Microsoft's Xbox 360 Plan: VOD Trojan Horse

| About: Microsoft Corporation (MSFT)
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I’ve been theorizing for awhile that Microsoft’s (NASDAQ:MSFT) Xbox 360 (and the forthcoming Sony (NYSE:SNE) Playstation 3) isn’t really about teens and video games. Obviously gaming is a core feature and responsible for getting these systems into many homes, despite the steep $400 price of admission. But that’s just a trojan horse — the real money and future of the Xbox 360 is as a digital media hub for the living room.

Over the last year, owners of both Microsoft Windows Media Center Edition and the 360 have been able to stream a variety of content such as music, photos, and even pay movie downloads from their computer to the TV via the 360. Yesterday Microsoft pushed out an Xbox software update that now allows media transfers directly from a typical XP computer, without the need of the specialized MCE OS.

But this is just the tip of the iceberg… Ultimately, Microsoft will want to simplify the process by taking a home computer out of the equation. Right now customers have the ability to directly download a variety of movie trailers and game demos which has served as a proof-of-concept, both as a technical demonstration and a demonstration of consumer acceptance: 70 million pieces of content downloaded.

The next obvious step is to monetize by renting movie downloads directly to the 360. In order to provide such a service, Microsoft needs both content deals and more Xbox storage. They already have a start on the content side in dealings with online video distributors Movielink and Akimbo. Additionally, they recently tested long-form content download of a Battlestar Galactica recap. On the hardware front, Microsoft plans to release an 100GB hard drive accessory for the Xbox 360 in Q1 ‘07.

Which brings us to when will this play out… 2007 will be the year of Internet-based video-on-demand services. There are quite a few ongoing experiments in place, such as television network broadcasts and Apple’s (NASDAQ:AAPL) iTunes dipping their toes into Disney movie downloads. I expect we’ll see more content owners in this playground as the new industry coalesces into something mainstream consumers, rather than the bleeding edge geek set, can utilize and appreciate. Microsoft’s Xbox 360, along with Apple’s forthcoming iTV media extender, will lead the charge.

Disclosure: Author has no position in stocks mentioned