01 Jan 2008

When two of the biggest boys in the media playground get together to fight their corner, it makes news. So now that Microsoft has finally announced its XBox games console partnership with BT, the future of alternative television is coming into sharp focus.

BT will be the first of Microsoft's IPTV software customers to offer customers Xbox 360 games consoles that can function as set-top boxes for on-demand TV content. The service should start by the middle of this year, and similar services can be expected from other telcos pretty smartly. Putting the two boxes into one is a good plan for both companies. But is it enough?

It is certainly no secret that BT Vision is taking time getting traction in the UK market and Xbox has had its own problems in the past year: a software glitch that could effect more than 12m consoles forced Microsoft to take a $1bn (€0.7bn) charge against profits in July. The success of its most recent Halo video game has helped Xbox 360 push ahead of its rivals in the games console market, but despite billions of dollars in investment, Xbox hasn't yet turned a consistent profit.

The BT deal was unveiled along with a lot of other Microsoft entertainment-oriented announcements at January's Consumer Electronics Show in Las Vegas. But it's taken a year for the IPTV-games console integration to happen; Microsoft first announced that Xbox and IPTV would become one at CES 2007, with the target of having the commercial rollout begin for Christmas 2007.

Of course Microsoft has a lot of money to throw at technical problems and at market initiatives, but money isn't everything. Indeed, the company has been criticised recently for suffering a bit of a mid-life crisis. One example is its recent acquisition activity. Last year Google beats out Microsoft to buy DoubleClick, the online ad technology company, and to make sure it keeps up with Web 2.0 competitors Microsoft paid a whopping 85% market premium to buy DoubleClick rival aQuantive.

Call it Microsoft attempting to keep up with Web 2.0 competitors. Microsoft's efforts to stay abreast of the newer kids on the block in the internet arena is mirrored by the challenge facing IPTV systems rolled out by telcos from TV services delivered over the open internet. Online TV services are cropping up like dandelions, from cyber-cable operator-type services offered by Joost and Bablegum to the initiatives from broadcasters like hulu.com in the US and Kangaroo in the UK.

IPTV advocates say that the quality of service of a closed IP system married to the ability to control content rights, makes IPTV the best solution for on-demand video systems. The telcos argue that a bundled service of phone calls (and maybe mobile phone service as well), high-speed internet access and quality-of-service-enabled IPTV is a winning formula.

Taking the latter point first, a revealing survey by consultancy KPMG in late 2007 called Consumers&Convergence 2007 II found that the convenience of a converged bundle of services (and one bill) is not actually what customers are looking for first when they shop for communications and entertainment needs.

Clearly, telcos are keen to push service bundles and thereby help maximize customer loyalty and ARPU growth, but according to the KPMG study, customers aren't buying it. Convenience may be a factor but price was the real bottom line. Of the 4,400 consumers surveyed by KPMG in 16 countries in Asia, Europe, and North and South America, 57% said that attractive pricing was their most important consideration in a bundled service. In UK the figure rose to 83%. At this point, someone might want to email KPMG's survey to Orange and O2, both of which are planning to roll out bundled services in the UK in 2008, joining BT and Tiscali.

Even if bundling was more popular with consumers, there is a more fundamental problem with telco TV. The telcos' brand of IPTV is based on a platform that is closed and proprietary. But the biggest developments of the Web have come because of its openness so anyone can write an application or launch a new service and so help push the innovation envelope.

Closed IPTV systems may be better able to guarantee Quality of Service at the moment but what about the problem of customers being hostage to an inferior user interface or a set of limits on the content available because these suit the telco? Of course the telcos have too much at stake to let a possible new revenue stream slip between their fingers. They will adapt because they will have to.

So is IPTV a doomed business? It's too early to tell, but here's something that may hint at future developments: closed-system supporter Microsoft has already bought into open access content phenomenon Facebook and paid a pretty penny for it as well. No-one ever said that Bill Gates had to stay in his own corner of the playground.