Just a few years ago, technology giant Microsoft (MSFT 1.65%) was urged by analysts to consider spinning off its devices unit into a separate entity. This was a result of languishing growth and deteriorating margins in the hardware business. Since Microsoft was literally losing money each time it sold one of its Xbox consoles, many wanted the company to cut ties to its device unit and be done with it.
Fast forward to today, and all that has changed. Not only is Microsoft not giving up on hardware, it's doubling down on its Xbox franchise. Microsoft has announced that it will roll out original programming through its Xbox Entertainment Studios. This is clearly a shot across the bow to other content providers such as Netflix (NFLX 4.17%) and Amazon (AMZN 1.30%), which are each taking steps to acquire and produce content on their own. In the war for your living room, there's an arms race going on between service providers to monetize their legions of subscribers. Here's Microsoft's recent tactical move, and why Netflix and Amazon would be wise not to ignore it.
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Microsoft's unique position
It may seem like Netflix and Amazon have insurmountable leads in the war for the living room, but Microsoft already has some arrows in its quiver. Its Xbox has a devoted following among gamers, which the company is hoping will allow it to acquire non-gamers as well. The Xbox has a strong distribution network and significant integration possibilities with other types of media. To be exact, Microsoft's Xbox has 48 million subscribers worldwide. The base of those subscribers, millennial males, are the group Microsoft is primarily targeting. However, its rollout of original content contains a wide array of programming that could appeal to consumers outside Microsoft's core demographic.
In all, Microsoft plans to release 12 original programs. The move to offer original programming makes sense, since users are already doing a lot more than gaming on their consoles. Nancy Tellem, Microsoft's President of entertainment, recently stated in an interview with CNBC that Microsoft's subscribers actually spend more hours streaming content than gaming.
Microsoft has made great strides in its efforts to revolutionize the Xbox from a video game console to a one-stop shop for all living room functions. You'll recall Microsoft's $8.5 billion acquisition of Skype less than three years ago. That has allowed Microsoft to turn its Xbox console into a social community, where users can enjoy media and communicate about a lot more than just video games.
Streaming services are duking it out
Both Netflix and Amazon are making moves themselves to win control of your leisure time. Netflix has had a very successful rollout of original programming, including its hit series House of Cards. Amazon has now entered the fray with its Amazon Fire device, and its recent agreement with HBO to deliver HBO content in a first-of-its-kind deal worth an estimated $300 million.
Microsoft may actually have a leg up on both Netflix and Amazon with one program that is particularly exciting. That's the planned live-action series based on the hugely successful "Halo" franchise. The show will begin production in November and has Steven Spielberg on board as a producer. This has the potential to hugely capitalize on what was already a massively successful series. Microsoft racked up huge sales of the four official "Halo" titles, not including the several "Halo"-themed spin-offs. Consider that the last three iterations of the "Halo" series cumulatively generated more than $500 million in sales in their first 24 hours.
Microsoft is making a mountain out of a molehill
Once dismissed as a margin-eroding waste of money, the Xbox console is turning out to be a potential gold mine. Microsoft has found a way to turn a solid profit in hardware, and the profit potential may just be getting started. That's because Microsoft is planning to launch a series of original programs, designed to further monetize its army of subscribers.
The fight for your living room wages on, and it's clear that Microsoft is getting serious. It's not standing idly by while competitors Netflix and Amazon release original content and sign deals with premium content providers. If the "Halo" series lives up to the hype, Microsoft's presence in the living room may be hard to contend with.
