Executive Summary

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). 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. If successful, the strategy will help PC manufacturers, by encouraging consumers to upgrade their PCs more frequently, and content owners, by providing a new, lower-cost distribution channel. For consumer electronics manufacturers, Microsoft’s plans offer both an opportunity to sell new types of devices and the threat of commoditization.

However, Microsoft faces consumer resistance to its PC-centric approach as well as stiff competition. As a result, it has begun to hedge its bets by supporting digital media scenarios that do not require a PC but that rely on other Microsoft products, particularly the Xbox 360 game console. This could create new revenue streams for Microsoft, but at the expense of traditional PC partners.