nScreenMedia OTT multiscreen media analysis

Why Microsoft should introduce an Internet STB

Posted by Colin Dixon  
The renewed interest in Internet set-top boxes this year was underscored last week by an article in the Wall Street Journal that claimed Microsoft was working on its own STB.  The piece had scant details on the purported box and even questioned that the device would be released at all. What it did do was emphasize that the battle for the connected television is far from over. Why might Microsoft be considering such a device when it already has 26% penetration of U.S. households with Xbox 360?

To understand this, let’s examine the three main market approaches used with Internet STBs:

  • General media streaming devices, such as Roku and WD TV Live player
  • Service-specific devices, such as the rumored Amazon STB and the upcoming Intel Media device
  • A hybrid of the above two approaches, such as the Apple TV box

Microsoft’s currently uses the hybrid approach with Xbox. The company works with third party content providers to support their services. Examples of this are Netflix and Verizon. Most of these services also help to sell another Microsoft service, Xbox Live Gold membership, since the Xbox video features require Gold tier membership at $60 a year. (The BBC iPlayer in the UK is the one exception to this.) As well, the company promotes its own services; the Xbox Video Store and Xbox Music Pass, for example.

Were Microsoft to introduce an Internet STB it is likely the company would follow the hybrid model they have been successfully using with Xbox. However, does it really need an STB with Xbox doing so well?

If the objective is penetration and control of the living room, the short answer to the question is yes. Although Xbox is still seeing small growth, the company sold 261,000 boxes in the U.S. in March of this year, game console sales overall have plateaued over the last several years. The lackluster performance of Wii U shows how tough selling consoles has become. The truth is everyone that wants a console already has one. So if Microsoft wishes to progress beyond a 26% living room market share, it must come up with a different approach.

One way to do this is with a cheap Internet STB that ties in to the richness available through Xbox Live Gold membership. The key selling point for the box (and an Xbox Gold membership) will be differentiation: how can Microsoft provide something that Roku and Apple don’t (or can’t.) Given that everyone has Netflix and YouTube the company will have to come up with something unique.

One obvious approach would be to apply Kinect functionality to enhancing the TV experience. Voice control works very well with Xbox and gesture control is progressing. However, there are two problems:

  1. Kinect functionality will push the price of the STB up above Apple and Roku
  2. Voice and gesture control alone is unlikely to win over many customers

Another more radical idea could really differentiate the box but could also have a negative impact on Xbox console sales. Onlive has proven it is possible to provide a very satisfying gaming experience leveraging a cheap STB alone. If Microsoft were to introduce a totally online game service targeting the more casual gamer integrated with the media features of Xbox Live gold, that could be a huge differentiator for the box and likely would be very difficult for Roku and Apple to emulate. The biggest downside, however, could be an impact on console sales – particularly the entry level Xbox 360.

Why it matters

Without a new approach to the living room, Microsoft is unlikely to increase penetration of connected TVs in the short term.

An Internet STB could help the company grow living room penetration. However, to be successful the box would need to sell for $50-$99, leverage the media riches available through Xbox Live Gold membership and bring something tangibly different to the experience.

A totally online gaming experience targeting the more casual gamer might be one way to differentiate the box. However, it risks disabling some console sales.

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