How Microsoft Made Xbox a Hit in the Living Room

Colin Dixon is a Senior Partner with The Diffusion Group (TDG) and a GigaOM Pro analyst. Here is a synopsis of his recent report “The Evolution of Over-the-Top Video,” which is available for GigaOM Pro subscribers.

As the number of companies seeking to bring Internet video to the television seems to increase daily, it’s easy to neglect the few companies that are already there and already enjoying the fruits of their success. One company, in particular, has recently accelerated the development of its TV media portal and — although it may seem surprising for a company so closely associated with the PC — that company is Microsoft (s MSFT).

In case you missed it, the Xbox 360 and Xbox Live network are undergoing a rapid evolution into a media delivery power-house. This started back in 2007 when Microsoft first launched a movie download service for Xbox users. By the end of 2008, 15,000 hours of movies and TV shows were available with 2,000 hours of HD content. All this content seems to have struck a chord with Xbox Live members, who by the end of last year had downloaded over a half billion entertainment items. In December, Microsoft partnered with Netflix (s NFLX) to bring all the streaming content available through the service to Xbox Live subscribers. Within three months of the announcement, 1 million Xbox Live members had activated the client and streamed 1.5 billion minutes of content.

So, why has the Xbox been so successful at connecting the TV to the Internet and delivering a great TV experience over broadband when so many others have failed? There are three main reasons for the success:

  • No Extra Box under the TV – Consumers already had the Game Console connected to the TV to play games
  • Internet Video was not the primary reason for connecting the box – For gamers, multi-player gaming was an essential part of the experience and was motivation enough to get them to go to the trouble of connecting the console to Internet
  • Not competing with PayTV – Microsoft did not tell its customers to throw out their PayTV service. It just provided compelling content to customers on a convenient platform.

In brief, Microsoft made it easy for its customers to consume broadband media on their TV. And so they did.

Microsoft is also capitalizing on a deeper shift in media consumption: one that sees a viewer’s loyalties and interests shifting from programmed channels to show-by-show selection or, as we call it, “Quantum Media.” People are no longer HBO viewers but Deadwood fans. This quantum consumption model sets viewers at the center of the media universe, putting the onus on providers to reach the viewer on their preferred platform.

While PS3 and Wii struggle to play catch-up, Microsoft is not sitting still. At the E3 conference in June, Microsoft announced a slew of new features and upgrades to the Xbox media experience. Utilizing smooth HD technology, it will now be possible to get 1080p video – a resolution almost identical to BluRay – on the Xbox that starts almost immediately and supports 5.1 channel audio. Xbox Live customers will also be able to watch movies with friends with the new, improved Party Watch system and stay in-touch with buddies through Facebook.

However, most interesting of all is the blending of gaming with video entertainment in media such as 1 versus 100. Combining participation with the spectator roll is clearly an important part of the entertainment experience going forward. After all, why yell the answer at the TV, as in Jeopardy, when you can actually answer the question and match wits with contestants?

All of this might leave you thinking that in five years time we will all be trading in our Comcast (s CMSCA) subscriptions for Xbox Live. Clearly this is not case. Game consoles are but one way that Internet Video is going to find its way on to our TV screens. It will arrive through DVRs, Blu-ray players, set-top boxes and even directly through the TV itself. As our research tells us, as many as half of 45-54 year olds would consider canceling their PayTV for a broadband-based more flexible service. This demographic will likely prefer some other platform than a game console.

However, for now, Xbox is blazing a trail into new media that consumers seem ready, willing and able to follow. One thing is for sure: there are many companies seeking to follow.