsoft devices, as well as a world-class operating system, and huge troves of content. Yet, interestingly, some say Microsoft has flopped in its recent roll-out of the “Surface” tablet and cellphone, which makes the implementation of its “Whole Home, Connected-Device” ecosystem that much harder, and that much longer.

Put another way, like many media companies today, Microsoft also struggles with what is known as the “second screen” dilemma (where more than one screen is asked to concurrently display the same content). Poor sales of Microsoft’s tablet and cellphone have impeded that creation of a greater base that can more quickly grow the Xbox and that “Whole Home, Connected-Device” place.

Furthermore, reports of a new Microsoft hardware subsidization model, like several items above, create both an opportunity and a challenge for Xbox and Microsoft. As always, the “subsidization struggle” becomes just how much do you incentivize a consumer to get him/her to buy your hardware, with payments on the back-end, in the form of monthly service fees?

Finally, there has to be great concern about whether competition Xbox receives from the new litter of smart TVs and the Roku-like devices that are populating more and more homes, will also hinder Xbox’s – and Microsoft’s “Whole Home, Connected Device” plans.

Other Points

Because Microsoft only reveals overall Microsoft company results, targeted data regarding key Xbox assets and liabilities are limited.

As noted above, with nearly 40 mil. Xbox users, among whom apparently 60+% are Internet-connected, Xbox is now rated the second largest video on demand and electronic sell through service, offering robust content, literally, from all the major Hollywood studios. This is a huge asset. As the # 2 VOD and EST provider, Xbox has a strong argument that it can get its large customer base to interact with its content, and the next logical step is to get them adaptable Microsoft devices so that those can be those customers’ “go-to 2d screens.” 

Pricing of the Xbox console and games is considered balanced, for both old and new titles. A new Xbox console lists for $179 from the Microsoft and Amazon websites; while Xbox monthly fees for the core service run from around $5 to $15 (depending on the package features). Many see this monthly fee as an impediment to growing a larger Xbox service, especially since the core subscription on key rival services is free. In Xbox’s movie offerings, the service remains competitive pricing-wise.      

Summary

The Microsoft/Xbox motto reads, ”Much More Than Just Games For Your Kids,” which is apt. In many ways, because of its live TV offerings via pay TV service providers Comcast and Verizon and AT&T, via on-demand deals with Netflix and Hulu Plus, and via partnerships with content providers such as Bravo, SyFy, ESPN, and HBO GO, the Xbox is better positioned than most to take users into the next realm video distribution and TV. This includes not only live TV, but all media in one entertainment and information center. That would mean not only TV shows, live and past, but music, games, VOD, EST, and the next best thing…via traditional pay TV or Internet IP infrastructures. The big question now is can Microsoft successfully connect the second screen(s) in that “Whole Home, Connected-Device” environment to the content being sold and interacted with in the Xbox?

Looking forward, the jungle of digital media providers is clearly better off because Xbox resides there. Fellow big game -- in the form of Apple and Amazon -- are certainly heeding Xbox’s stealth, which, ultimately, is a great thing for them and for most of the others – including the consumers – who make up that ecosystem. Indeed, looking forward, we see nothing but the continuation of what has turned into a true (and great!) cat fight!

Jimmy Schaeffler is a telecom author and chairman/CSO of Carmel-by-the-Sea-based consultancy The Carmel Group (www.carmelgroup.com).