Xbox Live: Worth a bundle

Microsoft’s Xbox Live platform passed a significant milestone last month. It was then that entertainment apps passed multiplayer gaming as the most popular use for the online platform. Total monthly hours spent on the platform were up 30 percent year-over-year, according to Microsoft, and most of that growth came from increased use of Netflix, Hulu Plus, Zune Marketplace and other streaming video services, which the company said had more than doubled.

Good thing, too. While the Xbox 360 is still the best-selling video game console on the market, grabbing 42 percent of all console sales in February, the most recent month for which data are available, overall sales of living-room game consoles are down sharply, falling 18 percent year-over-year in February, according to NPD. Sales of console games were down 23 percent. The current generation of game consoles has saturated the core gamer market and sales have nowhere to go but down, at least until the next generation of hardware hits the market sometime next year. Price cuts could probably sustain the current cycle for a while. But simply slashing hardware margins in hopes of incremental revenue from game sales and licensing fees is likely to produce diminishing returns given declining software attach rates.

At this point in the cycle, in other words, there is probably more upside for Microsoft in Xbox Live than in Xbox hardware, or for that matter Xbox games. And sure enough, The Verge reported this week that Microsoft will soon unveil a new $99 Xbox bundle that includes a 4GB Xbox 360 and a Kinect sensor with a two-year commitment to a $15 a month Xbox Live Gold subscription.

Bought separately, the cheapest version of that bundle would cost $420 at current prices. The new offer would come to $459 over the two-year period. According to the Verge report (widely picked up but still unconfirmed by Microsoft as of this writing) the new offer may also include a few streaming services that Xbox Live subscribers currently have to buy separately, although the report doesn’t specify which services.

Underscoring the importance of the service contract, buyers would reportedly also face an (unspecified) early termination fee, a la cellular phone sevice, if they want to get out of the two-year commitment before it runs its course.

Apart of what it would do for Microsoft’s Xbox games business, however, the new bundle, if successful, could hold significant implications for its broader digital living room ambitions as well. If Microsoft proves it can attach long-term service commitments to Xbox hardware, it’s no big leap to imagine it eventually leveraging those contracts to begin reselling other services and subscriptions.

If Microsoft were able to deliver a two-year, no-churn service commitment to Netflix, or Hulu Plus, it could significantly reduce those services’ sales and marketing costs, much of which are currently consumed in replacing churned-out subscribers. Lower those costs enough, and Netflix would no doubt gladly allow Microsoft to bundle Netflix subscriptions in with Xbox Live and bill customers itself, with Microsoft taking a cut.

Even cable TV providers wrestle with churn, and might be happy to let Microsoft resell their service, especially since the Xbox could replace the cable operator’s set-top box, saving it additional cost.

In short, the ability to secure long-term service commitments from consumers by bundling it the service with Xbox hardware could position Microsoft as, if not quite a gate-keeper to the digital living room then as a value-added reseller of third-party services. Though more or less a wash in terms of near-term revenue, the strategy, if successful,  has the potential to return much more to Microsoft in the long term.