Here's a riddle. Why was a $300 PC with a Pentium III CPU, an 8GB hard drive, 64MB of RAM, 10/100 Ethernet, a DVD player, and an NVIDIA graphics chip considered a killer PC system in late 2001? The answer is because it wasn't a PC -- it was the original Xbox. In recent years, Microsoft has evolved the Xbox quite a bit. No longer is it a PC system with N-1 technology -- it is now a targeted and focused piece of engineering that is state of the art and optimized for games -- but importantly, a lot more than games. It's the Xbox that will likely be Microsoft's beachfront into the digital home, and it will be the Xbox which furthers Microsoft's role in the digital home beyond the PC.
In order to understand the Xbox and what it means to Microsoft, it's important to take a quick look at where Microsoft stands in the home. While Microsoft is the dominant player in the world of desktop computing for business users and home users, the home market beyond the PC has remained elusive to them. Despite several attempts, Microsoft has had poor success attempting to jumpstart the home market using the software licensing models that have served it so well in the PC arena. In the handheld market, Windows Mobile is only now beginning to make some inroads against competitors (but that's a story for another column), and older efforts such as WebTV and Sega's Windows CE-based Dreamcast system failed miserably in creating a Microsoft presence in the family room. I won't even begin to talk about music and how the iPod has fared against the Zune's efforts. The result is that Microsoft has learned that trying to sell operating software to third party OEM licensees in the consumer electronics space is a very different world than the world of PC operating systems.
Microsoft has realized that if it wants to further software initiatives in the home, it would need to reluctantly become its own hardware OEM and create the market for the hardware necessary to sell software. As a common folk saying goes, when all you have is a hammer, the whole world looks like a nail; and of course that's why the Xbox originally resembled nothing more than a low end PC with souped up graphics. In this regard it is important to note that while the Xbox is a hardware platform, it is really a software play for Microsoft. In fact, Microsoft has adopted the traditional video game business model, where it publishes all titles for the platform and charges third parties a fee on each disc that they ship for the system.
"The Xbox is now finally poised as a Trojan horse ready to invade the living rooms of Windows users everywhere."
But the Xbox 360 is more than a videogame console. With links to broadband via its built-in Ethernet, wireless support, Windows Media connect and Media Center Extender and large storage capabilities, the Xbox is now finally poised as a Trojan horse ready to invade the living rooms of Windows users everywhere and leverage and deliver content directly through the console (through partners such as Netflix) as well as leverage the relationship to the PC as a media hub. Over time it's likely we'll even start to see integration to other initiatives such as Zune and Windows Mobile as well as other software services that Microsoft will happily charge for. While Windows 7 doesn't offer that much in terms of ability to act as a media hub over Vista, that part of Vista was so overlooked that there's an opportunity for Microsoft to make the the most of those features in Windows 7 as brand new and innovative. The combination of a combined marketing effort of Windows 7 and the Xbox would be a powerful way for Microsoft to stand apart from competitors such as Apple and Sony and help finally drive consumer adoption of converged usage models.
Before this can happen as mainstream activity, however, the Trojan horse has to actually get in the door. That's why we're going to see a major push this Spring into the holiday season to further drive Xbox adoption as well as a strong push for Windows 7 once it's released as the media hub for the digital home.
The Xbox has been a brave new world for Microsoft. With emphasis now on secondary functions beyond gaming and formidable competition, Microsoft is going to face a tough battle in this space. If, however, Microsoft can achieve a strong Xbox holiday season, that will begin to pave the way for the company to move more consumers on to additional services for the system, and drive console use well beyond core videogame functions and further towards becoming a critical spoke in the digital home.
Families looking at an Xbox vs. devices such as the Wii might not focus on these enhancements on their own, and it's going to be key that Microsoft evangelize these additional functions simply and carefully. For many consumers, the game console is still first and foremost about games -- something Microsoft is hoping the Xbox will finally change.
Michael Gartenberg is vice president of strategy and analysis at Interpret, LLC. His weblog can be found at gartenblog.net. Contact him at gartenberg AT gmail DOT com. Views expressed here are his own.