Microsoft's Xbox iTV surprise

Posted by Rob Enderle, Principal Analyst, Enderle Group

San Jose (CA) - We've known for some time Apple was planning a spoiler party at MacWorld during CES to take the edge off Microsoft's Vista launch later that same month. Today Microsoft struck first by launching Xbox Live Video Marketplace their own iTV like offering with the Xbox 360 and folks that already have one, in effect get an iTV for free.

In terms of simple math this makes Apple the instant underdog because there should be more than 7 million Xbox 360 consoles in the market by the time iTV launches. Content with the Xbox Live Video Marketplace is initially rather light but it includes high definition content, which is incredibly hard to get this year thanks to the content owners fears of piracy.

By the end of the year, Microsoft is expected to have over 17 million Xbox 360s in the market and many, if not most, will be hooked up to high definition displays thanks largely to the massive drop in price of HD sets.

With the combination of game titles and media you would think this is a slam dunk, and it is vastly better than what the PlayStation 3 is bringing to market, but can Apple pull a rabbit out of its hat?

Apple's iTV advantages

While it appeared at first the iTV didn't have a hard drive, Sony has indicated that it does, indeed, have a hard drive and the target price of $299 puts is about $100 below the fully featured Xbox 360.

Apple is likely able to match the offerings that Microsoft announced and they will probably have Disney giving them a deeper set of partners. In addition, game systems are generally not plugged into the main TV in the living room and buying another Xbox for just that TV will be more difficult to justify.

The iTV is now rumored to be a Viiv compliant device so that it will plug easily into any Intel Viiv branded PC and receive Intel's marketing support something the Xbox is unlikely to get. The iTV has HDMI support, which makes it easier to set up and appears more in line with what new HD TV buyers are likely to be told to look for when buying a HD TV product next year.

The Apple product appears to be fully integrated within the iTunes system which means that the media you want to watch and listen to can also be enjoyed on iPods. Currently, the Xbox Lice Video Marketplace is not supported by the Microsoft Media Center, Plays for Sure, or Zune.

Finally, it is likely that the iTV will have direct access to YouTube content largely as a result of Google's board room influence providing a breadth of content that may be unmatched outside of a PC.

Game over, Apple wins right? Not so fast.

2007 the fight for your digital living room

Never believe that the initial entry of any player is how the product will mature. The Xbox offering has the feel of something that was rushed to make a fourth quarter ship date and suffers from being incomplete as a result. But, even incomplete, it exists in market in the fourth quarter and is more complete than anything announced by either Sony or Nintendo.

Microsoft is holding back parts of the Vista launch much like Apple is holding back parts of iTV so it can build excitement during the launch wave. Part of what Microsoft is clearly holding back is content for the Media Center PC, which is vastly improved under Vista. It is extremely likely that at or shortly after launch, the Xbox and the Media Center PC will become highly integrated once again with regard to content.

Zune doesn't have video yet and Plays for Sure does - a scenario that suggests that once the content program gets integrated into the Media Center, it will flow out to all the Plays for Sure devices, including the portable players and set top box products. By the end of the year, Microsoft and its partners should have more things at more price points than Apple. But Apple still has an edge in the market with its iPod.

The difference bewteen the tow comes back to the 17 million Xbox 360s expected to be installed by the end of 2007 coupled with an estimated 30 million+ Vista Premium PCs athat are estimated to be sold next year. The combination should eclipse Apple's numbers.

Typically, when Apple beats Microsoft, the company succeeds by coming out first and maintaining a lead in design, ease of use, and being more focused. When Microsoft loses to anyone, it generally is the result of a lack of focus, too much complexity, and inadequate marketing (both funding and quality).

If Microsoft can't bring together the parts of this solution and ensure the content can move across Microsoft's personal technology offerings and if the company cannot market the result effectively, then Microsoft will lose and this really would not have been the first time.

If both companies execute flawlessly, Microsoft would be the larger and the first mover, which could provide the edge. And clearly, if Apple stumbles, the company not only loses the living room, but may lose the iPod as well. In that sense, Apple will be taking a gamble that it cannot avoid. Plus, there is a wild card expected to enter the market late next year.

Cisco: The wild card

I'm hearing increasing rumors that Cisco is planning to launch its own iTV like offering, which is being referred to as "The Cable Bypass Box". This offering takes the most advanced components out of their the advanced Scientific Atlanta set top box products and turns the result into what could be the most compelling product of the three - both from a price and capability stand point. Using set top box techniques and economies of scale, they could undercut even the Apple offering by as much as $150 and, if it can work in a subsidy, Cisco could probably provide the resulting offering for free.

In the end, for this once, Apple and Microsoft may not really have each other to worry about. If the rumors are true and Cisco does have what could be "the killer product," then both companies could turn out to be bit players in a market increasingly dominated by Cisco.

That in fact could lead Microsoft and Apple to partner much like Novell and Microsoft currently did in an effort to combat the entry of a technology provider who could lock both out of the market. Granted, this is a long shot, but so was the Apple/Intel Deal and the Microsoft/Novell deal was even more impossible. Intel is still partnered with both companies and could play the marriage broker role (Intel loses if Cisco wins as well.)

Looking Ahead

Regardless of the outcome, the good news is that by this time next year, you should be able to have a choice between providers for high definition content on demand over the Internet. For those of us who are going to buy one of the new incredibly inexpensive HD TVs this year and would otherwise be disappointed about content, this could be a good thing. If you already have an Xbox 360, you will be able to experience this future almost immediately; for those who don't, you may want to check out your friend's or neighbor's Xbox 360 and see what you are and will be missing.

Rob Enderle is principal analyst for the Enderle Group. He can be reached at renderle@enderlegroup.com.