How Microsoft can beat iTunes

A friend asked me the other day how I felt about Microsoft putting out an Elite version of the Xbox 360. He was into the whole concept of the beefy 120GB hard drive and the HDMI connection, which is missing on the original Xbox 360 Premium. Aside from the continued lack of built-in Wi-Fi, he was pretty stoked and wanted to know whether I was planning on upgrading. I told him I was, but mainly because the Elite's black finish fits the color scheme of the rest of my A/V components. Deep down, that's what appealed to me. The rest of the stuff was just window dressing.

He thought I was kidding, but I wasn't. The truth is, I'm waiting for the real next rev of the 360, which will allegedly include a cooler-running 65nm CPU. What wasn't lost on me, however, was the beyond-the-specs message of the higher-capacity 360. In a week when Apple launched Apple TV and Sony was busy rolling out the PS3 in Europe and Australia, Microsoft was lobbing yet another salvo in the battle for living room dominance.

Late last year, Microsoft began adding full-length HD movies and TV shows to its roster of downloadable content on Xbox Live, revealing its intention to gradually turn its online Marketplace into an entertainment hub, complete with IPTV functionality--meaning you'll be able to get live, streaming TV programming in addition to the pay-per-download content now available. I've generally applauded this effort, and in many ways Microsoft is ahead of Apple when it comes to downloading and playing video content on your TV. While the selection of movies isn't great--yet--a growing assortment of newer releases are available, and Microsoft has taken the smarter tack of having you rent rather than buy movies at hardly-a-bargain rates (Apple charges $10 to $15 for movies). True, your rental expires after a few days, which some folks may find irritating, but the company's taking more of the video-on-demand or pay-per-view approach that we're used to seeing with cable and satellite companies. At the moment anyway, the value added is that you can choose to watch the movie in HD rather than standard-def. The only problem is that it can take a while to download a movie.

I personally have no interest in renting movies from Microsoft under this current plan. Sure, I'll be glad to download a free episode of South Park or whatever show is being promoted on the Xbox 360--and a trailer or two--but actually paying for something at this point really isn't the cards.

iTunes is a slightly different story. While I don't have any interest in streaming relatively low-resolution, store-bought iTunes videos from my PC to my HDTV (I'm more interested in Apple TV for listening to music and viewing photos), it does make sense for me to pay for a few episodes of The Office or some other popular TV show, so I can watch them on a trip--or more likely, load them on to my wife's iPod, so she can watch them on a trip (she travels more than I do). I'm not a "season pass" type guy, but I can see how that sort of bigger investment (ranging from $26 to $48, depending on the length of your show's season) might appeal to people who are constantly on the go and want to remain up to date with their favorite programs.

We could chat about how Microsoft has failed (thus far) to have the Zune sync with the Xbox 360, but the real issue for me is that, thanks to a Netflix subscription and a cable HD DVR, I'm already loaded up with plenty of good content, the majority of which I don't have time to watch. Say the average digital cable bill is $55 a month. For another $30 or so on top of that I get the DVR, plus four "premium" HD movie channels (HBO, Showtime, Cinemax, and Starz), as well as channels such as Universal HD, which also serves up some decent flicks. Then there's the crap that the other 300 channels are offering. So, what the hell is Microsoft--or Apple or Sony--going to give me that I don't already have?

The answer is nothing--which is why, at the end of the day, it's going to come down to a value proposition. Sure, all these companies are going to be able to make incremental revenues from impulse buyers. You know, you go to a party, have a few drinks, come home, fire up iTunes or your Xbox 360, and think, "what the hell--that looks good," and you click the OK button. It happens. The revenue is real. Yet, according to a recent report by the NPD Group, "the average number of files purchased by the average iTunes user fell 11 percent since 2005." Will the arrival of a wide selection of DRM-free music help reverse that trend? Maybe, maybe not. In the meantime, it's not a good stat if you're building a business model on digital media delivery.

To me, the question is not if, but when Microsoft will implement a subscription model for its Xbox Live video content. With the appointment of Netflix CEO Reed Hastings to its board, the company obviously has a certain amount of respect for the DVDs-by-mail service, which has managed to attract a total of around 6 million subscribers and rake in close to a $1 billion in revenues in 2006. Netflix expects to add another 2 million subscribers in 2007 and is already streaming movies from its Web site at no additional charge to subscribers (if you have a $19.95 subscription, you can stream up to 20 hours of content). According to Hastings, the company hopes to have 5,000 movies available online by year's end.

Meanwhile, in early March, Microsoft announced that it had surpassed 6 million paid subscribers to its Xbox Live service. It also announced that it had integrated an IPTV platform into Xbox 360 and that "IPTV on Xbox 360 is expected to be available to consumers by holiday season 2007." It's unknown which channels or what content will be available at launch, but if I could choose just 20 stations (from, say, 50 or 100 offerings), I could see paying $20 a month for that service--even more if it offered DVR-style recording and was truly good enough for me to dump cable. Flesh it out with a Netflix-style service that lets me hold on to as many as three digital movie rentals at a time, and a Rhapsody-style music service, and I'd happily go higher. Make these services streamable to other Xbox 360s and Media Center/Vista PCs in the house--and smart phones on the road--and you've got the beginnings of a compelling digital entertainment ecosystem. For the price of three iTunes movie downloads, Microsoft could be offering a monthly digital entertainment cornucopia. Which would you rather have for $45?

Of course, I'm probably asking for too much, at prices that remain unrealistically low once all the various movie studios, bandwidth providers, and hardware manufacturers take a cut of the action. And I still hope Apple and Sony step up to the plate to offer worthwhile alternatives to that Microsoft vision--I just think Redmond has the resources and the will to make it happen before anyone else. Until it does, though, I'm probably just going to slap on a black faceplate and stick with the original Xbox 360 and its puny 20GB hard drive--you'd be surprised what you can fit on there with some judicious deleting.

Would a subscription-based Xbox Live video service kill iTunes? TalkBack to me below.