May 23, 2013 – Quick Thoughts: Xbox One Delivers on Steve Jobs Vision of TV Future

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–          Xbox One is the FIRST real next generation TV solution, trumping Apple, Google, Sony and others by leveraging a gaming legacy, rich content partnerships, and groundbreaking interface technology.

–          The Xbox360 was already the #1 streaming TV solution, with 46M Xbox Live subs delivering the largest slice of Netflix traffic. Gaming? The exclusive Halo franchise has sold 50M+ units to date.

–          MSFT added a slick voice, gesture and mobile device interface that controls your set-top as well as the Xbox One, with split-screen multitasking, rich content discovery tools, and interactive apps. Special deals, with partners like EA, the NFL, and Steven Spielberg, promise exciting proprietary content and applications.

–          Enthusiastic gamers will drive FAST adoption of the platform – think 20M+ first year units – giving MSFT a huge first mover advantage vs. would-be rivals Apple and Google in the living room.

In his widely read biography of the Steve Jobs, Walter Isaacson quotes the late Apple CEO – “I’d like to create an integrated television set. It would be seamlessly synched with all of your devices and with iCloud. It would have the simplest user interface you could imagine. I’ve finally cracked it!” That quote, published just two months after Jobs untimely passing, has fueled a cottage industry of Apple iTV whisperers passing on reports of clandestine meetings, skunk works engineering teams and grainy spy photos from Asian manufacturing sites as evidence of that “One more thing” from Apple. While the iTV remains legend, like Nessie, Big Foot and the Abominable Snowman, Apple has traipsed forward with its “hobby”. The AppleTV alternative set-top is a me-too box, competing with the likes of Roku and Boxee, with a few cool proprietary bells and whistles. It is hardly the living room miracle promised by the Steve Jobs quote.

In the analyst sycophancy around the iTV, Mister Softy has generally been ignored. The Xbox360 model has been with us since Christmas 2005. It has sold 76 million units with 46 million households subscribing to Microsoft’s on-line Xbox Live service. With those subscriptions, Xbox Live members have access not only to multiplayer games and exclusive gaming content, but to streaming video from Netflix, Hulu Plus, YouTube, HBOtoGo, Amazon Instant Video, Microsoft’s own service and a host of other options. Those 46M households dwarf the installed base of AppleTV, TiVo, or Roku, making the Xbox360 the most important streaming platform in the market, accounting for the largest share of Netflix traffic.

The Xbox One leverages that legacy. The gaming community is famously filled with early adopters who have been champing at the bit for nearly a decade since the last major console upgrades. Given sales of the tired Xbox360 have been running at 10M a year in its dotage, the Xbox’s big time processor and graphics upgrades, souped up game controllers, hypersensitive Kinect motion sensors, 300,000 server-strong cloud processing network and blockbuster new title line-up should be good for first year sales topping 20M units. But the Xbox One will be a lot more than that.

Microsoft has serious chops in voice recognition and gesture controls. Most of the main system level commands can be spoken, including “Xbox On” to activate the whole living room entertainment system from sleep, without need for “training” or fear of inadvertent commands stemming from normal conversation. The new Kinect system is a wonder, able to detect the fine movements of 6 people simultaneously at distance and in wide angle, in low light or bright sunshine, down to finger movements and joint rotations. The 1080p camera system and sophisticated microphone systems are also there for Skype video conferencing, video recording, and other voice/video enhanced applications that developers come up with. If talking or gesturing commands from the couch is too much trouble, Microsoft’s SmartGlass apps will allow the Xbox One to be fully controlled by smartphones and tablets, along with synching the mobile devices for 2nd screen applications tying to content fed to the TV.

Set-tops supplied by Comcast, AT&T, Verizon and others will feed directly into the Xbox One, replacing the God-awful blue grids and impenetrable menus with that nifty voice/gesture/smartphone interface. The spoken command “Xbox, Watch Game of Thrones” will show you options for watching the HBO broadcast directly, identify episodes saved in your DVR, and availability on the streaming services to which you subscribe. Using a feature called Snap, you can go split screen and pull up another application while you are watching a show or playing a game. Indeed, Microsoft’s Xbox Studios has cut exclusive deals with ESPN and the NFL to tie special 2nd screen content to their broadcasts – e.g. fantasy statistics or user controlled replays. Xbox Studios has also been hard at work negotiating other exclusive content deals, including a live action series based on the iconic “Halo” franchise to be supplied by legendary director Steve Spielberg.

All of this will be backed up by Microsoft’s serious distributed cloud data processing infrastructure, the same one needed for Azure, Office365, DynamicsERP, Bing, Outlook, Skype and Microsoft’s other cloud-based initiatives. 300,000 server cores have been pledged directly to support the additional traffic on Xbox Live, a commitment that can be scaled upward as needed to deliver a superior user experience as demand grows. Microsoft’s cloud resources and expertise trail only Google and Amazon amongst potential competitors, giving at substantial and sustainable advantage over others.

For many investors and analysts, used to considering Microsoft as an enterprise software company only, except, perhaps, to belittle their progress with the Windows Phone mobile platform, the excellence of the Xbox One may be difficult to believe. Microsoft has had the good sense to give the Xbox team a strong measure of autonomy and some of the best and brightest engineers in the organization. The result is the most fully realized next generation TV solution announced to date, one with strong distribution and a full steam of customer anticipation to boot. Assuming availability ahead of the Holiday season, we expect Xbox One to be the biggest selling alternative TV device in the market by large measure, and expect a cheaper, media specialized version to follow for 2014, widening Microsoft’s already formidable head start toward leadership in the battle for the living room. Longer term, the success of Xbox One in the living room could be a spur toward wider adoption of Microsoft’s smartphone and tablet platforms should its interface and applications prove popular.

Meanwhile, the most likely challengers to Xbox in the living room, Apple and Google, have struggled to gain traction with their solutions. Apple TV has sold about 10 million units in its history and features a nifty Airplay function to mirror content from iPads and iPhones onto the TV, but the interface is pedestrian and the list of content partners is unimpressive, leaving analysts and bloggers to pine for the mythical iTV set. GoogleTV is even further adrift, with afterthought commitments from consumer electronics partners to load the software solution into a few models, but no real value proposition to distinguish it from other connected television solutions. Microsoft has thrown down its gauntlet, and we will see if its platform rivals can respond in kind.

For our full research notes, please visit our published research site.

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