As Yahoo! and Google's YouTube step up their commitment to producing original video, Microsoft (NASDAQ:MSFT) has ended its commitment before it ever really began.
The company will close its Xbox Entertainment Studios, or XES, as part of the broader cutbacks announced Thursday, which include around 18,000 layoffs. Shows that are already being produced will remain in production. Beyond that, the company has abandoned what once appeared to be an ambitious push into original TV programming.
XES was led by former CBS executive Nancy Tellem, who joined Microsoft in 2012. She will be staying on board, at least for now, to oversee the shows already in production. These programs include the documentary series "Signal to Noise," which has a first installment that examines the rise and fall of Atari. Production will also continue on shows based on the game franchise Halo.
Microsoft released a statement explaining the Xbox cuts, and how they relate to the company's overall retrenching.
As Satya said last week, Xbox is important to Microsoft. Games are the single biggest digital life category in a mobile-first world. And Xbox is a strong consumer brand with an incredible fan base. As part of the planned reduction to our overall workforce announced today and in light of the Xbox vision to focus more on games and gamers, we plan to streamline a handful of portfolio and engineering development efforts across Xbox. One such plan is that we will expect to close Xbox Entertainment Studios in the coming months.
Xbox will continue to support and deliver interactive sports content like 'NFL on Xbox,' and we will continue to enhance our entertainment offering on console by innovating the TV experience through the monthly console updates. Additionally, our app partnerships with world-class content providers bringing entertainment, sports and TV content to Xbox customers around the world are not affected by this organizational change in any way and remain an important component of our Xbox strategy.
Building part of the Xbox brand around original content was something leadership believed in under Steve Ballmer. But even Ballmer -- before he was ousted -- seemed to lose taste for original content; his last organizational restructuring led to the company dropping all original content from its online brands. That included shuttering MSNow, a site that produced original news designed to capitalize on trending topics, eliminating all in-house and freelance original content on the various MSN brands, as well as changing direction for the company MSN News product.
When that brand was launched, it was supposed to be developing original stories, in part to make up for the journalism lost when the company sold its share of MSNBC back to NBC. Under the new direction, it stopped creating original stores and serves as an aggregator.
From the end of Ballmer through Nadella's ascendance, Microsoft has become a company committed to licensing and aggregating rather than creating on its own. Just a few months after it was announced, XES seemed like an outlier that only existed because Xbox One needed lots of fancy perks to entice customers to pay $499 for the console when Sony(NYSE:SNY) was only charging $399 for its PlayStation 4, which also has an array of original video programming planned.
The Xbox has changed
When Microsoft introduced the Xbox One, it pushed it as an entertainment device with games being only part of the picture. With that marketing and with the higher price, it made sense to invest in original programming. A lot has changed since November 2013, when the console was first released, however.
Xbox One struggled out of the gate compared to PS4, selling at least 2 million fewer units than its rival through April, when both companies last released numbers. Sony reported 7 million sold, while Microsoft claimed 7 million shipped to retail, so the actual sales difference was higher.
Since that time, Microsoft has unbundled the Kinect motion sensor from Xbox One and lowered its price to $399. That puts it on par with the PS4 price and functionality, as a lot of the non-gaming features pushed at the Xbox One launch were tied to Kinect.
Dropping Kinect has worked, and June U.S. sales of Xbox One more than doubled over sales in May, according to a statement from Microsoft.
That's good news for Microsoft, but it's bad news for people who saw the potential of the Xbox One beyond gaming. Removing the Kinect clearly makes the device just another gaming console -- albeit a really powerful one. Selling the Xbox One as a game console does not require high-priced original programs.
Sad, but correct
The XES strategy seemed overly ambitious and somewhat unnecessary from the beginning. Creating expensive TV shows was unlikely to lure in enough people to make it worth the cost of producing the shows.
Microsoft is also not a company built on the type of creativity that makes the kind of programming planned for XES. If the company is making cutbacks, this was clearly a logical place to cut. There are plenty of TV shows to license without taking on the added expense and risk of producing them.
The Xbox One may one day be the center of your living room entertainment system, with enough users to justify creating original programming. That day, however, is not here yet. XES was excessive, even if it was ahead of its time.
How to profit from the changing landscape
Even without Microsoft's departure from original programming, there are still a ton of ways to view content. With that increased competition, you know cable as we know it is going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.
Daniel Kline is long Microsoft. He can barely watch all the shows on regular television that he likes. The Motley Fool recommends Google (C shares) and Yahoo. The Motley Fool owns shares of Google (C shares), Microsoft, and Yahoo. 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.