For Microsoft and Xbox, Focus Shifts From Game to Video

Executives at Microsoft are fond of saying that its subscription gaming service, Xbox Live, should be thought of as a cable channel.

They want Xbox to be seen not merely as a gaming machine for teenagers, but as a media portal for parents and grandparents, too. The company is even producing shows for users: it is in the middle of the second season of "1 vs. 100," an interactive version of a game show that was on NBC.

The content ambitions do not end there. Microsoft has held in-depth talks with the Walt Disney Company about a programming deal with ESPN, according to people close to the talks, who requested anonymity because the talks were intended to be private.

For a per-subscriber fee, ESPN could provide live streams of sporting events, similar to the ones available through ESPN 360, a service that is available from some high-speed Internet providers. Microsoft could also create some interactive games in association with ESPN, the people said. One of the people said the deal was not imminent. The companies declined to comment.

Already, video game consoles are putting a new emphasis on the video, rather than the game.

The roughly 20 million monthly members of Xbox Live can surf Facebook, browse an online mall of movies and TV episodes and, if they pay, watch Netflix.

"It's 20 million connected living rooms," said Marc Whitten, the general manager of Xbox Live.

Similarly, users of the Sony PlayStation can tune into BBC shows and see Weather Channel updates, as well as stream Netflix. Last week, Netflix extended its streaming service to the Nintendo Wii.

Among the many companies that want to transport the on-demand qualities of the Internet into the living room--the over-the-top model, in industry parlance--the console makers have a significant head start. Nearly 60 percent of American homes now have at least one console, according to the consulting firm Deloitte, up from 44 percent three years ago.

"For both of the big guys, it's about extending the value of the hardware platform," said Mike McGuire, a vice president for the research firm Gartner, referring to Microsoft and Sony. "The devices are hooked to TVs and have broadband connections, and there are more and more opportunities to license movies and TV shows and deliver them in over-the-top models."

Microsoft said this month that it had sold 39 million Xbox 360 consoles around the world. About half sign into Xbox Live each month. At that size, "it starts to feel like a cable network," said Mark Kroese, who oversees Xbox advertising sales for Microsoft. The company does not specify how many members pay for access to premium services like Netflix; basic functions of Xbox Live are free.

The company says it regularly counts more than a million concurrent users--and topped out at 2.2 million at one point during Christmas week last month. That compares favorably to some of the top channels on cable, like TBS and the Cartoon Network, which reach about one million viewers at any given time, according to the Nielsen Company.

The comparisons are crude at best because many of Xbox Live's users are playing games rather than watching video. No third-party measurement exists, because ratings companies like Nielsen do not yet track the service fully.

But there is no doubt that consoles are expanding their domain, something that is evident in Whitten's vision of the service: "The entertainment you want, the people you care about, wherever you are."

The addition of Netflix in late 2008 was an important step into the entertainment arena for Xbox, and perhaps a precursor to Microsoft's current talks with Hollywood producers.

Without releasing specific numbers, Whitten said the streaming movies and TV service were "very, very popular," including in his own household.

Whitten said Microsoft wanted to be a bigger player in television and film viewing. He declined to comment on the conversations with Disney but said more than once that "there's going to be a ton of experimentation around business models and rights."

"Our goal is, really, how can we get as much content there as possible," he said.

Disney is not alone in showing an interest in the console market. Many companies sell TV episodes and film rentals through Microsoft's online store, and Web video ventures are clamoring to have a place on the service.

Console makers have a long way to go to be considered replacements for cable subscriptions, but, at the very least, they could put a dent in the time spent viewing traditional TV.

The interactive game show "1 vs. 100" drew well over 100,000 concurrent users at times during its first season last year, according to Microsoft's internal data. During the second season, which began in November, two-hour TV-style trivia competitions are scheduled on Tuesday and Friday nights. A voice-over announcer, shown onscreen as an avatar, provides live color commentary.

Like the defunct NBC show, the game has a contestant, "The One," and a "Mob" of 100 other players. Members of the audience can watch passively or play along, improving their odds of being picked to play for prizes. Unlike on the live-action TV show, every player on Xbox is represented by a cartoonish avatar.

Dave McCarthy, a general manager at Microsoft Game Studios, said the scheduled TV-style shows provided a guarantee that "you're a part of something bigger."

Beyond the game show realm, Microsoft also exclusively shows "The Guild," a sitcom that it bills as "Seinfeld" meets video game culture. It stars its creator, the actress Felicia Day, and is sponsored by Sprint.

For advertisers like Sprint, online communities like Xbox Live are another arena to pursue consumers. Within "1 vs. 100" there are 15- and 30-second commercial breaks like on TV. Those spots account for about 15 percent of the service's advertising revenue; most of the rest comes from ads on Xbox Live navigation pages, like display ads on Web sites.

In November, Nielsen started to track "1 vs. 100" play and ad views. The pilot program "is the tip of the iceberg," said Gerardo Guzman, a director for Nielsen Games; eventually, he hopes to generate TV-style ratings.

Kroese said Xbox advertisers were "very interested in being able to compare the media buy on Xbox to other media buys they do."

Microsoft says nearly half of Xbox Live members use its entertainment content; the rest mostly play multiplayer games. But it expects that more of its users will try the entertainment side and the line between them will blur further.

"I don't think there's a real difference between a game and 'Lost.' Or a game and 'American Idol.' They're all ways we spend our leisure time," Whitten said.

Over time, he predicted, "these narrow swim lanes--games, music, movies, etc.--will dissolve."