Microsoft Just Beat Apple to the Living Room: Does it Mean Anything?

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's no secret that Microsoft (NASDAQ: MSFT) has failed to make a dent in mobile computing while PC sales have sharply declined. While Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) have seen huge growth in the secular shift in how we use computers, Microsoft's single-digit share of the tablet and smartphone market is increasingly making the company less and less relevant in our more connected lives. And for investors, it's this loss of relevance that's a very real long-term concern. 

On May 21, Microsoft announced the next iteration for its Xbox gaming platform, to be called Xbox One: There's little doubt that Big Softy is counting on this new console to play a big role in the company's effort to establish itself as a serious player in the living room. For investors, the question is whether or not this will move the needle.

More than just a gaming console

Microsoft has done a nice job of squeezing every ounce of capability out of the existing Xbox 360 platform over the past couple of years, including adding dozens of popular streaming apps like Netflix and Amazon Instant Video, as well as the ability to use the console as a cable box for Verizon FiOS and Comcast XFINITY, adding further integration between many of the ways that consumers access content. However, there's only so much juice in an orange, and the nearly decade-old technology in the Xbox is slow to move from one function to the next. It's just never felt fully integrated. Factor in that the voice recognition in Kinect, while revolutionary, just doesn't work that well as an interface for watching TV or moving from one content source to the next.

The Xbox One looks to be changing that in some very serious ways, with powerful hardware and integrated software that- at least as they've pitched it to us- will be the first platform that ties both our connected- and legacy- technology lives together in a seamless, integrated fashion. The idea is for us to interact with these things in a simple, comfortable way, instead of adapting ourselves to our entertainment sources as we've had to do in the past.

But will it actually work that way?

That's the billion dollar question. The bottom line is that Apple has done a remarkable job of creating an "ecosystem" of sorts, between iOS, iTunes, and the App Store, using iCloud to tie it all together while never really making a solid dent in the living room. User satisfaction surveys consistently place the iPhone and iPad at the top of the heap, and it has substantially higher numbers of repeat buyers than any other manufacturer, especially amongst those competing with one another with different flavors of Google's Android.

But despite the moderate success of the Apple TV set-top box, we are yet to see any real evidence of the rumored iTV, fully integrated device that investors have clamored for as being the company's next big market-disrupting innovation, or the supposed iWatch. All the while, the stock price has languished as the market has faced uncertainty about both future growth, and deployment of the massive cash generated. 

Google has established itself as the de facto source of information with its dominant search, maps, YouTube, and AdWords drawing in both searchers and advertisers by the boatload. And while Google uses its massive profits and free cash flow to fund research via its top-secret Google X labs into more ways to connect people and information, it has also never made an effort to establish itself as a real player in the center of connecting these disparate parts of our entertainment lives. Google remains a destination, by its own choosing.

Microsoft's big push with the Xbox One could actually pay off if it does a good job continuing to position the console as the next step in home entertainment. But the key isn't so much about the Xbox One itself, as it is about what else comes along with it, if it can draw consumers back in.

Bringing consumers back because they want to come back

This may be the biggest challenge Microsoft faces. The company spent more than two decades as essentially the only choice; and if there's anything the mobile revolution has taught us, it's that we don't have to pick just one. And while surely some of Microsoft's failure to establish itself in mobile is a matter of poor execution, there's a case to be made that consumers are simply tired of buying Windows based computers, and are happy to choose something that doesn't say Microsoft, simply because it doesn't say Microsoft.

If the company is to re-establish a relationship with consumers, it will be on consumer's terms; that's something it hasn't had to do in a long, long time. Microsoft faces an uphill battle: Frankly it will have to be more innovative than its competition to win out- it will have to offer something more. And the Xbox One could be a part of that offering.

Foolish bottom line

It's critical that as investors, we keep perspective. Microsoft's Entertainment and Devices division is easily the smallest of its three divisions, while the Business division is its largest. Both of these two business units are growing, and becoming increasingly more important. Actually, the growth of mobile is making both of these business units more relevant, whether it be the increasing demand for Microsoft's server tools, as processing power is pushed to virtual computers and the Cloud. Add in the potential for growth with the Xbox One as a way to fully integrate our entertainment sources as consumers have learned that reliance on traditional media providers isn't really as necessary as once thought. And while PC shipments are down, Windows 8 seems to be doing well as a standalone product; when one considers that it was designed to let users get more capability out of older computers, it should be no surprise that PC shipments are down, while the Windows division's numbers are up.

But the key question investors need to ask is two-fold: 

Will the growth of the other two divisions outrun any future declines in the Windows segment? Will products like the Xbox One make a dent in the living room, bring back consumers, and drive sales of Microsoft's mobile devices?

I think that the answer is "yes" to both of these. And despite Microsoft looking to have made a faster move to the living room than Apple, these two companies, along with Google, will remain relevant and central to the way we compute and entertain ourselves, for years to come.

More from the Motley Fool

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Jason Hall owns shares of Apple, Microsoft, and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus