Broadband Cable Association of Pennsylvania


January 7, 2013

High-tech giants have been battling for years over control of the living room. That war is far from over, but one company has grabbed a surprisingly strong position: Microsoft Corp.

The software maker has progressively transformed its Xbox from just a videogame machine into a multipurpose hub for entertainment delivered over the Internet. Now, the 11-year-old hardware line is facing its stiffest competition yet. Microsoft, seeking to give users more reasons than solely games to buy an Xbox console, has been busy striking deals with companies such as Netflix Inc., Google Inc.'s YouTube and Walt Disney Co.'s ESPN unit to deliver content to the device.

While users can find competing devices with similar services, Microsoft has exploited assets such as Xbox 360's Kinect controller to provide more novel offerings, like exercise apps that track people's movements or the ability to control the television with voice commands. It has also launched interactive features such as voting on live televised awards shows. Xbox has "been the first to successfully combine television with interactive," says Bing Gordon, a longtime videogame executive who now is a partner at venture-capital firm Kleiner Perkins Caufield Byers. Mr. Gordon called Microsoft's Xbox Live, the 10-year-old Microsoft service linking Xbox to the Web, "one of the great software inventions of the generation."

The success of the Xbox adds an upbeat chapter to a long saga of living-room disappointments for Microsoft. Products such as WebTV, a system acquired in 1997 for reaching the Internet from TV sets, failed to find a broad footing. So did efforts based on connecting specially equipped personal computers running Windows to TVs. Interactive television was frequently a focus when Microsoft Chief Executive Steve Ballmer, and co-founder Bill Gates before him, kicked off the annual Consumer Electronics Show in Las Vegas. The opening keynote this year is scheduled for Monday night, but neither will be there; Microsoft decided before the 2012 show to stop speaking or exhibiting at CES. Others are. Big consumer-electronics companies are expected to announce advances in products such as TV sets that come with Internet connections and improved operating systems-including products running the third revision of Google Inc.'s TV software. Other competitors, such as TiVo Inc. and Roku Inc., keep updating their own set-top boxes.

Even greater expectations are building regarding whether Apple Inc., whose Apple TV gadget links iPhones, iPads and Web services to TV sets, is planning a broader attack that might include its own Internet-connected TVs. The potential prize is a say in the future shape of entertainment, and the more than $150 billion annual market for U.S. television subscriptions and television advertising. Marc Whitten, corporate vice president in charge of Xbox Live, says Xbox's head start, expanding services and user loyalty make him confident about withstanding rivals in home entertainment. "It's really an exciting time to be in the space and see where entertainment is going," Mr. Whitten says. "We're incredibly honored to have the user base we have, and I think that helps us a lot." The Xbox's sales-more than 70 million consoles since 2005-far outstrip sales of specialty entertainment hubs such as Apple TV.

Microsoft has been touting the Xbox's success beyond gaming for some time. In a shift that Xbox officials first announced last March, the company says Xbox Live users consistently spend more time on entertainment activities such as watching Netflix videos than on options for playing videogames online with other people. In one potential sign of its entertainment ambitions, Microsoft reached a recent deal to acquire id8 Group R2 Studios Inc., a startup that has been working on technology related to distributing and displaying digital media on TV, according to people familiar with the matter.

Yet Microsoft faces a plethora of competitors and skeptics, some of whom point to compromises in price and complexity in a device designed for both gaming and streaming video. An Xbox costs $199.99 or $299.99, compared with a Roku online-streaming gadget at $49.99 and up. To access most entertainment features through the Xbox, users also need a subscription tier to the Xbox Live service at $60 a year.

Subscriptions to Netflix, Hulu Plus or a cable-TV service add to monthly bills. Anthony Woods, Roku's chief executive, concedes that devices such as the Xbox are the most widely used routes to the Internet in living rooms now. But he predicts future growth will mainly come from devices like Roku's or Internet-connected TVs, at least for households without gamers. "A $50 Roku is a much better solution," Mr. Woods says. The outcome of the battle might come down to how Microsoft updates the Xbox, which some industry watchers say could happen by the end of 2013.

According to people familiar with Microsoft's deliberations, executives have considered whether the next Xbox should come in two versions, a powerful but more expensive console primarily for gaming, and a stripped-down, less-expensive version intended mainly for watching video and performing online tasks. Mr. Whitten declines to discuss future plans for the Xbox. "I continue to think this is the platform to drive all of your entertainment in one place," he says. Though long publicly associated with gaming, broader entertainment goals were part of the original planning for the Xbox, say Mr. Whitten and others familiar with its launch in 2001. Microsoft has continued to add online features and services to the Xbox, including music-streaming and Web data-storage services announced last fall. It also has added voice-controlled search so a user can find an episode of, say, "30 Rock" whether on live TV, Netflix or other on-demand services.

Though long an unprofitable business, Xbox also seems to finally be earning its keep. Wedbush Securities analyst Michael Pachter estimates Microsoft earns roughly $115 in gross profit on each Xbox console. The Microsoft division anchored by the Xbox business posted revenue of $1.95 billion for the fiscal first quarter ended Sept. 30, off from $1.96 billion a year earlier, and operating income of $19 million, down from $340 million. As the Xbox 360 ages, sales have been bumpy. The company says it shipped 25% fewer Xbox consoles, or 1.7 million units, in the quarter ended Sept. 30 compared with the year-earlier period. Wall Street Journal

Citing increases in programming and operating expenses, Atlantic Broadband will increase the cost of some if its services, beginning with the February billing statement. This marks the fourth consecutive year Atlantic Broadband has announced a rate increase.

"Our programming costs continue to increase more than 5 percent per year," said Senior Vice President and Chief Operating Officer David Dane. Most customers will see a 3 to 4 percent increase in their monthly bills, Dane said. The price of limited cable service, which includes 25 channels, will increase from $15.21 to $15.70 a month. The cost for the 53-channel value package will increase from $67.75 to $70.49, and the 104-channel digital plus package will increase from $90.75 to $94.53 a month, according to a letter dated Dec. 25 that customers received with their most recent bill. High speed Internet service will increase by $1.04 a month for the starter package and by $2.04 a month for the preferred package.

Customers with Atlantic Broadband's unlimited phone service will not see a price increase but those with local phone service purchased with any video or high-speed Internet service will see an increase from $19.99 to $24.99 a month, Dane said. Atlantic Broadband has about 27,000 residential customers in the Altoona and Johnstown areas. Altoona Mirror