Microsoft (MSFT) has been taking flak for their several hundred million dollar investment in Xbox Live, a service that for $12 a month allows users of the console to gain access to sophisticated online gaming capabilities. There is also continued criticism of the building losses within the home entertainment division.
People seem to underestimate the level of investment needed to build a beachhead into the home and the potential return it might bring. Think of the preparations that went into Operation Overlord (D-Day June 6, 1944) – an equivalent effort will be necessary to make the digital home a reality.
An upcoming magazine article clearly shows that Sony sees the Xbox Live service as a threat and is moving to one-up Microsoft. This seems to be a pattern by Sony (SNE) – the PS3 has always been positioned as technically superior (Cell Processor, Blu-Ray drive) and now they claim the online capabilities will be ‘better than Xbox live’. Looking at this article it is clear that Sony views Xbox Live as a threat equal to or larger than the Xbox 360 hardware itself. And I’ll save all of the anti-Sony readers a need to comment on this post by agreeing they need to put-up-or-shut-up with a launch date.
There are now 3.2M Xbox Live subscribers ($50 a year to join) who also can pay extra for new content. $150MM a year in revenue doesn’t even begin to cover the massive investment Microsoft has made in this service ($250MM last year to upgrade Live for Xbox 360), and it is but a small fraction of the $5BB a year Xbox business. However, Xbox Live is by far the most strategic component of Microsoft’s thrust into the living room. As I’ve written before, Xbox is destined to become much more than a gaming console, and will morph into a set-top box and media center for the home. Xbox Live will be the infrastrucutre for content to be delivered and billed.
The Playstation 3 is another such device, so is Apple (AAPL) iTunes (with iPod and derivatives being the hardware), and even devices such as Tivo (TIVO) have this capability if connected to a broadband home network.
Companies whose business relies on the old model of broadcast will wake up one morning and find that their delivery mechanisms have been depreciated by new media transport networks, built on the backbone of FTTH, DSL, and Cable modem infrastructure. We see the Telcos waking up to the fact that there may be a way to extract value from making sure the user experience is protected by charging for QoS. My bet is Microsoft will be happy to pay Verizon or Comcast to ensure their user’s experience is not compromised.
The titanic effort to build these networks and deliver superior system integration is one of the reasons we continue to believe that the consumer future will be shaped by large cap companies, and not the Web 2.0 riff-raff.
Forbes interviewed Michael Moritz, a VC at Sequoia Capital. Here’s a snapshot:
“Consumer-tech businesses, he says, are a pit of “muck and mire.” They have low margins, require massive marketing budgets, compete with monster retailers’ house brands and face Asian copycats. Though he has helped fuel the consumer craze, he laments the rise of handheld gadgetry: “The march of consumer technology will spell an end to tranquility,” he says. “Most of the venture money going into consumer-related companies will be squandered, and the rest will be lost. It will be brutal.”
I think he’s right.