The Next Xbox: An Integral Part of Microsoft's Ecosystem

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With the pending release of Microsoft's (NASDAQ: MSFT  ) Xbox coming later this year, gamers are hoping to see one of the best entertainment consoles they've ever encountered, while investors are hoping the new system (code-named "Durango") will turn around the company's sluggish entertainment division revenues. If the Xbox is able to satisfy both constituents, it'll be because the new console fits nicely into Microsoft's entertainment ecosystem.

Microsoft's halo effect
When it comes to the gaming world, Microsoft still reigns supreme. The Xbox 360 was the top-selling gaming console for the 22 months preceding last November, showing Microsoft's dominance over competitors like Nintendo's Wii console and Sony's (NYSE: SNE  ) PlayStation lineup.

But as reported in Microsoft's latest earnings release, the company's console platform revenue decreased by 29% year over year. Some have speculated that a drop off in the entertainment division's numbers is due to the fact that the Redmond company is set to release the latest version of its Xbox console later this year, and that consumers are patiently waiting for the new release. But despite the drop, Xbox sales from this past holiday easily beat the PlayStation and Wii U.

Source: The Verge.

It's how you play the game
Details about Microsoft's new console have been popping up all of over the Internet, and if all the rumors are true, investors should expect a stellar product that continues lead the pack.

The Verge reported earlier this week that the new Xbox will sport an enhanced voice recognition system. The updated feature will respond to verbal commands to turn the console on, provide voice-activated search functions, translate speech into text, and allow users to ask Xbox specific questions like what games the users' friends are playing. Aside from voice recognition, the console is rumored to have Skype integration, an updated Kinect version, a Blu-ray drive, and the ability to record TV shows.

An integrated Microsoft
Something gamers may not notice, but investors should, is that Microsoft is creating a cohesive platform across all of its devices, including the Xbox. The latest console is expected to have further integration with Windows 8, which isn't surprising considering that back in October Microsoft launched SmartGlass, which connects content from the Xbox to Windows PCs and tablets.

In the company's latest 10-Q, Microsoft mentioned its drive to integrate all of its software into a complete ecosystem: "Windows 8 is made for both personal and professional use and unites the light, thin, and convenient aspects of a tablet with the power of a PC. For example, Xbox Music, Video, Games, and SmartGlass applications make it possible to select and experience entertainment across a range of devices by simplifying and increasing the accessibility of those experiences."

Microsoft isn't just creating a new Xbox for gamers; the company is integrating the console with PC computers, the Surface tablet, and its Windows Phone OS by combining aspects of the Windows 8 platform into all of its devices. It's the same thing consumers see Apple doing with its iOS software spilling over into the latest Mac OS systems like Lion.

Why the Xbox matters
Microsoft's revenue from its entertainment division (which includes the Xbox, as well as Skype and Windows Phone) dropped 11% this past quarter year over year. The company said in its latest quarterly report that the main reason for the drop in entertainment division revenue was from declining Xbox platform sales, which shouldn't be a surprise considering the latest Xbox 360 is now six years old. But the Xbox is still the leader in the gaming market, and a new version of the console could be the perfect offering to turn that declining revenue around.

Investors should consider that although the Xbox is a small portion of Microsoft's revenue, it represents a much broader entertainment focus for the company. With rumors of Apple creating a possible Siri-enabled television, Microsoft already has a strong presence in the living room space with Xbox content aggregation. A smaller, cheaper Xbox Lite entertainment system, similar to Apple TV, is rumored to come out later this year, which will diversify Microsoft's entertainment offerings. A new Xbox with Windows 8 integration, along with an Xbox Lite for non-gamers, would further solidify Microsoft's foothold in living room entertainment and make consumers more familiar with Microsoft's software ecosystem.

Through its Xbox platform, Microsoft proves it can create class-leading hardware and software that are both fun and easy to use. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is also looking to make a splash in other markets. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

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