Could the Xbox Replace Your Cable Box?

Microsoft‘s (s MSFT) Xbox 360 game console already has a huge install base, a wide variety of content and engaged users. And now, according to an article in the New York Times, Microsoft is in talks with Disney (s DIS) to bring some live video content from ESPN to the gaming platform. So what’s to stop it from becoming a virtual cable operator?

Microsoft has already shown that it can deliver a live and on-demand offering, as seen through its deal to bring programming from UK satellite operator Sky onto the Xbox. The Sky Player on Xbox 360 offers the same electronic program guide and live content that’s available through a Sky set-top box. And Microsoft has been working with AT&T (s t) to enable its U-verse subscribers to use their Xbox gaming consoles as a set-top box.

So it’s possible that Microsoft could launch a live, multichannel video service on the Xbox platform. But is it likely?

Let’s start by looking at the potential audience. Microsoft has a pretty large install base, with more than 39 million Xbox 360s sold to date. About half of those consoles are hooked up to Microsoft’s Xbox Live service, through which users can play multiplayer games, watch movies from Netflix (s NFLX) or purchase or rent movies through Microsoft’s own online video store. According to the NYT article, the Xbox Live service regularly reaches about a million concurrent users, and topped 2.2 million at one point during the holiday break. That’s a pretty large number, but it’s worth noting that most of those users were signed in and using the service to play games, not necessarily watching video.

But would Microsoft risk alienating its service provider partners? The company is currently working with AT&T on integrating U-verse controls into the Xbox 360 — but would it want to then go up against AT&T by offering competing over-the-top-delivered programming? Would it scuttle its deal with Sky by coming up with a live video offering of its own in the UK?

Microsoft isn’t the only company looking at providing an over-the-top subscription video service direct to consumers; according to a report in the Wall Street Journal last year, Apple (s AAPL) has been in talks with companies like Disney and CBS (s CBS) to get content that it could charge a subscription fee for users to access. But while Apple has a relatively small base of consumers that have bought its Apple TV Internet set-top box, the Xbox has a much wider footprint.

For now, it seems an Xbox live video service might be a while off; to be sure, one source told the NYT a deal wasn’t imminent. Even so, ESPN is a good first choice for content partner, as consumers have shown time and again that live events — and live sporting events especially — are of strong interest and help to drive new business models.

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