Will Microsoft's Original Programming Bring In New Customers?

The company has jumped into the tech-gone-entertainment business, but with a twist on the model. It may satisfy existing owners, but will it attract new ones?

Apr 30, 2014 at 8:00PM

Microsoft (NASDAQ:MSFT) is joining the list of tech companies trying to make their mark in the entertainment industry's original programming world. As most would agree, the company has generally followed the herd when it comes to trends -- it's never first to market and often puts out a product that struggles to gain traction. Will this be any different? One big element is the distribution model for the company's original web-based series is unique, delivered to a substantial existing user base of Microsoft device owners and Xbox Live members. While the model has its advantages, it raises plenty of questions, too.

The pitch
Microsoft has partnered with the right content creators to make its first slate of original programming appealing. The company has Steven Spielberg and Ridley Scott on board for two series involving the extremely successful Halo franchise, in addition to comedy programming and special interest documentaries. Considering that Microsoft already knows exactly who will be viewing these shows (its nearly 50 million Xbox Live user base and, potentially, Surface-tablet users, among users of other devices), the content is spot-on. Those who have paid the $500 price tag for an Xbox One will likely watch the shows, and the potential for cross promotion and interactive services is tremendous.

What about non-existing customers, though? When Netflix got into the original programming business, its appeal to outside customers grew substantially. Switching costs among these hardware-less streaming services are next to nothing, and a $9 per month subscription is easily justifiable if you want to see Kevin Spacey be evil in Washington DC. The entry cost for Microsoft's original programming, in contrast, is gigantic.

The obvious one here is the Xbox One barrier to entry. If a non-current Microsoft customer is compelled by one of these shows, they have to pony up some serious change just to get the hardware to watch it. Sure, the device is an all-in-one entertainment center, but what if prospective customers don't need or want that?

Buying the Xbox One then gives you the privilege of signing up for a paying service: Xbox Live. The monthly fee here is favorable to Netflix's price, and Microsoft at times offers one year memberships for free with purchase of a new console, but still -- who wants to spend that much to watch a TV show? Especially when you can watch other, amazing TV shows for a fraction of the cost, it just seems that the company is shooting itself in the foot by limiting access.

Distributing the shows beyond the Microsoft ecosystem eliminates the beautiful synergies that management is likely salivating over, and perhaps the incremental revenue will be enough to justify the production costs. With 48 million people currently using Xbox Live, the company has enough existing members to get the shows out and achieve its goals. In the long-run, though, this is a company that very much needs to accomplish customer outreach missions. Microsoft is still yesterday's technology company, by many standards, even though it has plenty of industry-leading strong points. The company needs new customers and advocates to maintain (and hopefully reinvigorate) its relevance in today's tech landscape.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Microsoft and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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