And in this Corner: Microsoft Xbox One and the Future of OTT

Microsoft announced the Xbox One on Tuesday in Redmond, Washington. Given that the Xbox 360 has been around since 2005 and sold over 70 million units worldwide, finally seeing the next-generation console from the #1 player in the market is a pretty big deal.

So what should we make of the new Xbox One, and what might it mean for the future of over-the-top (OTT) TV?

TV Takes Center Stage
Throughout the history of home videogame consoles one thing has remained constant: gaming and watching TV were two separate activities living on two separate boxes connected to two separate television inputs. Microsoft’s Xbox 360 has nibbled at the edges of this issue for several years now, via support for Netflix and other OTT apps, and a few experiments with integrated pay-TV apps from Verizon FiOS and others. Xbox One, by contrast, takes the live TV bull squarely by the horns and supports full HDMI pass-through from the console itself.

While this does not break any truly new ground technologically—Google TV boxes have taken the same approach since 2010—it is a first for a mainstream videogame console; a platform that remains the most popular platform for OTT TV delivery.

The goal here is clear: Microsoft wants everyday TV viewing going through the Xbox. And given that there are still a lot more hours of TV consumed than there are hours of console videogames played, this means the Xbox will spend most of its time in TV mode. For these users, the new Xbox’s gaming capability becomes a little like “four-wheel drive” on the family SUV. A check-box feature that users want to know is there just in case they need it, but not really part of the everyday routine. A game console not built explicitly to play videogames? Yup, you heard it right.

Pay TV UI Bye-Bye
The Xbox One demos spent a lot of time highlighting the cool new UI features that are available while watching TV. Change channels with your voice? Check. Microsoft-cool program guide with supplemental program information? Roger. Integrated Skype calling? Of course.

Whether one agrees with every design choice is really beside the point. The larger issue is that, for Xbox owners, the pay-TV provider is disappearing from view. Sure, the channels are still there, as is the monthly bill. But the pay-TV interface is gone. Remember how Microsoft Windows first appeared as a user interface on top of DOS? (Younger readers ask your parents.) Well, the traditional pay-TV interface just got DOS’d. Yes, there remains some technical unpleasantness around DVR and VOD content from pay-TV providers (neither of which work at the moment on the Xbox interface), but the direction is clear. Google and Microsoft now both offer experiences that turn live TV into a data feed underneath their own overlays. Do we really think Apple and Amazon will be any different?

Game Console = Smart TV for the Millennial Generation
In the run up to the announcement, a fair amount of speculation revolved around the name of the new platform, with the consensus supporting the “Xbox 720” (i.e. 2 x 360). If the positioning had been around gaming performance, this would have indeed been the logical choice. Microsoft is clearly aiming for a different target with Xbox “One.” Namely, Microsoft wants Millennials (think 18-34) who will comprise the lion’s share of Xbox One users to see the Xbox as their preferred platform for an all-in-one living room entertainment experience.

The operator’s set-top box? Buried out of sight. What about iSTBs or smart TVs? What’s the point? The Xbox does all of the same things already, plus supports advanced gaming. I expect the hard-core gaming community will likely grumble at this positioning because it means that the Xbox is no longer just for them. But in terms of mass-market appeal, it is hard to argue with Microsoft’s thinking. TDG continues to conduct its own primary research into this topic, and will have some interesting data confirming or denying Microsoft’s thesis moving forward.

To its credit, Microsoft appears to have fully grasped the scope and significance of Xbox to its overall business. The recent sale of Microsoft’s operator-focused Mediaroom business to Ericsson signaled that the folks in Redmond were going all-in on Xbox as the centerpiece of their living room strategy going forward. Yesterday’s announcement of Xbox One demonstrates that this was and is the case. The battle has been joined and the big technology ecosystems are all setting their sights squarely on TV again. If the last few months are any indication, change in the TV ecosystem is starting to accelerate. Don’t be surprised if we look back in a few years and identify 2013-2014 as the tipping point.

TDG members – please check the Analyst Insight area for more on this and other topics. If you are not currently a TDG member, come talk to us and see what you are missing.

Joel Espelien is former General Counsel and Senior Vice President of Strategy at PacketVideo, which was acquired by NTT DoCoMo. Joel is now a Senior Analyst for TDG and lives near Seattle, WA.