Xbox TV: Microsoft Has the Numbers to Win the Internet Television Market

by Anthony John Agnello | September 15, 2011 2:14 pm

xbox_360_logo_flickr_185[1]Microsoft (NASDAQ:MSFT[2]) couldn’t have picked a better time to strike. Flush with strong press reviews of both the new Windows 8 operating system[3] and the early Samsung-made tablets[4] that use it — not to mention on the day that Netflix (NASDAQ:NFLX[5]) showed its first real weakness[6] in the streaming video market — Microsoft chose Thursday as the day it announced its new Xbox TV service.

After nearly one year of rumors[7] and hints[8] about getting into the ever-changing streaming- and web-based television business, Microsoft will open Xbox TV for business later this year, offering both on-demand video and live television side by side. Users, rather than having to use a complex controller and menu system to find what they want to watch, will use the Kinect microphone-and-motion controller for the Xbox 360 and Bing search technology to find programming by simply asking for it and navigating by waving their hands.

How will Microsoft succeed where others like Apple (NASDAQ:AAPL[9]) and Google (NASDAQ:GOOG[10]) have failed? And what will leery content partners and cable companies, concerned over revenue lost to yet another technology company, do when Microsoft enters the fray?

On the hardware front at least, Microsoft never will suffer the same trouble that Apple TV and Google TV had in trying to stake a claim in the average citizen’s living room. Where those companies needed to convince consumers to buy new set-top boxes, consumers already have bought into Microsoft’s delivery method: the video game console Xbox 360.

Between 2005 and today, the company has sold more than 55 million Xbox 360s, and it announced in July that, as of the second quarter, it already had shipped 14 million Xbox 360s to retailers this year. Microsoft also has sold more than 10 million Kinect devices, which features so prominently in Xbox TV, since last November.

Xbox Live, the online network used not only by Xbox 360 owners, but by Windows and Windows Phone users as well, also will be the delivery method for the new on-demand and live television options offered by Xbox TV. Xbox Live already has a user base of 35 million customers, and close to half of them are paying subscribers to the Xbox Live Gold premium service. Microsoft doesn’t need to find an audience. It already has one, and from the look of Netflix, it’s an audience that is at least curious about alternative streaming services.

Microsoft CEO Steve Ballmer provided early details about the service at Microsoft’s annual financial analyst meeting during the Build conference in California. He showed off a prototype version of the interface, saying “Xbox, Bing ‘The Office'” to bring up an episode of the Comcast (NASDAQ:CMCSA[11]) and NBC Universal television show The Office.

The demonstration, of course, called into question who Microsoft’s content providers will be to support the Xbox TV platform. At the Electronics Entertainment Expo in June, Microsoft said it will be partnering with Comcast and Time Warner (NYSE:TWX[12]), as well as other cable and satellite providers on their television project, which would suggest the company won’t make individual deals with television channels and movie studios, but give users access to existing television subscriptions through their Xboxes.

This would be smart considering how cagey channels like Liberty Media‘s (NASDAQ:LSTZA[13]) Starz are becoming about licensing their content[14] for streaming services, but partnering with cable/satellite providers isn’t a guaranteed fix. Time Warner ran into serious trouble earlier this year[15] when it attempted to air Viacom (NYSE:VIA[16]), News Corp. (NASDAQ:NWS[17]) and Discovery Communications (NASDAQ:DISCA[18]) content through an iPad app without renegotiating its agreements with those companies. Any deal with Microsoft for Xbox TV would have to be ironed out before the service makes its holiday release.

Content, however, is a secondary hurdle to delivery. Content providers will go where the audience is and, thanks to the Xbox 360’s continuing success, Microsoft has just the audience it needs to make Xbox TV big business.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello[19] and become a fan of InvestorPlace on Facebook[20].

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  2. MSFT:
  3. Windows 8 operating system:
  4. Samsung-made tablets:
  5. NFLX:
  6. showed its first real weakness:
  7. rumors:
  8. hints:
  9. AAPL:
  10. GOOG:
  11. CMCSA:
  12. TWX:
  13. LSTZA:
  14. are becoming about licensing their content:
  15. ran into serious trouble earlier this year:
  16. VIA:
  17. NWS:
  18. DISCA:
  19. @ajohnagnello:
  20. InvestorPlace on Facebook:

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