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Showtime for the Xbox 360

Posted by Ravi on November 7, 2006

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Microsoft hopes a new video downloading service will elevate the already popular game console into an entertainment center

To gamers, the Xbox 360 is a smoking hot game machine. But to Microsoft (MSFT), it’s always been seen as that—and a whole lot more. Microsoft wants the machine to be the digital entertainment hub in your home; a way for customers to consume all sorts of video entertainment.

Now it’s making a big move in that direction. On Nov. 22, Microsoft will begin offering movies and television on demand through its Xbox Live service (see BusinessWeek.com, 9/27/06, “Microsoft Plays It Cool on Games”). The four million Xbox Live subscribers, including those who use a free barebones service, will have access to movies from the Paramount (VIA) and Warner Bros. (TWX) studios, including Mission: Impossible 3 and Superman Returns.

They’ll also be able to download TV shows from CBS (CBS) and MTV such as various flavors of the CSI franchise and South Park. What’s more, since the Xbox 360 can handle high-definition content, many of the available programs will be in high-def as well.

Console Competition

The move comes just as rivals, Sony (SNE) and Nintendo prepare to launch their next-generation consoles to compete with the Xbox 360, which has been on the market since November, 2005 (see BusinessWeek.com, 5/10/06, “Game Time for Sony, Nintendo, and Microsoft”).

With all the marketing hype behind those devices, Microsoft is hoping to grab some attention with an innovative service, as it is the first game console to include these capabilities. And it’s betting that the pay-per-view feature will help it expand the audience to moms and sisters who aren’t the core Xbox 360 users. “This additional capability is something that will get them over the hump to getting a game console,” says Ross Honey, senior director of Microsoft’s media, content, and partner strategy group.

Sony notes that both PlayStation 3 models being released Nov. 17 will have hard drive capabilities for downloading content—though no video downloading service has been announced. The Nintendo’s Wii console, to be released Nov. 19, offers Internet connectivity, but does not come with a hard drive.

A Few Obstacles

Microsoft hasn’t announced pricing. But the software giant says movies will be competitive with pay-per-view programming offered by cable companies, typically $4 to $6 apiece. And TV shows will cost roughly the same amount to download as they are on Apple’s (AAPL) iTunes service, which is $2 (see BusinessWeek.com, 6/21/06, “Apple’s iTunes Movie Muddle”).

There are clearly some caveats that will slow the uptake of the service. First, downloading videos, particularly high-definition ones, is a time-consuming proposition. The speeds depend on the data transfer rate of the user’s broadband connection. But for many folks, downloading a high-def movie will run about three times as long as the movie itself. That means customers will need to pick a movie when they walk out the door in the morning so that it’s ready for viewing that night. Viewers can start watching programming in standard definition roughly two minutes after they begin downloading.

A second challenge comes from the ownership rights of the viewer—or the lack of it. After customers download a movie, they’ll have two weeks to watch it. And once they start watching it, they’ll have 24 hours to finish it before they are locked out. Customers can keep TV programs and watch them as long as they like. But there’s no way to transfer the program to a laptop or CD for viewing later, say on a plane trip. It’s locked to that Xbox Live account.

A Roadmap

Microsoft also moves into the pay-per-view business with no exclusivity advantage and no price advantage. That means that the Xbox Live service gets movies at the same time as other pay-per-view providers, primarily cable providers, and charges the same amount. So as long as a consumer has a high-def set-top box, the choice is between instantaneous viewing of a high-def movie or waiting several hours to catch the same flick on an Xbox.

That’s not to say the new service won’t break new ground. It will be the first to offer on-demand high-def TV shows. And it will offer customers a library of old shows, such as remastered versions of the original Star Trek series in high-def as well as shows targeted at the Xbox’s young male demographic, such as Turner’s Aqua Teen Hunger Force and Ultimate Fighting Championship programming.

But more important, it shows where Microsoft wants to go in the entertainment business (see BusinessWeek.com, 2/7/05, “Microsoft May Be a TV Star Yet”). The company isn’t simply satisfied making a video game console and games. It’s pushing into content delivery, putting it squarely in competition with partners, such as Comcast (CMCSA) and AT&T (T), that use its software to sell the same shows. “There’s a new horse race” for Microsoft, says Richard Doherty, research director for The Envisioneering Group, an industry analyst firm. Microsoft is betting it has the stamina to win.

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