Sunday, December 21, 2008

Microsoft is Cable: Part Three Edition


In 2001, at the launch of the first Xbox, Steve Ballmer 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 guess we got to that point. In yesterday's New York Times Bits section, Shane Kim, newly appointed head of strategy and business development for Xbox was quoted as saying:
“We have been very focused on making sure we win in the gaming space,” Mr. Kim said. “Now that we expand and our aspirations broaden, we need to think about which assets of Microsoft fit in.”

Which closes the loop on what I wrote in December 2001:
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.

and moves us one step closer to Xbox fulfilling the prophecy Bill Gates shared in his 1995 book The Road Ahead:

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 connect 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.

By making the Xbox a game platform, Bill got us all to subsidize that nasty up front capital expense. In the 2001 piece, I also detailed how the Xbox allowed Microsoft to avoid legal scrutiny and become the dominant set top box. It was not a case of insightful brilliance on my part, it was merely an exercise of my uncanny grasp of the obvious. After all, Bill Gates laid the whole thing out 6 years earlier.

My premise all along was Microsoft would lay low, until they gained an installed base of 20 million or so (according to vgchartz.com I was off by about 5.9 million), and then they would flip the content switch. This would be late enough for the gamers to be entrenched enough not to reject the box as a CDI/3DO everything box. It would also be late enough to have family members who are not game members wondering if there is something they can do with the box. It would also be a large enough base to really excite content folks with the audience size. Microsoft made some smaller deals with content creators and studio deals for film distribution, but the first real step in this direction was Netflix. Mr. Kim outlined the next ones in the article:
He argued that while there might be hundreds of video sites, most of the activity was concentrating on a handful of sites like Hulu and YouTube. So his first instinct is to cut a handful of deals that integrate the Xbox more deeply into such sites.

(If you have not checked out Hulu yet, you should. The the Mac Mini plugged into my television, I was able to do Dick Van Dyke Show marathon at the site, as well as introduce my son to the wonders of Lost in Space.) It's really neat to have all the iTunes stuff on my computer and iPod. If I want to spend more money - I actually did- I can get a Mac Mini, or less money and a get a somewhat anemic Appletv, to move it to my television - or I can use my 360. Before purchasing the Mini I was able to use the 360 to channel media from my Mac, but it was kind of cumbersome and the Rube Goldberg essence of the set up received a very low Wife Acceptance Factor score. Microsoft is fixing this, soon, I won't even need the Mac. In typical Microsoft style, they let others build the content stores while they own the OS and in a very web 2.5 kind of way, the billing system and the community.
While I am gloating about how right I was, I should admit, where I was wrong. I wrote:
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.

Intertainer went out of business before Xbox Live happened, so NBC and Fox content will come in through Hulu, as well as a ton more. Movielink was acquired by Blockbuster and Cinemanow has been ignored in favor of direct distribution deals and Netflix for catalogues. I also though Passport was going to be pulled into the Xbox, when in fact, Live is being pulled into the PC world. Hey, if I am going to toot my own horn when I am right, I do have to point out the mistakes as well.
Mr. Kim says he is now working out a strategy to make money and not simply be a carriage provider. This makes sense, but I believe he is only feigning humility. First of all, carriage providers are subject to considerable regulation, not something Microsoft is about to walk into knowingly. Second, more significantly, as I wrote last April in part two of this seemingly ongoing series, Microsoft enjoys leveragable advantages over cable:
Microsoft's advantage over cable is significant as well. Cable companies must pay for the boxes to be installed in people's homes. We buy 360s and subsidize R&D through game purchases. Cable companies compete each other by using a shotgun approach to broadcast everything under the sun to every subscriber. They must secure a lot of edge case content to broadcast into every micro, nano, niche interest known to man. I have never even surfed through the Golf Channel. Those 30 or so Spanish language channels? Nope, and there are a lot more. My cable service is kind of like British food in the 90's. Sure we give you a lot of uninteresting and possibly overripe content, but just carve off the bad bits and there is still plenty of good stuff underneath. Microsoft is able to narrowcast to a homogenous user base so they can post content and serve on an as needed basis. The audience programs their own channels. Same variety, less bandwidth. Relative to a cable company, they are heavy on storage, low on serving. Oh yeah, and they don't even pay for the pipes. We have to pay for the ISP to connect us to the subscription service for which we pay a monthly fee. That is enough to make and MSO break down in tears.

Finally, and most significantly is cable is weighed down by its legacy. Microsoft launched just a few years ago. So they are able to roll out with IP addressable boxes with powerful processors and built in hard drives. Every time Microsoft identifies a new feature, they are able to download an update to the installed user base. Every time the cable companies realize consumers want things like TiVo, they have to source it, engineer it into the system, and then figure out how to get consumers to accept it. This puts them years behind the market. The more incremental boxes in the field, the larger the variation in the installed base. Stealing a page from Apple - the first 360 dev kits were Macs - Microsoft's installed base is homogenous and the system is closed.

So I guess while we are all trying to figure out whether Microsoft beat Sony yet, or if Nintendo is really ahead of Microsoft, Microsoft is targeting the cable systems and satellite providers. What is the aggregate value of Time Warner Cable, Comcast, Charter, DirecTv, Dish Network and Bskyb again? Games are no longer the driving force of Xbox, they are only division.

As much as I love Apple, and would love to see a company which replaced a blue screen with a red ring not own the set top in my living room, I think they did it. There is no question Microsoft is the hands down leader in set top boxes, they just haven't told anyone yet.




3 comments:

ericzoo said...

pretty interesting and insightful commentary. I always find your views more rooted and practical than the analysts in game websites. In this case, I think you nailed their internal strategy.

JoeCool79 said...

Great post Boesky. Great way of tying outside and inside sources. The MTG card was a good image choice. Keep up the great work. Happy Holidays!

Mike said...

Seeing Netflix streaming straight through a 360 was enough to finally convince me that the 360 could appeal to more than the Gears and COD demographics.

The questions are can they promote it efficiently and can they manage the linger price schizophrenia between the mass market unit they're pitching for $200 which isn't the device that supports the best of all those mainstream features.

And is the financial model they've built for this trijan horse cable killer really workable? Their hardware has never been profitable and continues to use components that are a premium level above most cable boxes. They've accrued losses on hardware and continue to.

And what about the $50 XBL fee. Would PS2 owners have been willing to buy that mahine for its DVD capabilities if they had to pay an aditional $30 license each year to run the DVD functionality? It's an imperfect analogy, but if I still have to pay a cable provider to give me high speed internet, how likely is the average consumer going to be to pay that cost in addition to XBL fees?