Blog Post

Argo & Microsoft’s Portable Dreams

Where there smoke there does seem to be fire, at least in the case of Microsoft. The impending launch of a line of portable media players and/or game consoles – the Argo, or Zune, or whatever its going to be called – seems to be a foregone conclusion at this point, if reports in the Seattle Times and Joystiq are to be believed.

I think it will happen. The rumors have been flying over the past year, and the bottom line is it just makes too much sense. While their Portable Media Center 2.0 software and products from partners are much less clunky that the first generation, the company is still breathing Apple’s fumes and will continue to do so with the PC model they’ve retrofitted onto the digital media player market.

I wrote a research brief in February of this year saying basically the same thing, suggesting that Microsoft needed to launch an Xbox branded media and game player of their own. Now I don’t claim that my article was the reason they’ve gone down this route, because it was clear to me, and a few others (and most likely Microsoft), that they needed to do something if they had any hope of establishing themselves in portable digital media.

But I also think there’s a bigger story here. Some of it has to do potentially with gaming and the Xbox 360 – Microsoft is the only of the big three console makers without a handheld gaming console – but its also the fact they want to dominate the living room of the future, and right now they’re best shot is not necessarily their Windows monopoly and the upcoming Vista, but instead lies with the Xbox.

Now there are a bunch of Sony fanboys who take umbrage with any suggestion that Sony won’t repeat its 100 million console dominance of the PS2. Well I’m here to say, face facts guys, there is no way Sony’s going to sell another 100 million. They’ll be the leader worldwide once again, but it’ll be by a much smaller margin. Both Microsoft and Nintendo have a much stronger story this time around, and Sony continues to stumble, first with delays, then with high prices ($600 for a game console?), and now with lack of details over their online gaming strategy.

Back to Microsoft. So why is Microsoft’s Xbox franchise, or at least parts of it, the company’s best bet to take on Apple, Sony, and others leveraging their own respective brands as beachheads into the digital living room? First, despite some early production hiccups and a box that does run fairly hot and loud, the 360 is the best thing by far that Microsoft has done in the consumer space, bar none. There’s a reason Xbox folks like J Allard keep getting promoted in the company: they’ve given the company a real shot at leading North American and European market share for this generation (forget Japan – Microsoft would probably be better off to just give up now), and did fairly well the first go around.

Secondly and related, Xbox Live is the currently the most evolved online gaming service for consoles, and while Sony and Nintendo are planning massive upgrades this go around to their online gaming offerings, Microsoft has a four year head start. And, more to the point, it’s not just about gaming. Microsoft plans to expand the service cross platform with Live Anywhere, allowing it to reach the PC as well as mobile devices, including the Argo/Zune.

Even as Microsoft works with MTV to develop its URGE online music portal, its not unlikely to think that Live Anywhere will serve as the underlying platform for purchases of digital media. The company is already offering microtransactions through Live to the 360 for levels and maps, for casual games, and even for viewing HD movie trailers. Why not use extend it to a portable device?

So that brings me back to Apple and the digital home. Apple has grand plans for the living room as well, and there’s no doubt they’ll leverage iPod/iTunes as well as the growing popularity of their Intel based line of iMacs and Mac Minis. The Front Row application is their media hub software, and with support for Bonjour media networking standards, an iMac or Mini transforms into a media server. Microsoft sees this, sees the potency of combining the iPod, Apple’s newly charged line of Macs, and iTunes.

Seeing this, they know they can’t afford to rely on OEM partners in the portable space anymore.

So they’ve decided to throw the PC model out the window, alienate partners like iRiver and Creative and whoever else has standardized on their PMC software, and risk another hundred plus million dollars in building this player in a market where the ship has already sailed, at least in the digital music side of things.

Why? Because they know Apple’s model of tying a seamless experience of hardware, software and services has proven to be a winning combination in this market, and more importantly, they can’t afford to let Apple have unrivaled dominance in an area that will be crucial in the connected home of the future. They’re going to use the best thing they’ve got going for them in the consumer space, the Xbox, and even though they may not even brand the player with Xbox (though I think they’d be wise to do so), they’ll certainly tie it to the Xbox 360 through Wi-Fi and will likely use the Xbox Live Marketplace as a commerce engine for content.

Will they succeed? Too early to tell, but if the Argo or Zune or whatever it is ships by Christmas, it’ll be certainly be fun watching them try.

One other thing of note: At WinHec 2006, Microsoft announced a new web services initiative tied to their home networking technology suite for Vista, called Windows Rally. Pieces of this suite go beyond what is in the new Universal Plug and Play 2.0 specs announced this week by the Universal Plug and Play Forum.

By pushing a more proprietary approach to web services for connected devices beyond the standard they helped create (Microsoft was the driving force behind UPnP 1.0) means Microsoft may truly be moving towards an Apple-ization strategy. Windows Rally can be expected to be a key underlying component of the Zune.

Michael Wolf covers digital media, home networking and gaming for ABI Research. He can be reached at [email protected]

3 Responses to “Argo & Microsoft’s Portable Dreams”

  1. The xbox has lost billions but all new business are expected to loose money the first 3 years. Look at the long run, they can now work in the console market for the next 50 years. Same goes for zune.

  2. Seems relying on the XBox model is exactly why Microsoft may be done in the future: is it really wise to have another billion dollar or multibillion dollar unit that loses money?

    Yes, the 360 and Live are good products, but they both lose money, and despite your concerns about Sony’s next generation, the PS2 outsells the XBox! Repeat: outsells. I would wager that when the PS3 does come, the combined %s of PSOne (they still sell well), PS2, and PS3 will make Microsoft’s 4 billion dollar experiment to get to 18% of the market look silly and hugely costly.

    As you point out, this is the beachhead for MS even if Windows and Office remain the only sources of profit. So why would it be a good thing to engage another loss leader that concedes none of the 5 different media strategies they’ve had over the last 5 years made any sense while at the same time raising competition and antitrust concerns by once again going to a vertical, tied solution after promising an open platform for their partners?

  3. The first reaction was to think that the key to winning against the iPod was to have an open, drm-free platform for music. But now I don’t think this is true…obviously openess does not matter in this market…ease of use is king.

     As a matter of fact, the key to winning against the iPod is to have a platform where consumers can connect to each other and to musicians through the medium of music.  iTunes is still very much a connection between the consumer and the firm (Apple in this case).  Connect consumers together and you will have a movement.