Microsoft’s Next Xbox Could be the Ultimate Smart TV

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Microsoft (NASDAQ: MSFT) is expected to unveil its third Xbox console sometime this year. The device is widely expected to compete directly with Sony’s Playstation 4 and Nintendo’s Wii U.

Yet, in recent months, Microsoft has been laying the groundwork to ensure that its third Xbox will be an all-encompassing media center, likely to compete directly with the upcoming wave of smart TVs, including Apple’s (NASDAQ: AAPL) long rumored device.

The evolution of the Xbox 360

Microsoft launched the follow up to its original Xbox in 2005. When the Xbox 360 hit the shelves, it was all game console -- the first of its generation, in fact. But in the subsequent years, Microsoft has slowly bolstered the Xbox’s entertainment focus.

Xbox Live is the Xbox’s internet subscription service. It was created to provide multiplayer gaming over the Internet, and though that remains its focus, its features have been updated through the years.

In 2008, for example, Xbox Live received an upgrade that gave the service integration with Netflix’s (NASDAQ: NFLX) video library. Integration with other video services was later added, including HBO Go, Hulu, and The ability to connect to music services was also made available, as the Xbox was integrated with and iHeartRadio.

Perhaps the biggest addition to Xbox was the 2010 release of Kinect, a camera that tracks the movement of players. Although the Kinect is primarily known for allowing Microsoft to follow Nintendo’s trend of motion-controlled video games, it also added some key functionality to the console itself: owners of Kinect can control their Xbox with voice commands and hand gestures.

Microsoft’s shift into media

In addition to incorporating other services, Microsoft has been making moves to become a content player in its own right.

Last October, Microsoft launched Xbox Music, a subscription-based music streaming service and digital music store. It was largely a carryover from Microsoft’s Zune Music Marketplace -- necessary, as Microsoft had abandoned its lineup of Zune devices.

The decision to re-brand the Zune Music Marketplace to Xbox Music says a lot about Microsoft’s intent for its Xbox brand. No longer does Xbox stand simply for gaming; rather, Xbox represents the entirety of the entertainment spectrum.

Microsoft has also been getting into the video content business. Last September, Microsoft hired former CBS executive Nancy Tellem to oversee the creation of original content. In Microsoft’s press release, the company named the Xbox specifically as a device that would benefit from Tellem’s content.

Microsoft to acquire Netflix?

In line with its content aspirations, Microsoft has long been seen as a natural suitor to acquire Netflix. Periodic market chatter of an imminent deal has sent shares of Netflix rallying a number of times in recent months.

Netflix’s CEO, Reed Hastings, resigned from Microsoft’s board last October after serving roughly five years. Officially, Hastings claimed that he wanted to reduce the number of boards he was serving on, so that he could devote more of his time to Netflix.

Unofficially, Hastings resignation may have been to avoid a potential conflict of interest, particularly necessary if Microsoft was mulling a bid for the company. Strategically, Microsoft’s ownership of Netflix would make sense if it was looking to build Xbox as a media hub.

If it had Netflix, Microsoft could offer its content free to all Xbox Live subscribers. It would also give Microsoft the rights to Netflix’s new hit series House of Cards, and Netflix’s pipeline of upcoming content.

Carl Icahn, perhaps sensing the obvious synergies, took a near 10% stake in Netflix last October (a few weeks after Hasting’s Microsoft resignation) and began pushing for a sale.

Apple’s rumored TV

Piper Jaffray’s Gene Munster has been predicting an Apple TV for years. Munster’s prediction has been bolstered by comments the late Steve Jobs made to his biographer, as well as current CEO Tim Cook’s remarks about a TV to NBC’s Brian Williams.

At this point, no one appears to know when the device will finally be available. In the past, Apple’s TV has been rumored to offer users the ability to purchase subscriptions to individual channels a la carte, rather than paying cable companies large monthly subscriptions for bundles of channels.

Analysts at Pacific Crest said last August that Apple’s inability to get content providers to agree to such a plan was delaying the release of Apple’s TV indefinitely.

From an interface perspective, Apple’s TV has been reported to incorporate features such as voice command, motion controls and connectivity with Apple’s other mobile devices.

Microsoft could be well positioned in the smart TV wars

If TVs prove to be the next tech battleground, Microsoft might prove to the best positioned company of them all. It has been steadily converting its Xbox line from a pure video game console to a full-fledged entertainment hub, complete with features (voice/motion control) Apple’s upcoming television is only rumored to have. If a purchase of Netflix ever came to fruition, the company would only cement Xbox further as a powerful force in internet media.

That could be bad news for Apple, or any other company hoping to enter the smart TV market. In the end, the launch of the Xbox 3 could be the single biggest event for TV in 2013.

Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple, Microsoft, and Netflix. 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!

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