Want to watch TV? There’s an app for that

With the rollout of its massive Xbox Live update, Microsoft has made a strong bid for the pole position in the digital living room. And with dozens of new programming partners also included with the update, the company now offers perhaps the most comprehensive, versatile and advanced over-the-top video system of any major player, including Apple and Google. But the most intriguing additions to the platform are not, strictly speaking, over-the-top offerings. Rather, they point to a possible future for pay-TV services that could be far more disruptive to the existing economic model.

Beginning later this month, Xbox Live users who subscribe to Verizon’s FiOS IPTV service will be able to integrate their pay-TV service into their consoles and control it using the Xbox Live interface. That includes voice and gesture control if they also have Kinect. Early next year Microsoft will add support for Comcast’s Xfinity On Demand service. In both cases, the services will be available only to existing subscribers, putting the apps squarely within the scope of the service providers’ own TV Everywhere strategies.

Pay-TV apps have appeared on CE devices before, the most notable of them being the Time Warner Cable and Comcast apps available on connected TVs from Samsung and Sony. But as my colleague Ryan Lawler has pointed out, the viewing experiences on those devices were largely siloed: open the app, watch a show, exit to watch something else. The app store layer itself added little value beyond eliminating the need for a set-top box, and the user interface and customer relationship still belonged to Comcast and Time Warner Cable.

With the Xbox Live integrations, on the other hand, pay-TV services are for the first time being incorporated into a platform with a well-established value proposition of its own. Xbox Live already has over 15 million subscribers in the U.S. and more than 35 million worldwide. That’s a massive installed base built without any help from pay-TV apps and largely without any pay-TV content. In other words, Microsoft no more needs Verizon or Comcast to sell Xbox Live subscriptions than it needs any other TV content provider. That’s important to note, because if the pay-TV business is ever to be disrupted, it’s far more likely to happen by the existing model being absorbed into an entirely new and independent ecosystem rather than via a frontal assault by over-the-top services.

OTT providers, by and large, seek to offer something comparable to existing pay-TV services but at a lower price and on demand. Content owners, however, have little incentive to encourage lower prices or to undermine live TV viewing, both of which threaten their own revenue streams.

Microsoft, however, does not need to build a competitive TV service for Xbox Live to grow. The platform’s growth is driven by other dynamics, such as the appeal of online gaming, and the larger it gets, the more attractive it becomes as a platform for all types of digital content, including pay-TV services.

Rather than challenging the incumbent service providers directly, Microsoft may simply end up consuming them. The company could do this via partnerships with service providers, as it is doing with Verizon FiOS, or by eventually leveraging the scale of Xbox Live to establish its own subscription-TV service through the Zune marketplace.

For now, Microsoft seems content to allow Verizon and Comcast to maintain their own customer relationships with their subscribers, but there’s no technical reason why that couldn’t change or why another independent platform provider couldn’t do it differently. And as newspaper and magazine publishers have discovered in building subscription-based apps for the iPad, losing control of the primary customer relationship can have serious consequences for a content provider.

Like the proverbial frog being slowly boiled, the service providers may not even realize what’s happening to them until it is too late. But once their service is reduced to a mere app running on someone else’s platform, they’re cooked.

Question of the week

Should pay-TV services cooperate with Microsoft’s Xbox Live strategy or resist it?