Microsoft Corporation (NASDAQ:MSFT) took some risks with its latest console, the Xbox One. Perhaps enough risks to sink the machine entirely. The backlash in the gaming community has been resounding: core players do not appear to be happy with the decisions Microsoft has made.
And yet, I still believe the Xbox One will be successful. Although it will take some time to play out, Microsoft’s strategy with its newest Xbox is very forward-thinking, and could allow the Windows-maker to dominate its customers’ living rooms.
Why the Xbox One could fail
Right now, the Xbox One’s future looks fairly bleak.
Microsoft Corporation (NASDAQ:MSFT) has fundamentally changed the notion of game ownership. With previous consoles, the “game” was the disc, and the disc was the game. But now, the “game” is merely a digital file.
For all intents and purposes, the actual physical disc is irrelevant. Gamers are more or less simply buying the rights to access the game on Microsoft’s servers.
This brings some unfortunate side effects. Games cannot be easily lent or sold. Moreover, gamers must connect their consoles to the Internet regularly to verify that their collections are legitimate.
Microsoft Corporation (NASDAQ:MSFT)’s rival, Sony Corporation (ADR) (NYSE:SNE), has capitalized on these shortcomings. Sony released a video indirectly mocking the Xbox One’s restrictions, and further, has decided to undercut Microsoft’s console by $100 with its PlayStation 4.
Various polls have shown that — at least online — gamers appear to be wanting the PlayStation 4 much more than the next Xbox.
Microsoft’s long game
But writing off the Xbox One as it stands today would be naive. With the Xbox One, Microsoft Corporation (NASDAQ:MSFT) has decided to play the long game. Though sales might be sluggish around launch, the Xbox One is intended to have a very long life.
In fact, for many gamers, the Xbox One might be the last console they’ll ever need to buy, because the Xbox One itself is merely the tip of the iceberg. Alongside the new console, Microsoft has invested heavily in its Azure cloud gaming servers.
Although the Xbox One is less powerful than the PlayStation 4, it should actually be capable of more impressive graphical output. Game developers can shift some of the processing power to Microsoft Corporation (NASDAQ:MSFT)’s cloud servers, and combined with the Xbox One’s local processing prowess, deliver superior games.
And as technology progresses, the Xbox One should only improve — cloud servers should become ever more capable. Meanwhile, broadband Internet speeds are steadily increasing (Google Inc (NASDAQ:GOOG) Fiber) meaning that, eventually, games could be handled completely in the cloud.
This would thus render the idea of a console obsolete. Rather than buy a new, $500 box every five years or so, consumers could simply stick with the Xbox One — potentially forever.
Sony’s cloud gaming buy
But Microsoft isn’t the only console maker interested in cloud gaming. Last year, Sony Corporation (ADR) (NYSE:SNE) spent almost $400 million on Gaikai, a cloud gaming service.
Some of Gaikai’s technology appears to be in the PlayStation 4. Although the PlayStation 4 isn’t backwards compatible, users can stream old PlayStation 3 games to their new console over the Internet — much like Microsoft Corporation (NASDAQ:MSFT)’s Azure gaming solution.
That isn’t to say they’re the same. There’s a big difference in strategy here. Gaikai is all streaming — Microsoft’s strategy is a hybrid of the two. Given that widespread fiber Internet penetration appears to be several (perhaps many) years away, that could give Microsoft the upper hand over Sony Corporation (ADR) (NYSE:SNE).
Microsoft’s TV ambitions
When Gaikai was still an independent company, its co-founder David Perry told CVG that he believed Microsoft Corporation (NASDAQ:MSFT) would be forced to start making its own TVs. Perry reasoned that the idea of a video game console was dying, and that soon, TVs alone would be able to play high quality games.
Turns out Perry was right, sort of.
The Xbox One is arguably a smart TV-DIY kit. Rather than buy an expensive, $3000 Samsung with built-in smart technology, users can upgrade their existing flat panels to smart TVs by spending $500 on the next Xbox.
To me, that sounds like a much better proposition than sinking several grand into Apple Inc. (NASDAQ:AAPL)’s rumored forthcoming iTV, and then tossing your old TV into the trash.
Room for an Apple TV
Apple Inc. (NASDAQ:AAPL) bulls certainly seem to be banking on there being a market for the company’s forthcoming TV. Apple-centric blog MacRumors declared that the market was “ripe” for an Apple TV. According to a study from TDG, only 14% of households owned a dedicated streaming box (like a Roku), meaning that the market is far from saturated.
An analyst at Avondale upgraded Apple’s stock in April, partially on the potential for an iTV. Certainly, excitement over an iTV could help propel Apple Inc. (NASDAQ:AAPL)’s shares in the short-term, as the company hasn’t introduced a new product since the iPad Mini last fall.
But if there’s a market for Apple Inc. (NASDAQ:AAPL)’s iTV, then there must be a market for the Xbox One as an entertainment device. In fact, many buyers of Microsoft’s Xbox 360 might have done so partially based on the device’s media playing capabilities. About 25% of the time, the Xbox 360 is used for media streaming — not gaming.
Xbox One will take some time to catch on
The widespread backlash to the Xbox One has failed to have a meaningful effect on Microsoft’s shares. Over the last few days, Microsoft’s stock has basically moved in-line with the broader market.
This is because Microsoft Corporation (NASDAQ:MSFT)’s Entertainment Division (dominated by its Xbox brand) accounts for an insignificant amount of the company’s profit.
But I believe that the Xbox One should be seen as a long-term positive catalyst. Despite the initially negative reaction, the Xbox One should be better received once the power of Microsoft’s Azure cloud servers are more fully utilized by developers.
At the same time, the Xbox One has the potential to be a potent smart TV solution — possibly offering better value than Apple Inc. (NASDAQ:AAPL)’s rumored iTV.
If the Xbox One does sell well, it should put Microsoft in a position to dominate the living room.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT).
The article Why the Xbox One Will Still be a Massive Success originally appeared on Fool.com.
Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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