(Source: Microsoft Studios)
TV shows are expected to be Xbox One exclusive, give console a boost

Microsoft Corp. (MSFT) delivered a rather mild surprise when it announced that it had recruited Steven Spielberg to produce an upcoming exclusive TV show for the Xbox One based on the Halo series in which future humans battle alien invaders.

I. Forza Motorsports: The TV Series?

This of course wasn't the first video game franchise to see a turn to video.  But past efforts have tended to be either well after the fact (like Tekken and Alone in the Dark), were horribly campy (like Street FighterMortal Kombat, and The Super Mario Brothers), or were just plain inexplicably mediocre despite big name actors/budgets (e.g. Prince of Persia and Lara Croft: Tomb Raider).

But over the last couple weeks, Microsoft has delivered a far bigger surprise revealing that it is looking to become perhaps the biggest maker of video game television and movies in the industry.  Comments Microsoft Studios CVP Phil Spencer at the Tokyo Game Show, "[The joint Microsoft/Spielberg team has] literally hundreds of ideas that they are incubating right now.  We will have some new announcement for TV shows coming pretty soon."

According to Reuters, Microsoft refers to these other projects as "Nancy projects" a title which pays homage to CBS Corp.'s (CBS) former Television Studios President Nancy Tellem whom Microsoft hired a year ago as head of entertainment and digital media. 

Mario Bros. movie
Microsoft doesn't seem overly concerned that in most cases video games moves have... well, stunk. [Image Source: Buena Vista Pictures]

But of all Microsoft “experiments”, its gaming business has been by far the most profitable, particularly as it has expanded its game publishing efforts via its Microsoft Studios Holdings.  And increasing the software/media efforts related to its gaming business helps to offset and make worthwhile the money losing console business.

And Microsoft's TV efforts could go a long ways to differentiating its Xbox console.  In addition to its Halo and unannounced other game-based TV series which ooze hardcore nerd/gamer appeal, Microsoft will also cater to the mainstream partner with the National Football League and other partners to offer exclusive clips via the Xbox One and its online backbone, Xbox Live.

II. Dwindling Console Sales, Controversy Take a Toll on Xbox Expectations

However; the effort is not without risk.  Microsoft upgraded its console to pull even with arch-rival Sony Corp. (TYO:6758) on an offline-hardware basis.  As a result, it will likely lose money on every unit sold.  Microsoft's big bet is cornered on three key assumptions -- that a lot of people will buy its Xbox One console, which launches in 13 markets on Nov. 22, that a lot of people will buy Microsoft Studios games (like HaloForza Motorsports, and Zoo Tycoon), and that a lot of people will sign up for its $60 USD a year Xbox Live Gold membership.

The consoles sales goal is by no means a done deal.  Piper Jaffray Comp. analyst Michael Olson predicts that the Sony PlayStation 4 (PS4) and Xbox One will each sell about 3 million units -- a far cry from the booming sales of some past consoles.  Mobile gaming has taken its toll on traditional console gaming.  Microsoft arguably has the more compelling console in terms of interface and exclusive titles, but has been mired in controversy.  

Some of Microsoft's most controversial stands (e.g. offering developers digital rights management code libraries to ban used games and requiring the console to be "always on"were reversed -- an admirable show of listening to customers.  But these controversies still have somewhat damaged the console's overall image.  And given Microsoft Corp.'s (MSFT) data sharing arrangements with U.S. National Security Agency (NSA) some remain concerned that the console's 1080p Kinect 2 camera -- which is always on when the console is powered up and internet active -- will be a privacy risk.  Microsoft's console is also more expensive; the Xbox One retails for $499 USD, while the PS4 retails for $399 USD.

As for the game sales goal, video game sales for consoles now only account for 33 percent of sales -- according to the NPD Group -- due to mobile games, social network games, and other niches stealing away some of traditional gaming's business.  Still that number is slightly misleading, as it doesn't factor in the digital downloads market (part of the remaining 67 percent), of which the Xbox has a substantial stake.
Xbox One
It's unclear whether Xbox Live Silver customers will be locked out of Microsoft Studios's TV shows.  Microsoft cripples certain console hardware features for customers who don't buy a "Gold" level membership.

But speaking of digital downloads, Microsoft's efforts to push customers into its Xbox Live Gold model by locking them out of features on their console (DVR, etc.) if they stick with the free Live Silver level members is alienating some potential buyers.  Microsoft's approach seems pretty counterintuitive in that it actually allows non-paying users to play online games (which costs Microsoft money in serving fees) for free, which Sony only allows paying customers to do.  But Sony does not lock non-paying PlayStation Network customers out of features on their console; features that essentially have already been paid for with the cost of the console.

With respect to its TV push, one critical thing not yet made clear by Microsoft is whether Live Silver subscribers will be locked out of the free Halo show and other television content on the console.  It's very possible that they may be, given Microsoft's announcement of the channel guide and DVR locking.

In short, there's a lot of unknowns as the Xbox One approaches, but Microsoft is certainly not shying from taking a unique and ambitious direction with its television ambitions.

Source: Bloomberg

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