The Microsoft (NASDAQ: MSFT) strategy for positioning the Xbox 360 as the most popular device in U.S. living room entertainment is, if nothing else, impressive in its scope.
The Microsoft Xbox 360 is not just a host for hardcore video games like the Call of Duty series and not just a family friendly entertainer thanks to the no-hands controller Kinect. The Xbox 360 is also a video powerhouse; it was one of the first machines to include Netflix (NASDAQ: NFLX) \streaming video service and it will partner with Comcast (NASDAQ: CMCSA) and other cable providers to offer live television through its premium online network Xbox Live on the Xbox 360 in the fall.
Now it’s taking a page from mobile and social video games with free downloadable games on the device.
The games will generate revenue through premium content purchased for small sums in the games themselves as well as advertising. The games will, no doubt, take advantage of the Kinect-based NUad interactive ads Microsoft announced it is developing last week.
Where the development of NUads is a distinctly unwise business plan on the part of Microsoft, free-to-play games should prove to be a monumental success for the company. That business model has made Zynga one of the hottest technology companies in the U.S. over the past two years. The company is currently valued around $9 billion, thanks to games like Facebook mainstay Farmville, a free-to-play game that generated $850 million in revenue by itself across 2010. Rovio made its signature title Angry Birds free on the Google (NASDAQ:GOOG) powered Android store, relying solely on advertising support. It was generating $1 million per month just after it released.
Given the influx of new casual and family players on the Xbox — Microsoft has sold more than 10 million Kinects since November — free-to-play games should tap one more revenue vein to keep the company’s entertainment division its fastest-growing asset.
Microsoft’s strategy may also prove to be one that all players in living room entertainment need to employ, particularly cable providers. While Comcast appears to be all too happy to provide television service for subscribers through the Xbox, that machine and other game devices like Sony‘s (NYSE: SNE) Playstation 3 have become greater and greater thorns in the side of cable companies as the breadth of video services on them has grown. Companies like Comcast, Time Warner (NYSE: TWX), DirecTV (NASDAQ: DTV) have hinted at offering game services through their cable boxes — Comcast offers numerous games on web browsers through its Xfinity service — but none have made games a key part of their home cable strategy.
Free-to-play games offer the ideal solution — they are cheap to develop, highly addictive, and most wouldn’t require these companies to offer expensive new input devices like game controllers since they could be played with cable box remotes. Though a premium add on to a cable subscription that gave consumers a controller and access to a large number of free games would no doubt be very appealing to a large portion of those companies’ audience.
Just as Microsoft’s Xbox business has demonstrated the vital importance of streaming video for the future of the home entertainment industry, so too will its free-to-play games. The line between what sells on the web, on mobile, and at home continues to blur; companies and investors both would do well to take note.
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 and become a fan of InvestorPlace on Facebook.
