One box to rule them all

When the first Xbox One ad was released without mentioning games at all, it surprised many by targeting not gamers, but sports fans. This reinforced widespread criticism of the non-games focus at the hardware’s unveiling. Among the reasonable and less reasonable censure of Microsoft’s strategy, why did the console’s multimedia functionality gall so much, and what strategic impact will it have?

Ironically, when the first Xbox launched, Microsoft vehemently denied it was a Home Hub designed to usurp other media devices. Until then, consoles had largely been purely gaming devices and Microsoft was sensitive to being seen as a domineering outsider using a games console as a Trojan Horse.

The media features of the Xbox 360 were relatively muted at launch, but non-games services, most designed to augment Gold subscriptions and drive new revenue, were steadily released. Microsoft invested substantially in partnerships with broadcasters and production companies like Sky, HBO and ESPN, pilots of novel interactive television shows and advertising using Kinect, brand-sponsored apps like Nike+ Fitness.

Microsoft’s growing investment has been driven by substantive changes in user behaviour. Microsoft revealed in early 2013 that ‘entertainment’ usage of the 360 had been growing at 57 per cent per annum, and actually overtook game usage in March 2012 – impressive considering that most non-games entertainment is locked behind Gold membership, a service originally designed to monetise the hardest-core 360 gamer. This is not confined to Microsoft; Netflix’s biggest distribution platform is the PS3 on which the majority of usage is also non-games.

With Xbox One’s unveiling, Microsoft’s management, emboldened by long-term trends in how their hardware is actually used, highlighted its entertainment capabilities. Launch details revealed a host of non-games features: stacked operating systems for video uploading and Skype chat, live TV channels and even the commandeering of other media devices like set-top boxes.

Video is key to console manufacturers’ social strategies, but Microsoft is taking this to a whole new level. LA-based Entertainment Studios, run by a former CBS exec, is a 200-man studio developing new formats. Following Netflix’s lead, Microsoft is commissioning original drama for broadcast on its new Xbox One TV channel, and is hiring TV people to develop interactive TV exclusives.

This media strategy is multi-faceted, aggressive, massively funded and archetypically Microsoft. Its logic is simple. Xbox One will soon reside under millions of televisions in Western households. Microsoft knows its users far better than cable companies thanks to its community features, marketplaces and vastly better usability. That valuable data, real estate and distribution channel releases the potential to bypass TV manufacturing and cable firms’ tired and underwhelming interactive services. To place this successfully behind a paywall requires a compelling content line-up for which it is paying handsomely.

Will the strategy work? On the business side, Microsoft will find some more and less willing partners. VOD providers are quickly transitioning to the new platform, and TV production and IP-owning companies will welcome a generous new partner.

Advertisers will initially be more wary, given in-game advertising’s mixed track record. Although agencies are still surprisingly slow to buy higher cost inventory from owners of highly profiled games audiences, they should eventually follow big brands onto the platform. Cable and satellite TV firms may react more suspiciously to the HDMI pass-through functionality, which could relegate their set-top box operations to just another app in Microsoft’s universe. But on the consumer side, audience data is unequivocal. It seems inevitable that Xbox One owners will lap up this new content up with increasing enthusiasm, because it’s now expected.

So the hue and cry over non-games functionality on Xbox One originated in misreading profound changes in user behaviour. Microsoft may possibly have mistimed this strategy’s announcement but its ‘entertainment’ plans look extensive, robust and comfortable alongside its strong games plans.

Given that pre-orders for Xbox One are beating historic numbers for 360, it seems that, once again, the consumer is happily ignoring this storm in a teacup. This strategy may provide solid differentiation for Xbox One and Gold membership for years to come.

Rick Gibson is a managing director of Ludifi, a studio that makes video interactive and playful.
www.ludifi.com