Unleashing the Trojan Horse: Microsoft Saddles Up Xbox for IPTV

Microsoft's Robbie Bach and Bill Gates

Microsoft Corp. might as well enter the real estate business. They may not want your mortgage payment or utility bills, but they’ll take all the space they can get.

Why? Because when it comes to the connected entertainment business, the diversified vendor wants to own or control the home and everything around it.

Consider this: As far as delivering video to consumers is concerned, the IT colossus already is in the home with your PC and media center software, already produces wireless devices and code, and already has multifunctional IPTV — and just cable TV — software in many TV STBs.

While many vendors would kill for this breadth of coverage — which spells countless big-buck revenue opportunities for service providers — Microsoft has it and plans to expand its presence in the home and beyond.

A clear-cut case-in-point was Microsoft’s announcement at the Consumer Electronics Show 2007 of plans to integrate its IPTV software with its wildly popular Xbox 360 gaming console for general availability to service providers by the holidays. The move was expected, as it long has been said that the Xbox was a Trojan Horse for Microsoft to own home networking.

This, in and of itself, represents a whole new video distribution channel for telcos through a product with a 10-million-plus installed base. But unlike anything Microsoft has done with technology, the story — and strategy — doesn’t stop there.

Microsoft said additional wares will be integrated into the IPTV for Xbox 360 offering, perhaps including Zune, but would not identify them specifically.

CIMI Corp.’s Tom Nolle

“Microsoft is a home player, and they need to leverage their presence in the home to create opportunities for themselves in the provider space,” says Tom Nolle, president of CIMI Corp., a consulting and market analysis firm. “This is a smart move on their part, and it would be even smarter for them to integrate Vista and Zune with IPTV offerings as well. Microsoft could promise providers complete control over the content experience, from where it’s hosted to where it’s consumed.”

Researchandmarkets.com estimates the combined revenue from the sale of both TV shows and movies via Xbox Live could reach $92.25 million in 2007, growing each year through 2011, when the aggregate revenue from the sale of both types of content could top $726 million.

But, as you might expect, Microsoft won’t admit it wants to dominate the home.

“We see IPTV for Xbox 360 as one device in the home, not as the only one,” says Ben Huang, director of strategic business planning for Microsoft TV. “It could start by taking the place of a set-top box in a kids’ or game room, with other TV sets in the house using traditional set-top units.”

Although Microsoft and industry analysts concur there won’t be any all-in-one entertainment device in the home, the one with the most functionality likely will be the primary.

“No one-size set-top box will fit all, and I’d venture to say that no one size would even fit one consumer all of the time,” says Steve Mannel, offerings executive for cable and broadband solutions with IBM’s media and entertainment communications sector, which among other things, helps service providers tie IPTV systems and services to back-office and OSS systems.

Click to Enlarge   The planned IPTV for Xbox 360 features the gaming console with what Microsoft calls the “MediaBlade."

Microsoft admits it will, over time, integrate its other entertainment properties into IPTV for Xbox 360, but would not provide a product-specific timeline. As already described, the merged system will enable consumers to play games, communicate using community-based features, watch TV, and view videos and movies. "Our goal is to make entertainment more personal, more interactive and more social," says Robbie Bach, president of Microsoft's entertainment and devices division.

“Microsoft knows that the area you need to position in is the area that’s newly developing, because there’s no burden of depreciation to deal with,” explains Nolle. “Microsoft knows that DTV, HDTV, mobile content, self-authored content like YouTube, and the rest will reshape the home network, and they want to be there big time. They need to be.”

Microsoft's Robbie Bach

But with so much coming from this Microsoft system alone and with CIMI Corp.’s Nolle predicting Sony Corp. and other gaming systems vendors will follow suit, one core question for telcos deploying IPTV service becomes: Is this overload?

“I really think this is too much too soon and that most service providers are not ready for this,” says Teresa Mastrangelo, principal analyst for broadbandtrends.com. “Telcos already have a ton on their plate just trying to get their service more widely deployed. It’s going to be some time before they have the resources to act on additional video delivery opportunities.”

Opportunity or Threat?

Nonetheless, you can assume telcos of all shapes and sizes hear opportunity knocking, especially when it’s Microsoft doing the knocking.

That’s the case with AT&T Inc., which is working with Microsoft in the deployment of the telco’s U-verse video-driven package in parts of its 14-state region. The telco said from the outset that it saw video from a three-screen perspective (the TV, the PC and the wireless device).

AT&T has been focused first on the TV side with the Internet taking slot two. That alone has kept the telco, which still is absorbing BellSouth Corp. and fighting mightily on the video franchising front, more than busy. To add to this heavier-than-heavy workload, Apple Inc. launched the iPhone in January in a deal that gives AT&T exclusive rights to offer wireless connectivity services for it for two years. There’s your third screen of video!

AT&T expressed strong interest in IPTV for Xbox 360 at CES but did not commit to implement it, a stance that could change with time.

“We will look at it hard, and we’ll see to what extent it makes sense for us,” says Jeff Weber, vice president of product and strategy with AT&T. “We don’t see an all-consuming device, but we’re committed to competing on integration, which means it’s critical for us to deliver video to any device a consumer wants. We need to offer as much differentiation as we can, and this would be a terrific way to address that, but we’re not placing bets on any one gaming console.”

Of course, one telco’s opportunity is another one’s obstacle. In this case, that’s because telcos that use non-Microsoft middleware can’t tap into this platform without a complete swap out, which is highly unlikely.

“This could be considered a potential threat to our business,” says Shane Broyles, R&D coordinator for Rural Telephone Co. in Lenora, Kan. The company has been delivering video over DSL for a long time. “I also see many more players getting into the game,” he says, adding video delivery to gaming consoles may require network operators to rethink their traffic-handling strategies.

The STB Impact

Microsoft’s IPTV software works with STBs from Motorola Inc., Scientific Atlanta, Thomson and a few others.

Scientific Atlanta’s Davies

STB vendor Amino Technologies plc, which provides the wares to a long list of telcos already offering IPTV, doesn’t see any way to capitalize on the Microsoft plan.

“My main point about the Xbox 360 doing video is that it is useless unless the service provider is offering a Microsoft-based service so you could use the Xbox for video decode,” says Rick Sailor, sales director for Amino. “So it might be an announcement, but I’m unsure what the true value is, or if it makes any impact on Amino sales.”

Amino STBs currently are deployed in MPEG-2 or MPEG-4 IPTV systems that use other middleware, with which the Xbox is not integrated, notes Sailor.

The Xbox 360 plan notwithstanding, Scientific Atlanta sees the role and functionality of the STB continuing to evolve.

“Today’s STB is not your father’s set-top box,” says David Davies, vice president of strategy and product marketing for Scientific Atlanta, which claims to have shipped 30 million of the devices, and was purchased last year by networking kingpin Cisco Systems Inc. “The STB is now a media center device which connects to a lot of IP devices. As it also connects to portable devices, it will quickly evolve to a media gateway device. We see Xbox 360 as becoming a sort of additional set-top box in the home, with the set-top box for the TV remaining as the main one in the connected home.”

What makes Microsoft’s efforts exclusionary for some STB vendors is the often obscured fact that its IPTV software very commonly is referred to as “middleware,” which is a major misnomer.

Microsoft IPTV Edition software does more than typical middleware, notes Microsoft TV’s Huang. “It comprises digital right management code and handles the serving up of video-on-demand content as well.”

STB vendors must evolve their products quickly and spare consumers from any and all resulting complexity, experts concur. “Consumers just want devices to work together, they don’t want to work at making them work together,” says IBM’s Mannel.

Content Owner Interest

Companies that own content ranging from mainstream movies and TV programs to more niche video already have expressed interest in delivering their content via Microsoft’s IPTV for Xbox 360 system and believe gamers not only will watch TV and communicate with others, but will buy content as well.

“It’s the perfect device for TV, with its high resolution and high quality,” says Jim Funk, vice president of marketing for Akimbo Systems, an AT&T content partner, which has 13,000 programs, initially delivered over the Internet. The content company already provides programming for AT&T Homezone, which pairs a resold version of DBS-based video service with AT&T’s high-speed Internet service.

“The hard part with devices is getting the installed based, which, in this case already is taken care of,” says Joseph Cantwell, vice president of marketing for advanced services for Starz Entertainment, referring to Xbox. Starz delivers movie content through cable systems, satellite providers and the Internet.

Cantwell says his firm would have to do some unspecified “reworking of code around the movies” to deliver films through the planned Microsoft all-in-one entertainment device, but emphasized that does not include changes to DRM technology, as it already works with and uses the vendor’s media center scheme.

When asked if the distribution channel was a good match for content such as movies, Cantwell replies that Xbox 360 gamers already spend a great deal of time on the system, typically have broadband connections and already are used to downloading content like games. “I expect gamers will buy movies and other content,” he says.

The Sony Play

Microsoft and content owners aren’t the only ones that see expanded functionality for gaming platforms.

“The PlayStation 3 is much more than a video game console,” says a spokesman for Sony, noting the product features a standard built-in hard drive, Blu-ray Disc Player and network connectivity. “Through the PlayStation Network, we already provide downloadable content, such as games, videos and high-definition movie trailers.”

In the future, the Sony spokesman says, “you can expect us to expand this content to include the vast array of entertainment properties found across the Sony family, as well as other third-party partners.”

The Future of Entertainment

Those with deep roots in the gaming community believe Microsoft’s vision, which they share, is crystal clear.

“The vision is that people want to be much more active in the way they entertain themselves, especially the demographic that grew up with a controller in their hands, perhaps interacting with Nintendo,” says Julia Miller, CEO of iBloks Inc., a social networking site and a former executive who worked for Robbie Bach as part of Microsoft’s Xbox Live group. “It represents the largest connected social network in the living room,” she says of Xbox Live, which boasts some 5 million subscribers.

Miller says consumers, including gamers, will help drive the consumer entertainment experience to one that’s three-dimensional, with network and games in the background. “3D on computers is going to be like HD on TV,” she predicts. “It will be visually exciting.”

The IPTV for Xbox 360 Plan for Telcos
Bob Wallace

Microsoft TV's Ed Graczyk

Microsoft Corp. plans to make its IPTV-enabled Xbox generally available by this year’s holiday season, but it will be working with a small set of telcos to roll it out as part of a test and waved introduction.

Microsoft sees IPTV for Xbox 360 as an add-on to a telco's TV offering, “that won’t require any changes to the network, but will require them to choose a business model and support the offering,” explains Christine Heckart, general manager for Microsoft TV. “We think it’s a super way for telcos to achieve compelling differentiation from cable companies and satellite operators.”

However, telcos that don’t currently, or don’t plan, to use Microsoft’s IPTV software will be on the outside looking in, according to Microsoft executives.

Much of the focus before general availability will be on integrating the multifunction platform with service providers’ billing systems. “It’s one of the most important and biggest integration projects,” says Ed Graczyk, director of marketing and communications for Microsoft TV. “We want to give service providers different models — such as leasing, rent-to-own and a subsidized model — to select from.”

Who performs any/all integration functions in implementing IPTV for Xbox 360 for a service provider can vary by telco, says Graczyk. It could be Microsoft IPTV telco integration partner Alcatel, it could be Microsoft itself for a specific task, or it could be a third party.

While Microsoft’s current IPTV clientele includes huge global names such as AT&T Inc., Deutsche Telekom and SingTel, Graczyk says Microsoft is creating a sales channel for smaller operators. “We’ll obviously work with any service provider that wants to add this to their arsenal,” he says.

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines