(An earlier version of this story ran online.)
It’s been nearly eight years since Microsoft (MSFT) performed a major overhaul of its Xbox video game console. In that time, the Xbox has demonstrated remarkable resilience, thriving amid huge shifts in the types of devices and online services people like to use. It may be Microsoft’s only beloved consumer product, in part because the company hasn’t mucked up its winning formula.
With the gaming market shifting away from consoles, though, Microsoft is doing a little tinkering. The goal is to move its system decisively beyond gaming and transform the Xbox into an entertainment hub for users’ televisions. On May 21, the company invited about 200 reporters and analysts to its headquarters in Redmond, Wash., and unveiled the Xbox One, a version of the console it plans to launch later this year. “We turn a TV that’s delivered to you one-way through a straw into a two-way experience that understands what’s going on with you,” says Xbox division head Don Mattrick.
At the press conference, Mattrick said the new console will form a “relationship” between you and your TV. The risk is that Microsoft weakens the strong relationship gamers have long had with the Xbox. Mattrick’s bid to take on the big players in computing hardware and TV programming also presents a challenge for a company that’s stumbled with new consumer-product launches.
The Xbox One is a black rectangle with sharp edges—it looks like the monolith in 2001—and the accompanying controllers have a similar aesthetic. The onscreen interface will appear familiar to any current Xbox owner, although the machine can flip between applications much faster than the 360. Voice commands allow users to switch between games, movies, TV, and music, instead of having to close one before opening another. Apps can run simultaneously, allowing a basketball fan to watch a game in one window while tracking fantasy stats in a second. These features, along with some displays of the Xbox One’s graphics engine, were met with applause from many attendees at the launch event. That’s a refreshing change, given the tepid reception to other Microsoft offerings (see Surface tablets, Windows smartphones, and even Windows 8).
When the Xbox arrived in 2001, the gaming industry shared a collective gut laugh at the thought of Microsoft winning over the core gaming audience of teenage boys and young men. Following many ups and downs, Microsoft has seized the momentum in the $37.4 billion console market. Since 2005 the company has sold 76 million Xbox 360s, and its Xbox Live online service has 48 million subscribers. Xbox 360 has been the top-selling console in the U.S. for 28 straight months, consistently beating Sony’s (SNE) PlayStation and Nintendo’s (7974:JP) new Wii U, which has failed to meet projections.
In that time, however, the rest of the PC kingpin’s empire has hemorrhaged users, who are buying tablets and Apple (AAPL) and Google (GOOG) smartphones in droves. Microsoft has moved to put the Xbox brand on its music and movie services, an attempt to sprinkle some of the console’s allure elsewhere. “They’re definitely trying to have a halo effect,” says Wes Miller, an analyst at independent researcher Directions on Microsoft.
Over the last couple of years, Microsoft has taken big steps to turn its console into an entertainment hub. Xbox Live subscribers can tune into live TV from several cable providers, as well as use apps from the likes of ESPN (DIS), Netflix (NFLX), and Hulu. Through its Kinect device, Microsoft has led in the drive to replace the remote control with gesture and voice commands. The company has pioneered interactive TV, allowing kids to play with Sesame Street characters in episodes of the show tuned for the Xbox.
With the Xbox One, Microsoft will go even further. It’s tapped Steven Spielberg to help create its own Web-delivered TV series based on the popular game Halo, and it struck an exclusive content deal with the NFL to make a fantasy league stat system it updates in real time during game broadcasts. Overall, the new machine represents the first time Microsoft “has not introduced a console that is first and foremost about gaming,” says Ben Bajarin, an analyst at tech advisory firm Creative Strategies.
In 2013, though, myriad technology companies see themselves as the future ruler of the living room. Apple TV and the “iUniverse” come buoyed by the more than 500 million iPhones and iPads sold to date. Google, Facebook (FB), and Amazon.com (AMZN) all have designs on the couch potato as well, trying to snag them with combinations of services, gadgets, casual games, TV, and movies. “It’s a battle for consumer platforms,” says Gartner (IT) analyst Brian Blau.
Microsoft’s bid to manage more home entertainment includes customizing the new Xbox to keep each family member happy. The Kinect sensor can tell mom, dad, and the kids apart and arrange or push games, movies, TV shows, and music to suit each person’s tastes. Microsoft has also tried to revamp how users search for programs, presenting a standard TV menu as well as suggestions based on what your friends and other subscribers are watching.
The focus on families and general entertainment risks annoying hard-core gamers, who view better graphics and innovative game play as greater priorities, says NPD Group analyst Liam Callahan. “Gamers won’t buy a next-generation console from Sony or Microsoft for that,” he says of movie recommendations and the like. Meanwhile, tablet and smartphone games threaten to pull people away from the Xbox’s core function. U.S. retail sales of packaged video games fell 21 percent last year to $8.9 billion, according to NPD, while revenue from games downloaded to PCs and mobile devices rose 16 percent to $5.9 billion.
Microsoft’s Mattrick remains confident that his team has built the right product to survive the tumult in the TV and video game worlds. “I think we will drive a bigger business—a better business,” he says. “I think this Xbox has the ability to go more than eight years.”