The Xbox 360 as the New IPTV Set-top Box

January 8, 2007, 10:09 AM by Scott M. Fulton, III

Scott Fulton, BetaNews: Right after the Bill Gates keynote, we spoke at length with Info-Tech Research analyst Carmi Levy. Gates had just left us with the final impression of the "Home of the Future," showing off, among other things, an electronic video wall which could be instantly set to redecorate itself whenever the home learns that his grandmother dropped by.

Carmi Levy, Senior Researh Analyst, Info-Tech Research: I’ve seen the same keynote a million times before.

Scott Fulton: [Gates] wants it [the electronic video wall] in his own house, so he wants it in ours.

Carmi Levy: Yea, he simply wants to be a man of the people, and he wants to be just like everyone else. So if we all have electronic walls just like him, he will truly be a populist. That’s my philosophy.

Scott Fulton: That’s kind of a backwards way of getting it done, but it might happen that way.

Carmi Levy: Exactly. Reverse-engineering raised to its highest level.

Scott Fulton: I get the impression, when people were going into this demonstration, that they weren’t really talking all that much about Vista. At least those who were, were talking about it as a commoditization of the PC, or the people they had to upgrade to; it wasn’t really the thing with the buzz. I’m wondering if maybe Microsoft changed the game just a bit in their favor.

Carmi Levy: Well, I think they did, and I think Microsoft is looking at January 30 as a pivotal day for them, and I think they saw the CES keynote as their last opportunity to really give the Vista marketing machine one final push before consumer availability. And obviously, the enterprise availability from the end of November did not have as large an impact on mass media as Microsoft would have liked, but that was to be expected. Enterprises work on much longer lead times than consumers do, so of course, enterprise availability on November 30 wouldn’t have had a massive marketing impact, because let’s face it, no enterprise would have been running Vista as of December 1. It’ll take months and months for Microsoft to begin to see the impact of that. So certainly the bigger of the two availability dates is clearly the consumer one, and they wanted to use the CES keynote as an opportunity to build momentum in advance of that date, so obviously Vista had to take precedent over everything else. And obviously, a lot of the other things that people were expecting were either pulled off the agenda or shunted down to the bottom of the announcement while they hyped Vista right up at the top.

Scott Fulton: I noticed that the role the Xbox 360 played in this presentation was not so much the gaming console that we saw at E3 last year, but more the device that extends the capability of the Vista PC into the more media-savvy home. It was a peripheral rather than a console.

Carmi Levy: Right, and Microsoft has been very savvy in recognizing that the consumer experience of the future will not be exclusively PC-based. So its dominance in operating systems for personal computers will not necessarily guarantee it dominance in the consumer electronics space going forward. So the Xbox has increasingly been positioned not simply as a gaming platform, but as a computing platform and as a media delivery platform. So [Microsoft] spends a lot of time talking about Xbox Live, about the ecosystem that they’ve been developing around Xbox Live, and by extension, IPTV.

Interestingly, IPTV was mentioned only in the guise of, or in connection with, Xbox. IPTV was not connected in any way, shape, or form with Vista throughout the entire keynote. That struck me as an interesting choice of direction. Microsoft is hedging its bets. Microsoft is ensuring that, whether the consumer platform of the future is a PC or whether it’s a gaming device that grows up into a full-blown content delivery platform, it wants to be positioned regardless of which way the market goes, and I think increasingly, when we now have super-charged game consoles that quite clearly rival the average PC in terms of power for the price, Microsoft is very intelligently playing its lead in the console wars as the foundation for the next battle in the overall war for supremacy in the living room. Microsoft is preparing for a world that extends well past PCs, and the Xbox 360 has had a year’s lead time on PS3 and Wii, and now they’re building on that lead.

Scott Fulton: Well, when you mentioned IPTV, it occurred to me that, when you’re dealing with upgrading Vista and setting the standards as far as PCs are concerned, Microsoft has had free rein to do that, to be able to change the “bulk” of Vista and, in so doing, change the minimum requirements for what the home PC must be. It has the kind of savvy to do that; it changes the operating system, thus the PC must follow. But in IPTV, historically, it is a very different ballgame. It seems like Microsoft has tried to make something work on the IPTV front, and the set-top box manufacturers, including Motorola...have said, “Now, wait a second, no-go, this isn’t going to work, it needs to be a smaller footprint, we need to make it less expensive than you’re thinking.” So when you say Microsoft is hedging its bets with tying IPTV to Xbox 360, I’m wondering if there are manufacturers here who are looking at this notion of Xbox 360 as the set-top box, and are seeing Microsoft no longer as a partner but as a competitor.

Carmi Levy: They should very clearly be looking at Microsoft as a threat. Microsoft is doing an end-run around them. It has not gotten the answers that it has wanted from the set-top vendors, and Microsoft has a homogeneous penetration of consumer living rooms. They’ve now passed 10 million installed Xbox 360s, which is huge. You find me one set-top vendor that has that kind of penetration. And really, what it’s doing is saying, “Okay, fine, you can keep your set-top boxes, your inexpensive, by-subscription-only boxes; we’re going to go our own way because we already have that presence. We don’t need to force consumers to choose from a Comcast solution or an SBC solution; we’ve already got an Xbox 360, we’re just going to add that capability on top of it.” And Microsoft has the heft to make that happen. They’ve done it on the PC side where they drive hardware with the operating system. They are now going to do exactly the same thing using the Xbox 360; they’ll introduce new services on top of Xbox 360 and, in fact, build a larger value proposition for what was formerly seen only as a game machine. Now, what they’re going to do is, they’re going to try to trump the set-top box vendors at their own game, and so you don’t need to buy or rent or subscribe to multiple boxes; “Just get ours, and we’ll just keep adding services on top of it.”

Scott Fulton: And try to hone in on that market and own it for themselves.

Carmi Levy: Right. This way, Microsoft does not have to partner with anybody. They will own a much larger percentage of that ecosystem than they would have if they partnered with the telcos right from the start. This way, they shut out the telcos and they can compete directly against the telcos, and they come in as a stronger competitor instead of simply a partner learning their way.

Scott Fulton: If they shut out the telcos like that, is there a way that the telcos can, well, bite back?

Carmi Levy: They would obviously either have to partner, or they would have to be one major player. Right now, there is no one telco that has the kind of overall market presence to take on Microsoft head-to-head. For example, I
don’t see Comcast having the kind of national penetration – sure, they’re strong in regions, but they don’t have the brand recognition, they don’t have the penetration, they don’t have the ability to deliver an integrated hardware/software solution that can easily rival an Xbox 360. They just don’t
play in that consumer space like Microsoft does. So either they figure out a way to partner and build that brand, or they compete not head-on, but they find some place to parallel-compete against Microsoft, so they don’t have to face the full onslaught of Microsoft’s penetration into the set-top market.

Scott Fulton: Could this have been partly a pre-emptive message against what might have been 50% of the message coming Tuesday from Apple?

Carmi Levy: Quite possibly. It’s interesting, because both Microsoft and Apple are dancing around that consumer space; Apple has always been more successful in that regard than Microsoft. Apple’s about to have a major
announcement; Microsoft obviously beats them to the punch by a couple of days. So at a high level, yes. What that means precisely won’t really be known until Apple makes its own announcement, but obviously, Microsoft saw the opportunity to trump Apple and to get the first headline, and they’ve clearly done that.

Scott Fulton: And next time, Apple might actually show up at CES just to have the opportunity.

Carmi Levy: Yea, but Apple wanted to put, I think, all of its apples into the Macworld basket. I think they figured media would show up regardless, and that rather than try to concentrate on two major events, or divide their efforts between two major events, it’s better to focus on one and get one cohesive, comprehensive message out and not be forced to share headlines on the same day with Microsoft. So they conceded CES to Microsoft, they figured, let them have it, and Apple will have its day this week.

Scott Fulton: Thanks for talking with us at such a late hour, Carmi.