For years, Microsoft’s (MSFT) Xbox video game console division was a bit like a sullen teenager in dealings with its parent company: It kept its distance and pretended they weren’t related. The debut of the Xbox One on Nov. 22 marks a new phase in the relationship. The console incorporates software and systems developed throughout the rest of Microsoft and is the first big test of what the company calls its One Microsoft strategy. Pushed by outgoing Chief Executive Officer Steve Ballmer, the idea is to encourage Microsoft’s product groups to work together and tear down once-rigid walls between divisions.
With the console industry’s revenue falling, Microsoft is marketing the Xbox One as a kind of living room set-top box, a device used to watch and control live television as well as streaming video from services such as Netflix (NFLX) and Hulu. Given that Microsoft has sold about 80 million Xbox 360s since 2005, the console may also be its best chance to turn Xbox fans into customers of Microsoft cloud services and devices. “It’s more than a gaming platform,” says Julie Larson-Green, Microsoft’s executive vice president for hardware. “We’re thinking more about our devices as a stage for all of Microsoft.” The risk: If the input from other divisions hurts the Xbox One’s performance, Microsoft will have sabotaged its only product with a dedicated consumer following.
The Xbox One’s operating system includes Windows 8 and speeds switching between apps and games. Windows also means a broader range of apps for users, because it makes software development easier than on earlier Xbox systems. Windows 8’s snap feature lets users watch a football game while running a fantasy gridiron app alongside it. Users can pan and zoom during Skype calls, and cloud service SkyDrive allows them to view photos and videos they’ve uploaded from other devices. Say “Xbox, record,” and cloud service Azure will save the last 30 seconds of game play as a video clip that players can share with friends.
Like Microsoft, Sony (SNE) is trying to push further into streaming video and other services with its PlayStation 4, released in North America on Nov. 15. “While gaming is at the heart of PlayStation 4, we know that PlayStation fans love all forms of digital entertainment,” says Sony spokesman Dan Race, adding that Sony Pictures is developing original content for the PS4. The console industry’s revenue fell 32 percent, to $13.3 billion, from 2008 to 2012 and is forecast to decline again this year, according to market researcher NPD Group. The new generation of hardware may help slow that skid: The PS4 sold 1 million copies within 24 hours. Nintendo’s (7974:JP) year-old, $300 Wii U is less powerful than the other two consoles, but spokesman Charlie Scibetta says its TVii service can also toggle between streaming services and live broadcasts, and integrate users’ social media accounts.
The Xbox 360 had the edge over the PlayStation 3 and the Wii and Wii U in U.S. sales, topping NPD’s sales chart for 32 straight months until Sony snapped the streak in September. With the PS4 starting at $399, compared with $499 for the Xbox One, Sony may have the advantage this time, says Michael Pachter, an analyst with Wedbush Securities. Yusuf Mehdi, a Microsoft vice president who oversees Xbox marketing, says, “If we are successful, because we are $100 more, it will be because we had these differentiated features.”
Chief Product Officer Marc Whitten says Xbox One users may soon be able to link a front-door camera to their consoles and use Skype to identify visitors, or say “Xbox, what’s the weather?” to get a report. For now, the console has limited software designed specifically for Microsoft smartphones and tablets. But the Xbox One will have to win over consumers before Microsoft can worry about any next steps, says Gartner (IT) analyst Brian Blau. “The Xbox has been their hero product. It gives them that cool,” he says. “If they don’t get it right, they probably don’t have a lot more chances.”