The (excellent) Slate technology writer, Paul Boutin, throws down the gauntlet and says that PC-TV hybrids, such as Microsoft’s Media Center version of Windows and Apple’s FrontRow response, are aiming for an audience that does not and never will exist. Media Center enthusiast and blogger Thomas Hawk replies, saying that Paul is ignoring Windows Vista and Xbox 360, which together will change the game—Microsoft will market Vista’s Media Center capabilities to Xbox 360 owners, causing them to buy a new US$1,000 PC so they can get DVR on the US$400 Xbox they already own.
I’ve been covering Microsoft’s home entertainment strategy for five years, and I have to agree with Paul, primarily because the business model doesn’t make sense. Microsoft loses money—probably about US$100–on each Xbox 360 game console, and earns about US$90 every time it sells a Media Center version of Windows XP (presumably the price will be about the same for Windows Vista Home Premium—the Home Basic version does not, despite what Thomas implies, include Media Center functionality). The Xbox business model makes sense only if people buy at least eight games over the life cycle of the box, although sales of high-priced peripherals (hard drives, memory sticks, Wi-Fi adapters) and Xbox Live subscriptions could also help. Point is, Microsoft doesn’t want people to buy an Xbox 360 primarily for its home entertainment capabilities. (Assuming people want to do that anyway—802.11g can’t stream high-definition video, and who wants to watch anything less on their brand new 40-inch flat-screen HDTV?)
Working in the opposite direction, existing Xbox owners might find Vista’s Media Center capabilities appealing enough, along with the other improvements in the OS, to buy a new PC. But there will only be 10 million Xbox 360 owners by the time Vista launches. Consumers will buy nearly 100 million new PCs in 2007. The Xbox 360 owners are early adopter/tech enthusiasts and so probably would have been among the first Vista purchasers anyway. So Xbox 360’s effect on Vista sales will be minimal.
As far as owning the living room and online advertising and all that, I’m very skeptical until I actually see somebody other than Google capitalizing on the huge growth in one particular market—paid search advertising. But maybe I don’t drink enough Web 2.0 Kool-aid.
Beyond the questionable business case, Media Center and other PC-TV hybrids disobey my first rule of consumer electronics and technology: divergence beats convergence. Time and time again, consumers have shown they prefer to buy one device that does one thing very well, rather than a multifunction device that does nothing well. The PC itself is a bit of an exception, but most people still use their PCs for surfing the Web, sending and receiving e-mail, and perhaps one or two other programs. (My second rule, convenience beats quality, is a subject for another time….)
I suspect that Microsoft will downplay the PC-TV hybrid after Vista launches, and instead come out with a Zune-branded networked entertainment device based on Windows CE, probably for Christmas 2007. This would be a combination DVR (like TiVo) with home networking capability to connect to the Internet. Eliminates all the PC problems—patching, spyware, crashing, slow boot—that you don’t want when you’re in front of your TV. The problem here will be selling such a device at a high enough price to make a profit (or at least not to go US$5 billion into the hole like Microsoft has done on Xbox so far), without getting undercut by the cable TV providers, who are bundling DVR into their digital cable offerings, hardware included. The key is the combination of online and traditional TV programming—but Microsoft has to build up a truly great online content source. Which is exactly what it’s rumored to be trying to do with Zune.
Some anecdotal evidence to support my point: the eHome product group at Microsoft, which oversees Media Center, moved out of the Windows group and into the same large group as Xbox and Zune about six months ago. In other words, they report up to Xbox maven Robbie Bach, not anybody in the Windows group. There goes the Windows tax…