Xbox One: Microsoft Wants To Be The Apple Of Your Living Room

May.28.13 | About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) finally unveiled its next generation console, the Xbox One. It wasn't hard to tell that something big was around the corner for the next generation console, as the company had made some new hires including former CBS executive Nancy Tellem to head the firm's content development initiative. Let's take a look at the revelations and how it might impact the company.

Steven Speilberg produces a Halo TV show

Xbox's move into exclusive content was not at all a surprise. In fact, we assumed we might hear about an exclusive TV show or movie even earlier. However, we were a little stunned to see legendary producer Steven Speilberg tapped to run the live action Halo show. In our view, seeing Microsoft dig into its coffers to hire elite talent reveals that the company is very serious about churning out and owning exclusive content. Making Halo the first is a relatively safe move since the brand is a proven winner. Frankly, several video game store lines could easily be made into movies or TV shows and have been in the past…with varying degrees of success. Nevertheless, we think if the project shows even modest success that Microsoft will greenlight additional projects in short order.

Somewhat similarly, the company anticipates Netflix (NASDAQ:NFLX) to be a big part of the ecosystem, based on what we saw from the launch. While Microsoft could easily attempt to replicate Netflix, and in the process bid up the cost of content, we think Netflix could be a possible acquisition target. After Microsoft acquired Skype, we've become more comfortable with the idea that the company could make another large splash, and Netflix would seem to fit nicely in the existing company infrastructure. Plus, Microsoft has plenty of cash so achieving profitability wouldn't have to be the number one priority.

Used Games Sale Are Sort of Allowed

Amidst all of the talk about banning used game sales, Xbox One will allow used game sales, but activating these games will require a $10 fee. This also applies to when a user may bring a game over to a friend's house, in which case installing the game to the hard-drive will also cost $10.

This is somewhat bearish for GameStop (NYSE:GME), but it is certainly a better alternative than if used game sales were banned altogether. The initial reaction to the fee is negative, but we're fine with the move. On one hand, if it doesn't work out, Microsoft can always get rid of the fee. But if it does work out, it could help boost game sales for developers and provide a nice revenue stream for Microsoft. This strikes us as a very "Apple" (NASDAQ:AAPL) move in the sense that it may agitate consumers initially, but they will likely come around, if not forget about it.

At the end of the day, we believe Microsoft knows trading in and selling games is a source of capital for cash strapped younger users, so banning the sale and trade of games entirely might not have been feasible.

TV, Gaming, and Internet All Integrated

Perhaps the most important feature of the Xbox One will be its ability to integrate TV, gaming, and the Internet. The much anticipated but possibly never existing iTV from Apple was supposed to give consumers all of these things, but it appears Microsoft has beat them to the punch. Because the Xbox One can interact with a cable box, the console will be able to literally move from a TV show to Internet Explorer to a game. This broadens the appeal of the device beyond gamers, and it could even foreshadow Microsoft entering the cable business.

Beyond blending the three mediums, the Xbox One also has an exclusive partnership with the NFL to deliver stats and highlights that interact with programing. With DirecTV (DTV) in no hurry to re-negotiate its NFL deal, could Microsoft scoop in and acquire the Sunday Ticket package? We think it's unlikely, but such a deal could be a huge catalyst for hardware sales.

As for gaming, we think the new Xbox launch and its online features could help reinvigorate the video game environment. Hardware capabilities have increased, therefore the possibilities to invent superior games with better graphics and superior physics. Activision (NASDAQ:ATVI) will launch the newest Call of Duty iteration on the console, and EA (NASDAQ:EA) foreshadowed the return of NBA Live, as well as an exclusive feature on FIFA for Xbox One gamers. We're optimistic that the new console will at least initially reinvigorate sales.

Whether or not the Xbox One is as popular as the Xbox 360 is up for debate, but we like the potential of the system thus far. Adding a Blu-Ray player and expanding the hard-drive compensate for what the previous console lacked. Considering the tremendous success of the Xbox 360, we think the future for the Xbox One looks bright. Microsoft remains a core holding of the portfolio of our Dividend Growth Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: A number of firms mentioned in this article are included in our actively-managed portfolios.