Saturday, February 16, 2008

I Love to Say I Told You So: Xbox Is Cable


I wish I could say I hate to say I told you so, but I really don't. I kind of love it. On December 10, 2001 I published the article posted after the jump in the Gaming Industry News suggesting the Xbox was really a cable box. This was about two weeks after the launch of the Xbox. I thought it was kind of odd that while seriously defending itself against the Department of Justice, Microsoft was well beyond the central issue of that case. Publicly they were arguing over placement of the browser in the OS, in reality, the company was moving its focus to the living room.

Much like cancer, Microsoft grows by metastasizing. If they get a foothold in your life, even if it is vaporware or buggy product, it is enough to iterate and grow. Anyone out like Windows 1x very much? My first Xbox - not so great. But my 360 is my friend. It will take media off my other computers and servers and deliver it to the TV, it will let me talk to others, it will even let me order HD movies at the touch of a button. And the feature set grows on a regular basis, slowly relieving me of that nagging need to get other products, like AppleTV, or soon, probably even TiVo.

Being the master of the universe that he is, Bill Gates disclosed his road map for world domination in his book "The Road Ahead." He just didn't think anyone would understand. In truth, we didn't. I was inspired to write the article by the following quote from his book:

Companies that hope to participate in the creation of the
applications and services and enter the content business
through investment and/or influence want to move now,
while the opportunities are open. Some of these companies
connects up the television set. Part of their strategy could be
to offer, for a single monthly fee, the connectivity to the
highway, the set-top box and a package of programming,
applications and services to go with it…. Although supplying
the boxes will increase the up front capital required by the
network operator, the outlay will be worth if it helps create a
critical mass of users.

Even though it predated the Xbox by 6 years, it sure sounds like an Xbox. In the article I suggest Microsoft would flip a switch and open the set top during the first generation of Xbox. I was wrong. They did it midway through the second iteration. It was during CES this year when Robbie Bach proudly announced that Xbox carries as much or more HD linear content as any cable network.

Why am I talking cable networks and game consoles? When measured as a game console, Xbox just passed viability last year. When measured as a cable set top box, the success is unprecedented. Verizon is paying $8,000 per user to upgrade its infrastructure to fiber and place set top boxes in people's homes. Time Warner is also paying thousands for the upgrade. When they are done with the upgrade, the boxes, when compared to an Xbox could be described charitably, as anemic. Microsoft has users paying them. Moreover, content providers pay Microsoft for access to the box. In the words of Bob Weinstein "They got a word for that. . .' cool'."

Microsoft now has over 12 million Xbox 360s installed in homes. This makes them the number 3 cable system in the world and by the end of the year, possibly number 1. They are already number 1 when measured by the size and performance capabilities of the homogenous base.

While we consider HD standards, digital conversions and which devices get access to the scarce HDMI ports on the backs of our new television sets, lets take a look back in time, read the article, and think about what has already creeped into our homes. The whole article is after the jump, just click to below to read it.



From The Gaming Industry News, Issue 5.

There's no doubt about it. The Xbox is not a Trojan horse, as many have already argued, it is more like the amphibious vehicles used to land the troops on the beach in the opening sequence of Saving Private Ryan.

Before I get started, I admit that all of my computers are Macs and I have significant issues with authority that preclude me from accepting Microsoft into my personal or business computing life. I also admit my interest grew when I saw the terms of the Microsoft settlement agreement with Department of Justice included the government's assistance in penetrating schools, the only PC market where Microsoft does not have monopolistic power. Bear with me on this one. I am a child of reality and as such wrote this editorial on my Mac, using Microsoft Word. The Xbox is a true technological engineering feat that is rivaled only by the legal engineering that enabled Microsoft to do what AOL Time Warner cannot. As early as 1995, Microsoft was targeting the set-top market. Bill Gates saw the digital tollbooth moving from the operating system to the set-top box, which he described as "…in every sense a computer." Who cares who owns the bridge if you have the toll- taking concession? In his 1995 book, The Road Ahead, Gates writes:

Companies that hope to participate in the creation of the
applications and services and enter the content business
through investment and/or influence want to move now,
while the opportunities are open. Some of these companies
connects up the television set. Part of their strategy could be
to offer, for a single monthly fee, the connectivity to the
highway, the set-top box and a package of programming,
applications and services to go with it…. Although supplying
the boxes will increase the up front capital required by the
network operator, the outlay will be worth if it helps create a
critical mass of users.

To those around him, Gates was evidently more worried than he let on publicly about a possible set-top threat to Windows' dominance. J. Allard, who is often credited with building Microsoft's Internet strategy and business, told Justice Department lawyers in 1998, "I understood that he was hypothesizing that a large vendor such as Siemens or Matsushita were able to come out with a hardware- based device that provided an alternative platform to Windows." No one knows better than Gates that gaining monopolistic control is a catch-22. Technology adoption is driven by applications, and applications are driven by the adoption rate. Once Windows became the dominant computing platform, developers favored Windows. Microsoft's first attempt to control the set top was the development of an operating system that would grow the installed base in the same manner as Windows. However, the cable companies were not only slow on the uptake, they were making deals with competitors like Sun and OpenTV. The next move was to invest in the cable companies. But a $5 billion investment in AT&T only achieved a commitment for deployment of 2.5 million Windows CE–enabled boxes (roughly the same amount of money that Henry Blodgett predicted Microsoft will lose on Xbox subsidies). Moreover, the boxes deployed were not robust enough to leverage applications coming down the pike within Microsoft's .NET strategy that would place its software and services online. Worse, if he continued down the cable route he would be subject to regulation. The government had already made overtures at regulation in 1994 and then later passed the Telecommunications Act of 1996. Section 629 of the act was drafted to accelerate deployment of digital set-top boxes and related technologies and to foster competition. Two years after that, in Order number 98–116, the FCC interpreted the boxes covered by the telecommunications act as "[e]quipment used to access video programming and other services offered over multichannel video programming systems include televisions, VCRs, cable set-top boxes, personal computers, program guide equipment and cable modems." A "multichannel video programming system" is one that provides multiple channels of video programming to subscribers. To you and me, that would be a cable or DBS networks such as Adelphia, Comcast, DIRECTV, or Time Warner Cable. These companies are regulated not only for video service, but also for ISP offerings. Curiously, Microsoft, and its Xbox do not appear to be regulated for either. This may not seem like such a big deal. After all, AOL Time Warner has a box of its own and a cable system to drive deployment. We must remember that not only does the Xbox make the AOL TV box look like it was taken from an episode of the Flintstones, by virtue of the Telecommunications Act of 1996, AOL Time Warner is required to allow other companies access to proprietary technology and manufacture of set-top boxes,
Microsoft is not.

The Telecommunications Act of 1996 and the interpretive order were drafted in the pre-Scour and Kazaa days. No one watched full movies over the Internet; we did that on TV. The FCC was only afraid that those nasty cable companies would leverage their unique access to the Bass Fishing Channel into monopolistic control of our collective digital future. The government's focus was the connection between the boxes and the people who controlled the television channels. If a box is used to access a "multichannel video programming system" or services offered by one, the box falls under the regulation. If it does not access a cable or satellite service, it is not regulated. Xbox does not access a multichannel video programming system, it accesses something with more content: the Internet. In a display of prescience that would put Miss Cleo to shame, Gates identified the government's concerns, determined their likely course of action, and devised a plan to avoid regulation. In The Road Ahead, he writes:

But government regulators worry that allowing the network
operators to have control of the boxes will put them in a
position to capitalize on their privileged position. A network
operator that owns the boxes could also seek to exert control
over what software, applications, and services run on those
boxes. There could be limited choices for studios that wanted
to sell their movies. Whether or not to allow various services
equal access to the wires and boxes is one of the tough issues
deregulation is going to have to address.

Maybe it was not prescience. He did have four years after drafting of that paragraph, one year after the passage of 98–116, and Allard to devise a plan for domination of the set top. The challenge was to come up with a machine that was powerful enough to operate .NET applications, not subject to government regulation, and installed broadly enough to eclipse any other set-top box. That is where the Xbox fits in. Although Internet appliances could satisfy the first and second criteria, they were spectacular failures when measured against the third. Existing set-top boxes would require cooperation from cable companies and that was not happening. Moreover, any connection to cable systems brought the boxes under regulations that would require open access to the network and the box, a very un-Microsoft proposition. The answer lay in game consoles.

Every version of consoles in the modern console era (since the launch of the Nintendo Entertainment System in 1988) grew installed bases in the tens of millions. A moderate success scenario would put 20 million boxes in people's homes. That would exceed the current installed base of digital cable and broadband Internet connections. It would also be almost 60 percent of people on line in the United States. Even better, as is standard in the console business, Microsoft has absolute and complete control over all interactive content for the platform. As if that is not good enough, once they receive approval from Microsoft, anyone who wants to publish an Xbox game has to pay Microsoft a per unit license fee for each unit manufactured.

The Xbox game console is a 733 MHz computer with 64MB of RAM, an 8GB hard drive, hardware acceleration, and an Ethernet port that plugs right into a cable or DSL modem, not to mention an operating system that is compatible with Windows XP. Couple this with Microsoft's ownership of the third largest ISP and the .NET applications it hopes will become ubiquitous, and we have a very compelling argument for a powerful network of personal computers that are plugged into our television sets.

I can see the argument and the germ of a massive marketing campaign: "Don't you want to edit your home videos using XP and then watch them in your living room with your Xbox? And of course you want to have access to your Microsoft Passport to make purchases online from your living room. Oh, yeah, and that Windows Media Player thing…" Through services such as Microsoft portfolio company Intertainer, you can access many of the offerings available via cable, right there in your Xbox. Intertainer utilizes Microsoft's Windows Media Player and related billing systems, and offers 65,000 hours of programming from more than 70 content providers including Warner Bros., DreamWorks, Twentieth Century Fox, New Line Cinema, NBC, Discovery, A&E, ESPN, Pearson Television, Warner Music, Sony Music, and others. This does not even address content available on the World Wide Web at large, including first-run pay-per-view movies, which are, or will soon be, available from companies like Moviefly, CinemaNow, movies.com, and other online movie services. These have small consumer bases today, but the offerings become significantly more appealing when they come through your television set rather than your PC. If there is a broad installed base of Xbox consoles in use, it will also become among the first viable platforms for interactive television programming.

Today, interactive television and videoconferencing remain unfulfilled buzzwords because the installed base is so fragmented, that no single platform can support the development costs of the content. With the homogenous base, it starts to make sense for content creators to develop for the platform.

Yeah, yeah, yeah, but how are they going to beat Sony and Nintendo? Xbox games are not as appealing to gamers as those found on the other platforms, and both of the other platforms are more popular than Xbox. First, although Sony and Nintendo are talking about networking their boxes, they do not pose the threat or have the viability of the Xbox. Nintendo is contemplating networking for games. Sony's network is a pipe dream relative to Microsoft's positioning. PlayStation 2 has no hard drive and no resident broadband connection. Anything Sony wants to deploy through the box will require peripherals and updated operating systems and memory. Second and perhaps more importantly, Microsoft is following a strategy that worked for it before: Get a foothold, and iterate. They want to get a position in your home and continue to expand and improve until they consume more and more of the applications and operability for the platform.
MSN, after all, looked a lot scarier before launch than after, but it is still around. Xbox will be around for a long time. This is not a battle that will be won in a single platform cycle. It is a war of attrition. When measuring competitors, Microsoft, with its hubris restored, is poised to win.

Microsoft CEO Steve Ballmer is not exactly bashful about his company's latest dream of domination. On November 30, two weeks after the Xbox launch, he said, "We know we have to
succeed [with a game strategy] but there is a broader concept there that we will pursue at some point. You can say, is it the end of the road or is there a bigger play? And the answer is yeah, there's a bigger play we hope to get over time." I believe him. Even if their first try is wrong – witness Windows 1.0 – they will ultimately get it right. I have every confidence that Xbox will be so integrated into our homes that one day I will be forced to upgrade the Xbox OS to change a lightbulb in my house.



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