Microsoft Quietly Conquers the Living Room

Microsoft (Nasdaq: MSFT  ) has announced agreements with 40 TV and entertainment providers, including Verizon (NYSE: VZ  ) , Comcast (Nasdaq: CMCSA  ) , Time Warner's (NYSE: TWX  ) HBO, and other entertainment companies, to bring more entertainment options to the Xbox 360.

Yelling at your TV finally does something
The cool part is that the service will be fully integrated with Kinect and Bing search. You can put down the remote and channel-surf using hand gestures and voice commands. You can also use Bing to sort through the various media libraries available through Xbox. For example, if you wanted spend a day watching Law and Order, you would say, "Xbox, Bing Law and Order," and your Xbox would show you all of the various ways you can check out your favorite police procedural.

Expect a little foot-dragging
If it works as promised, the Xbox has the potential to reduce the demand for Cisco's (Nasdaq: CSCO  ) set-top boxes, but I would count on most cable providers to fight for the boxes for a while yet. Verizon will offer a selection of live TV channels through the console, but it will require a subscription to both FiOS and FiOS TV. Access to the full channel line-up will probably require a box. 

Meanwhile, Comcast will make Xfinity's streaming library available only through Xbox. That's probably because the cable provider has been developing a new set-top-box platform with Internet connectivity. I'd imagine that the company would prefer you watch live TV through its box, so the company can steer you toward Xfinity's pay-per-view library rather than Microsoft's Zune Marketplace. Similarly HBO Go will be accessible only to current HBO providers.

Even so …
Despite the TV and content providers' restrictions, I think Xbox TV could work. First, Xbox already has an installed base of 50 million users. Microsoft only has to convince those users to try the new feature, which is much easier than selling them a new box -- as Apple and Google's struggles to launch their own media boxes have shown. Second, many of those users already watch video on their consoles. As I've noted before, consoles account for 60% of Netflix (Nasdaq: NFLX  ) streaming. Meanwhile, the Zune Market is the No. 2 online movie store with 16% of the market, thanks largely to the Xbox. Getting into the habit of also watching live TV on the console doesn't seem like that much of a stretch.

Foolish takeaway
I'm mostly excited about Xbox TV because it has the potential to finally fulfill the promise of digital media centers. It will wrap your music, videos, and gaming into a slick user interface that's easy to navigate from your couch. If you add this to the buzz surrounding Windows Phone Mango, and Windows 8, then Microsoft starts looking like it could become great again.

If you're looking for another opportunity to profit as we consume more media online, then you should check out The Motley Fool's Top Stock for 2011. The report is absolutely free -- download it today.

Patrick Martin owns shares of Netflix. You can follow him on Twitter, where he goes by @TMFpcmart03. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Microsoft, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Netflix, Google, Apple, and Microsoft, creating bull call spread positions in Microsoft and Apple, and creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2011, at 10:40 AM, ldkoehler wrote:

    I think MSFT is really on to something here.

    With so many XBox 360 consoles already in homes, it's easy for consumers to explore new TV delivery services - something consumers have been clamoring about for years as TV service lags behind other technologies like mobile phones. The availability of ESPN 3 on the XBox 360 has made it easier for sports fans to drop cable service. This new service will convince even more people to switch over to using their XBox as their primary media device.

    MSFT stock is also well positioned. The current price of ~$26.34 implies that investors expect cash flows to drop by 30% and stay there forever. MSFT hasn't been as flashy as Apple, but with an ROIC of 72% - in the 99th percentile of all companies - I highly doubt they will struggle to meet those expectations. In fact, with initiatives like this new XBox 360 TV, investor's may see considerable appreciation in MSFT's tock price.

    For more information on understanding market expectations, see:

    http://blog.newconstructs.com/2010/05/19/how-to-make-money-p...

    Important Disclosure: I am employed by a research firm that is a affiliated

    with a hedge fund that owns shares in MSFT.

  • Report this Comment On October 07, 2011, at 12:27 PM, techy46 wrote:

    Agree, Microsoft spent 10 years building enterprise integrated ecosystem bulding blocks and now is applying same rational to consumer ecosystem. They'll become a choice for more skilled technology consumers and could win over others if they can improve ease of use for average consumers. Windows 8 looks impressive.

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