Xbox One Key To 'One Microsoft'

Microsoft's Xbox One isn't just about taking over the living room. It's a proving ground for CEO Steve Ballmer's "One Microsoft" vision.

Microsoft sold more than 1 million Xbox Ones within 24 hours of the console's Friday launch. Sony's PlayStation 4 sold at about the same rate when it debuted the week before.

The launch is auspicious, if not necessarily extraordinary. It's been seven years since Microsoft released the Xbox 360, after all; with so much pent-up demand, an early rush of sales was inevitable.

Here's what's more important than day-one sales: whether the Xbox One's performance remains strong enough to affirm the consumer-oriented aspects of retiring CEO Steve Ballmer's "One Microsoft" strategy.

[ Is Microsoft's Surface 2 the right tablet for you? See Microsoft Surface 2: Hands-On Review. ]

A recent Bloomberg article spoke to this question, claiming that former Nokia CEO Stephen Elop, widely perceived as a frontrunner for Ballmer's job, would consider jettisoning Xbox and Bing if he is selected to lead. The article cited unnamed sources close to Elop, but even if he is less trigger happy than implied, Microsoft's consumer efforts face scrutiny from others as well.

Influential hedge fund ValueAct, which owns around a 1 percent stake in Microsoft, opposes Microsoft's decision to manufacture devices, for example, according to a July report in Reuters. Wall Street commentators such as Nomura analyst Rick Sherlund routinely say Microsoft would be stronger if the Xbox were spun off. Reuters also reported in October that several major shareholders feel Microsoft chairman Bill Gates is blocking the radical changes the company must make-- further indication of the contentiousness that surrounds Microsoft's future tactics.

Nonetheless, it's a foregone conclusion that Microsoft will continue to target at least some consumer markets; otherwise, it wouldn't have purchased Nokia's device business. But it's one thing for Microsoft to get serious about smartphones; they're the gateway to end users, and Microsoft's hand was somewhat forced because no one besides Nokia was wholeheartedly supporting Windows Phone 8 in the first place. It's something else for Microsoft to invest billions in Surface tablets, Bing and the Xbox -- the first two have lost more than they've earned, and the Xbox eats up resources that might be better spent on Windows, Office, Azure or other more profitable products.

The Xbox One

To be sure, the $499 Xbox One brings a lot to the table, perhaps enough to justify its $100 premium over the PlayStation 4. Its headline features include a next-generation Kinect sensor that can not only identify individual users, but also track a gamer's heartbeat during fitness games. It supports not only cable television, but also a number of video services, including Netflix and Hulu; can connect to the Web via Internet Explorer; and even supports multi-tasking for, say, watching a basketball game on one side of the screen while viewing an app with your fantasy league statistics in the other.

There's more. The Xbox One also obeys voice commands, has the cross-platform games you'd expect, and will boast a library of interactive titles once Microsoft finishes building them. Depending on your taste, you might also care about its exclusive games, such as Forza Motorsport 5 and Dead Rising 3.

Early reviews indicate the Xbox One doesn't get everything right, but as a grab at living room domination, it's as good as anything in the market -- which is to say, good enough to be intriguing, but not good enough to be an iPhone-level disruptive force. Research firm Gartner projects the video game market will be worth $111 billion by 2015, a 19% increase over this year, so if the Xbox One expands on the Xbox 360's reach, the spoils could be substantial.

If Microsoft's plan plays out, those spoils will extend outside the pure video game market, however. The Xbox hooks into Microsoft's cloud services such as Skype and SkyDrive, and its interface looks more like Windows 8's Start screen than ever. Under "One Microsoft," this synergy is designed to turn Xbox sales into subscriptions for Microsoft's cloud services, or, better yet, higher adoption of Windows 8 devices. If it works, Ballmer's interest in consumers could be vindicated. But if the Xbox One can't appeal to more than a core gaming audience, incensed investors will start circling.

Microsoft director John Thompson, who leads the CEO selection committee, has repeatedly stated that the company's next CEO will use the blueprint Ballmer has already established. But you wouldn't expect him to say anything else; otherwise, he'd be dooming products like the Surface Pro 2 and the Xbox One before they'd even had a chance.

If the Xbox evolves into a dominant media hub, it will have to grow from a gamer base, but it's not yet clear if the majority of gamers will go with Microsoft or Sony.

Apple and Google already dominate gaming, and media consumption in general, on mobile devices. Both are also experimenting with ways to expand their grasp to televisions. Microsoft and Sony are essentially trying to infiltrate the living room from one end, if one other words, but even if Microsoft prevails, it might find a Siri-equipped iTV or some future iteration of Chromecast waiting for it on the other.

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