Market Insight

Microsoft Targets Always-On Relevance With Xbox One's Integrated Entertainment Solution

May 22, 2013  | Subscribers Only

Paul Erickson Paul Erickson Senior Research Analyst, Service Provider Technology

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Overall Positioning

With the unveiling of Xbox One, Microsoft has put forward its vision for the evolution of its positioning of the Xbox platform as home entertainment hub, by building a hardware, software and services solution that integrates broadcast TV feeds, OTT content, Blu-ray video, games and ancillary consumer services such as Skype. As the name suggests, Microsoft aims to market Xbox One on the basis of providing a single, simplified gateway to the most important content on the TV screen.

The Xbox One platform incorporates a second generation Kinect peripheral, which is now non-optional. Kinect provides the cutting edge voice and gesture interface capabilities that have been improved to allow more accurate recognition of speech and movement in both gaming and interface navigation, as well as quick and seamless switching between content types sitting on the Xbox One platform.

The most noteworthy innovation in Microsoft's approach is its decision to try and integrate live TV into the Xbox output by using HDMI pass-through from connected set top boxes (STBs). Note, according to Microsoft this overlay feature will only be available at launch in the US. While this is not the first broadcast overlay solution to enter the market, Microsoft aims to deliver a very usable and fully integrated solution that allows seamless switching between live TV, games, and on demand video made possible by the raw power of the device and the ability to switch between virtualized operating systems. Tying these disparate elements together is the Xbox-based TV EPG and its Kinect interface.

Microsoft is betting hard on voice and gesture interfaces to simplify and improve the TV entertainment experience and overcome many of the inherent challenges of search and discovery that accompany consumer access to large amounts of content of differing types. The company also intends to make select live TV feeds interactive - a feature that should make Xbox One unique among its console peers.

However, as the broadcaster's reaction to the first generation of Google TV illustrated, the idea of a third party inserting content into or on top of the broadcast feed is not without its challenges. The announced NFL deal which enabled fantasy football interactivity during live broadcasts of games is an example of the functionality that can be created; but also illustrates some of the risks involved as the appetite of the broadcaster showing the game to have eyeballs diverted to a third party's fantasy football offering may prove to be a challenge. How far this strategy evolves depends on the deals that Microsoft can conjure up with content owners and broadcasters and history suggests that putting together a broad suite of compelling consumer offers will require deft negotiation. In this context Microsoft's decision to initially focus on the US where it has some of its most established relationships with TV companies makes complete sense.   

As an STB the Xbox One is well positioned as a transitional device capable of offering enhanced functionality to a large number of consumers today using the overlay solution, but that is also well equipped to adapt to the changing pay TV environment where operators themselves are closely examining the need for STBs as they turn more progressively towards apps on connected devices which incorporate live TV, on-demand content and cloud-based PVR capabilities. Significantly, not only is Xbox One positioned to engage the live feed TV audience through incumbent STBs, Xbox Live is already a home to online video and pay TV apps, and Microsoft is positioning the Xbox platform as ready for both today's and tomorrow's TV audience.      

At its most basic, this strategy to try and become a gateway for broadcast content is aimed to keep the Xbox platform relevant in the increasingly complex competitive landscape of home entertainment. Microsoft is aiming to make Xbox One the one-stop shop for content access and to be always-on in the living room.

The strategy also responds to other specific threats faced by the Xbox platform. Xbox One offers something different from its immediate console competition. While, we don't yet have a full picture of what Sony will offer entertainment-wise at the launch of the PS4, we believe Microsoft's strengths in software and interface mean it will offer a unique package.

Aside from direct console competitors, this one-stop entertainment solution with high-end games, aligned to a cutting edge and speedy interface also has the chance to displace other competitive devices. Connected TV devices of all kinds have yet to deliver a truly compelling and usable solution for content discovery. Microsoft has sensed this weakness and is attempting to fill the void, while also offering high-end games as the basis for adoption.

With the Xbox One Microsoft is not quite repeating the 'Trojan Horse' strategy that led Xbox to become the worldwide number two transactional online movies service. But the market has moved on since the 360 launched and the use of the Xbox 360 has ceased to only be about games (in March 2012 the majority of 360 use was 'non-game', up from 40 per cent in 2011). To be clear, we believe that games will remain the core driver for device purchase but that the combination of games and other media has the potential to disrupt existing platforms, and gives first mover advantage to Microsoft against what we believe are inevitably stronger moves from both Apple and Google in the connected living room.  But this combination of games and other entertainment also makes the Xbox One the strongest card Microsoft has yet played in the 'post PC' world.


Somewhat ironically for a device with console heritage, following the reveal, the biggest question marks centre on the availability and provision of games content on Xbox One. Microsoft made the decision to keep stage one of its reveal mostly about product positioning and to show off its innovation around TV overlay and user interface. This has left it open to criticism from consumers keen to engage with the Xbox brand on a gaming basis.

We reserve judgment on the platform's game portfolio until after E3, where Microsoft has promised to reveal more details about the fifteen Microsoft Studio developed exclusive game IPs the platform will be home to in the first year of its active service. Eight of these are confirmed to be entirely new game IPs. As detailed in our pre-reveal research note, IHS still believes that the core battleground and differentiator for Xbox One is its games portfolio. Exclusive high-end games will drive sales, especially for early adopters at launch price points.    

There also remains some thorny PR issues that Microsoft needs to overcome in relation to licensing of games, DRM and backwards compatibility. Like Sony, Microsoft has been forced into dropping backwards compatibility to accommodate a new device architecture. That means digital collections of games will not be transferable from Xbox 360 to Xbox One. While this doesn't actively ingratiate the brand to gamers with large collections of digital games, IHS believes this is unlikely to have a major impact on the willingness of consumers to transition to the new platform.  

More problematic is the issue of pre-owned games and how that value-chain within the market will be disrupted by Microsoft's decision to tie software licenses of all content to specific user accounts. For many consumers, used games are the source of income for new purchases, so to remove the ability to generate some value from used content would be a blow to a significant number of existing Xbox 360 gamers. It is also true that both platform holders and publishers would like access to the retailer owned pre-owned value chain. Microsoft has yet to detail its strategy on pre-owned games, but based on Xbox senior executive comments, the company will be implementing a new trade-in strategy in collaboration with retailers that enables it and its partners access to a part of the market that is currently off limits. IHS believes that a more controlled pre-owned strategy is unlikely to improve the experience for the consumer.     

The other major issue that has come to the fore, is the need to be online to authenticate software licenses. Microsoft has confirmed that there will be no requirement to be connected at all times, but new games will need to be authenticated while connected and there is also a suggestion that the device needs to authenticate at least once every 24 hours. In essence all Xbox One users will need to have an online account and be connected. IHS believes that there will be some continued backlash from vocal early adopters on the need to authenticate online. However, the fact is that eventually most games services and content will have an online or connected dynamic either because of networked gameplay or due to cloud-based content delivery. A vast majority of users of Xbox One will be connected and online, so while it is a thorny PR issue right now, in time this issue will have minimal impact on sales.

What's Missing?

Our research note prior to the reveal identified three core strategies we wanted to see from Microsoft to strengthen its positioning in the competitive landscape of home entertainment.

1.       Take Xbox Live To The Most Popular Smartphones and Tablets - No further details on Xbox SmartGlass and Xbox Live multi-screen were released beyond saying that SmartGlass is now fully integrated into the system.

2.       Double Down On Games and Interactive Content - Microsoft Studios announced 15 exclusives and 8 new game IPs with more details to come at the E3 press event

3.       Deliver Innovative & Exclusive Entertainment Experiences - Kinect UI, live TV overlay features, interactive NFL broadcasts

One core strategy remains uncovered by Microsoft's announcement - the availability of Xbox Live content on the most popular smartphones and tablets. We were disappointed not to hear more details on Xbox SmartGlass and its evolution from companion app and touch control interface to a more engaging tool for Xbox Live content on iOS and Android devices. At this point smartphones and tablets have the most disruptive potential for home entertainment consumption and pose a clear threat to TV-based services. On this basis we still believe that to maintain relevance in the home, Microsoft needs to extend Xbox Live more significantly to these hugely popular devices.


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