When Microsoft (NASDAQ: MSFT) released the latest update to the Xbox 360 game console’s dashboard and online gaming network, Xbox Live, earlier this month, they launched a new partnership with the ESPN Network (NYSE: DIS). Subscribers to the Xbox Live Premium service Xbox Gold can now watch a version of ESPN 3 exclusive to the service, letting users watch clips of broadcast programming, archived sporting events and live streams of college football and basketball events. The service has been a mild success in its first month, garnering as much criticism as praise for its content offerings that are both ad free and unshackled by traditional cable providers. ESPN 3 on Xbox Live is also a test bed, the larval form of Microsoft’s greater television ambitions. Networks and cable providers be forewarned: Microsoft is getting into the streaming television game.
According to a Reuters report published yesterday afternoon, Microsoft is preparing to offer a new subscription-based “virtual cable operator” through the Xbox 360 and the Xbox Live service. Users will pay a monthly fee to access a wealth of channels and programming delivered via the Internet that is not unlike traditional cable or satellite service offered by companies like Time Warner (NYSE: TWX), Comcast (NASDAQ: CMCSA) or DISH Network (NASDAQ: DISH). Rather than compete directly with these service providers though, Microsoft may take a page from Google’s (NASDAQ: GOOG) Internet television strategy and partner with cable providers to authenticate the Xbox 360 as a secondary cable box, not unlike the recently released Google TV set top boxes from Logitech (NASDAQ: LOGI).
Citing two sources familiar with the talks, the Reuters report goes on to say that Microsoft is already well into negotiations with television content providers and networks to bring their channels to the Xbox 360. Microsoft has enjoyed a number of profitable partnerships with network and cable channels on the Xbox 360 prior to the release of the new ESPN 3 channel. Since the console launched in 2005, the Xbox 360 has offered numerous video rentals and single-purchase downloads of programming from Viacom’s (NYSE: VIA) channels like Comedy Central and MTV. This is in addition to the numerous television shows from NBC Universal (NYSE: GE), ABC, Fox (NYSE: NWS) and CBS (NYSE: CBS) available for rent and purchase via Microsoft’s Zune store which is also accessible through Xbox Live on the Xbox 360. A devoted cable television service, not to mention more devoted channels similar to Xbox Live ESPN 3, would make the Xbox 360 a major competitor in the emerging streaming Internet television market currently occupied by the aforementioned Google and Apple Inc. (NASDAQ: AAPL).
Of course this means that Microsoft will face some of the same hurdles those companies have in bringing television content to users via the Internet. Both Google and Apple have been met with reticence to bring current television programming to streaming service on the part of content providers. Broadcast and cable networks alike are leery of losing ad revenue by offering the same content through traditional cable service and Internet services. NBC, ABC, Fox, and CBS have all blocked Google TV-enabled devices from accessing streaming episodes on their mutual official websites. Those same networks have grumbled over the low cost of TV episode rentals on Apple TV’s iTunes store. While the Reuters report says that early talks with content providers have been productive for Microsoft, it’s likely that any offerings from major TV companies will be limited in scope, not unlike the current version of Xbox Live ESPN 3.
Though Microsoft has neither confirmed nor denied the existence of plans for a cable service on the Xbox 360, those plans would fit well with the company’s business model for the console since it launched in 2005. Streaming Internet video has proven very profitable on the console. It was one of the first home electronics outside of PCs to offer the Netflix (NASDAQ: NFLX) instant streaming service. That service’s availability on the Xbox 360 has been instrumental in Netflix’s transition to a predominantly streaming-based business since 2008. That said, the possibility of network and cable channels getting streaming outlets on the Xbox 360 may depend on the success of other options such as the Hulu Plus subscriptions service. The ABC, NBC, and Fox-owned joint venture recently launched its subscription service on a number of platforms, including the Xbox 360 competitor, the Sony (NYSE: SNE) Playstation 3. If Hulu Plus is able to grow a significant subscriber base on the console, it’s more likely that that service will come to the Xbox 360 rather than devoted channels controlled by Microsoft.
Investors keen on Microsoft’s Xbox business would do well to track the success of the ESPN 3 channel over the coming months, especially considering the flood of new Xbox owners brought in by the Kinect motion controller. It’s said that any Xbox 360 cable service is at least 12 months away so support for its viability will be built during the final quarter of 2010 and first two quarters of 2011. Regardless, though, these early hints are more evidence that Internet television will be continue to be the dominant growing focus in home entertainment.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.