The video game business is at an inflection point: Games are moving off fixed consoles and into the cloud, where they can be accessed from mobile devices or low-cost, cloud-enabled set-tops. That trend poses a threat to the market dominance of traditional console makers like Microsoft, Sony, and Nintendo.
To counter this trend and also stay relevant in today’s gaming market, Microsoft has designed its new console to extend the Xbox franchise beyond gaming to encompass virtually every other type of entertainment content and service in the living room.
By tapping into other revenue sources, Microsoft hopes to shorten the ROI window compared to previous game consoles’ and ensure that the Xbox One has a viable life beyond the point where mobile and cloud-based gaming eclipses fixed consoles. Our analysis indicates:
- The Xbox One is designed to support a TV content ecosystem that will generate ongoing revenue for Microsoft in parallel with the video game ecosystem at the core of the Xbox franchise.
- Rather than spending its money to license non-exclusive linear distribution rights, Microsoft is investing in creating exclusive original TV content directly for the Xbox Live platform.
- Microsoft is co-opting the incumbent pay-TV service providers rather than disrupting or displacing them from the living room; Xbox One’s HDMI pass-through technology is a compromise that spares it the need to negotiate individual agreements with service providers and avoids antagonizing them.
- A video-only, cheaper Xbox is unlikely in the near term.
- Early grumbling from hard-core gamers over the Xbox One’s price point and limited support for used games likely will not affect sales negatively.