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Will Microsoft's Original Programming Bring In New Customers?

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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  • Report this Comment On May 01, 2014, at 12:36 PM, CroghanDL wrote:

    This move to have it exclusively tied to Xbox One owners in the short term seems to be a play in the video game market where it is competing with Sony, and Nintendo, but could also be a longer look at the streaming market only in a reversed way.

    The current video game landscape there are only marginal differences between the PS4 and Xbox One. The way biggest way to differentiate one system from another are exclusive games. Exclusive content directly targeted to the demographic of people who buy video game consoles gives another differentiator that could push consumers toward the Xbox platform and away from PlayStation. Having such a focused demographic will also most likely make it somewhat easier to choose the types of programs they can create.

    Once, or if, these original programs gain traction and prove themselves they could find a way to provide these programs through another service offering. There are currently Xbox Live apps for tablets and phones that could be a portal into their library of content.

    With these original programs, Microsoft could prove they can create high quality content while they workout deals for a wider content library. Once Microsoft strikes the deals needed they could create a service offering that could compete with current streaming leaders. Just a few high programs could not compete with Netflix or Amazon considering their breadth of content already available through their services.

    Just an idea...

    They could easily just still be too siloed as a company to think about Microsoft as a whole over individual business units. But I really hope that is not the case.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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