By Matt Rosoff [bio]
Posted: Mar. 20, 2006

The following an excerpt of a Research Report published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. More samples of our content, as well as a list of upcoming articles and reports are also available.

To establish the Windows PC as a home entertainment device, Microsoft is building technologies into Windows that improve the PC's ability to work with digital audio and video (digital media). This effort continues with Windows Vista, which will support new types of content, particularly high-definition video. The company and its partners are also creating a wide variety of entertainment products and services, from portable audio players to online music stores, that support the PC in this role.

The main goal of this strategy is to increase sales of Windows. Just as demand for Web access and e-mail created a huge spike in consumer PC demand in the mid-1990s, Microsoft hopes that new entertainment scenarios will spur consumer PC sales, particularly because working with digital media requires significant processing power, memory, storage, and other hardware (graphics cards, sound cards, speakers, microphones, and so on) that will require most users to buy a new PC. Microsoft also expects to earn royalties by licensing and selling its digital media technologies to device manufacturers and content distributors.

However, in an acknowledgment that some consumers are not willing to place a PC at the center of their home entertainment systems, Microsoft is beginning to support scenarios that do not require a PC. In particular, the Xbox 360 game console serves not only as a playback device for digital media stored on a PC but also as a digital media player itself—consumers can download material from the Xbox Live online service and will soon be able to play high-definition video disks on the console.

Benefits and Risks for Partners

If Microsoft convinces consumers that the PC is a viable home entertainment device, hardware vendors will benefit as consumers upgrade or replace their PCs and buy new classes of devices that work with those PCs. However, if this initiative fails to spur upgrades, Microsoft may increase its emphasis on home entertainment products and scenarios that don't involve a PC. In this case, OEMs and hardware suppliers might have to come up with other ways to spur consumer PC growth, such as new communications and personal productivity scenarios. They might also echo Microsoft's approach by building portable and consumer electronics devices that can connect to a PC but don't require one.

For the consumer electronics industry, Microsoft's home entertainment strategy presents a mixed opportunity: it could help vendors sell new products that work better with Windows PCs or other Microsoft products but could also reduce the importance of traditional consumer electronics hardware, while giving a large and powerful software company a critical role in setting standards. Moreover, Microsoft has shown its willingness to compete directly in established consumer electronics markets, such as console gaming. Because of these threats, many consumer electronics companies are taking a cautious approach toward Microsoft's home entertainment strategy and platform.

Content owners can benefit from advances in digital media by repackaging and reselling their content over the Internet or other networks (such as Xbox Live), but only if they can find an effective balance between protecting content against piracy and making it easy for consumers to use.

Challenges

The biggest challenge for Microsoft and its partners is convincing consumers to abandon the status quo—a household full of discrete consumer electronics devices, each of which performs one or a few functions well—in favor of a multifunction PC connected to other devices throughout the home. To succeed, Microsoft and its partners must make the PC and associated devices as easy to use and reliable as today's consumer electronics products. Advances in Vista, such as faster boot time and improved security, will bring Microsoft closer to this goal than ever before, but the PC's inherent complexity will continue to pose a problem.

In addition, Microsoft's reliance on partners to support its home entertainment strategy puts it at a disadvantage compared with companies that own more components of the digital media business, such as Apple (hardware, software, and content available through the market-leading iTunes Music Store) and Sony (hardware, software, content, and distribution). If Microsoft continues to trail these rivals, particularly Apple, it may mimic their approach and create a more comprehensive product set—including software, hardware, and online services—rather than relying on partners to fill these gaps.

What's Ahead

This report will help hardware manufacturers, content owners, and consumer electronics companies understand the threats and opportunities posed by Microsoft's home entertainment strategy, with a particular focus on digital media. It updates the Feb. 2005 Research Report, "Microsoft's Home Entertainment Strategy," with news and strategic shifts that have occurred since that report's publication, explains the underlying technologies and strategic reasoning behind Microsoft's digital media products and services (including Windows Vista and Xbox 360), and identifies likely directions for the future.

The report includes both new material and updates of material previously published in Update and consists of the following chapters:

The "Understanding the Pieces" chapter explains the components of Microsoft's home entertainment strategy and how they fit together and describes the Windows Media platform and its role in the overall strategy.

The "Vista Focuses on Video" chapter explains how Windows Vista, planned for late 2006, will improve the PC's capabilities as a digital media device, particularly for high-definition video.

The "Devices Connect to the PC" chapter describes networked and portable digital media devices that link to the PC.

The "Beyond the PC" chapter describes Microsoft's other home entertainment businesses, including Xbox and TV platforms.

The "Challenges and Future Directions" chapter explains the challenges Microsoft faces in realizing its home entertainment strategy and outlines some likely future directions.

The "Resources" chapter contains links and pointers to additional material about Microsoft's digital media products and technologies.

"Appendix: The Windows Media Platform" describes the platform in more detail.