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.

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