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Summary

  • Microsoft is finally leveraging Xbox as a way to break into your home ecosystem.
  • The idea of Xbox One doubling as a set top content box was common sense.
  • Microsoft continues to be a significant growth prospect.

For the better part of the last year, I've been following Microsoft (NASDAQ:MSFT). I've liked the company's progress over the last year - expanding into mobile, Surface 2 selling well, and Windows 8.1 actually being usable. Further, with the CEO transition over the last quarter, I am confident in Satya Nadella is the right man for the job.

With Microsoft's continued focus on cloud, mobile, and with Office 365 subscriptions booming (presumably due to Nadella porting the software over to iPad), Microsoft remains in a position to continue growing.

The one opportunity that I always thought Microsoft had in the ecosystem area, however, was to leverage its Xbox. Xbox is, essentially, an easy way for Microsoft to find its way into your living room, if it's not already there. Once there, why make consumers go out and buy a set top box, too? Why can't the Xbox just play quarterback for your home ecosystem? I've been harping on this point for the better part of the last year, my readers know.

When Xbox One was introduced and the emphasis was clearly on the integrated TV/video game experience, it became clear that this was a direction that Xbox was going to head in.

I first wrote about this as early as November of last year, claiming that Xbox was Microsoft's $1 billion weapon for growth.

Seeking Alpha reported yesterday:

  • Microsoft intends to this week provide hints about exclusive programming for the Xbox, with shows set to include a series from Steven Spielberg based on the videogame "Halo."
  • Another expected program is "Every Street United," a documentary-style series about soccer that will start in time for the World Cup in June.
  • However, Microsoft faces a crowded field in which Netflix, Amazon, Hulu and Yahoo are producing original content for the Internet.

I was so excited when I read it - Microsoft was finally listening to me! But, seriously, I think this is a fantastic road for Microsoft to potentially grow off of. The concept of developing TV shows off of Microsoft-only games (as they're doing in the event of Halo), I also think is brilliant, uncharted territory. Connect with games by bringing the content of their games to the TV screen as shows.

No sooner did I pen my last article about Microsoft's earnings, did I reiterate my thoughts on the potential value that Xbox has:

The growth in Xbox is important - it's turning a profit on the 360, which is still selling well, to counteract the long road to profitability for the Xbox One. I still believe Xbox is crucial, and I'm glad there was no mention of spinning it off.

Though Xbox still lags behind Sony (NYSE:SNE), I contend that getting an Xbox into living rooms is a great way to expand the Microsoft ecosystem through households - and will eventually be a great way to monetize other types of media like streaming TV and movies. In other words, instead of creating a set-top box that also has video game capabilities, Microsoft has a video game box, which it can give set-top capabilities. It can back its way in, in essence.

So, yes, Microsoft is going to be competing with the big boys on this one - Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Amazon (NASDAQ:AMZN) namely. However, if there's any company that has the balance sheet strength and cash position to be able to do this, it's Microsoft. If this was Ruby Tuesday (NYSE:RT) trying to break into set top boxes, I'd be worried. Microsoft? They have all of the tools they need to execute this correctly.

And, again, they've already got the leverage of having millions of Xbox One's sold - so they've breached your territory already, if you're a gamer.

Bears have argued for spinning off the Xbox division at Microsoft due to the fact that Xbox only becomes profitable after you sell a certain number of them (well into the millions). Having said that, the Xbox 360 is now profitable (and continuing to sell well), and the Xbox One has performed well off the bat with sales.

Additionally, this road continues to squeeze more juice out of the Xbox orange - changing the console's monetization power by making paid-for streaming media and music available.

I'll be watching these developments extremely closely, as I feel if executed correctly, this could be a major growth niche for Microsoft.

Best of luck to all investors.

Source: This Little Niche Could Do Big Things For Microsoft