Thoughts on Microsoft's new Xbox One

Yesterday, Microsoft unveiled its new Xbox One game console to an assembly of press, analysts and Microsoft employees on its Redmond, WA campus. The Xbox One has faster processors and more memory than the Xbox 360. A new version of its Kinect 3D digitizer with a 1080p camera is included as standard equipment. The Xbox Controller has also been redesigned, although the changes are mainly cosmetic. In addition, the Xbox One has an HDMI input, so that selected cable, satellite and IPTV set-top boxes can be connected to and controlled by the Xbox One.

Microsoft spent the first half of the presentation focusing on the Xbox One's TV-related features. For example, the Xbox One will have a built-in Electronic Program Guide (EPG) that supports many video operators. Users will be able to change channels and look for shows to watch by voice. In addition, the Xbox One will enable navigation via Kinect gestures.

The second half of the presentation was devoted to games. Only a handful of game publishers were represented on stage, and none of them showed actual game play; instead, they showed trailers. To my eyes, the most impressive trailer was for Forza Motorsport 5, which is the only game title that's been confirmed to be released day-and-date with the Xbox One. It looked great, with visual elements such as metallic paint and realistic depth-of-field rendering that would have been possible only in pre-rendered cutscenes not long ago. Unfortunately, that wasn't the case with the demos from the other game publishers. Electronic Arts, for example, appears to be using the Xbox One's additional horsepower to add more intelligence to the game play in its sports titles rather than for improving how its games look.

Microsoft is apparently concerned about the future of the Xbox given the falloff in sales of console games and the rise of casual games on smartphones and tablets. As a result, it's trying to position the Xbox One as both a set-top box (one that can both connect directly to content over the Internet and indirectly through cable, satellite and IPTV set-top boxes) and a high-performance game console. The problem is that those are two very different markets, with different use cases and consumer expectations. For example, Google TV provides most of the same non-game functionality as the Xbox One, albeit without voice recognition or gesture control. On the other hand, you can buy a Google TV-based set-top box from Vizio for $99, while I expect the Xbox One to be priced around $399. You can also buy an Apple TV or Roku set-top box for $99 or less. I simply don't see very many people buying the Xbox One for its set-top box features, since they can get most of its functionality from less expensive competitors. That means that most of the Xbox One's buyers will be hard-core or moderate gamers, which won't expand the potential market for the device at all.

I suspect that Microsoft's corporate leadership has fallen victim to Shimmer Syndrome (named after the combination floor wax and dessert topping in the famous Saturday Night Live commercial parody.) As with Windows 8, which works both on tablets and on conventional PCs but is compromised on both platforms, it's trying to make the Xbox One work both as a set-top box and game console. The compromise on the set-top box side is clearly price; we don't yet know what the compromise is on the game side, but it may be lack of attention that opens the door for Sony to offer a superior developer and gaming experience.

Poof! Your set-top box has turned into a brick

Yesterday, Sezmi, a Silicon Valley-based video service provider, announced that it is discontinuing its services in the U.S. in order to focus on selling its platform to international service providers. Sezmi used a combination of an Internet connection and digital broadcast signals to provide a subscription package of broadcast, cable and Internet-only channels. While the service was eventually offered in 36 U.S. markets, the cable channels were never made available outside Los Angeles (even though customers in other markets were told they would get them), and the cable channels in Los Angeles were discontinued last December. Subscribers purchased a $150 package including a set-top box with a 1TB hard drive, and a digital antenna for picking up over-the-air broadcasts; the monthly price was $5 for basic service, and another $20 for the cable channels.

Sezmi's unique selling proposition was that it was a low-cost replacement for cable service, but once the cable channels went away, Sezmi lost its primary selling point. In addition, if subscribers lived too far away from local television transmitters to get a good digital picture, they couldn't use Sezmi, either. Sophisticated industry observers could see that Sezmi was doomed, but consumers didn't necessarily have that insight.

Consumers who bought into Sezmi are stuck with bricks that will be useless for anything except watching YouTube by November 1st. Sezmi isn't offering any refunds for hardware, no matter when it was purchased. Subscription video services fail all the time--for example, Cablevision's VOOM was the first HD satellite TV service, and lasted for approximately two years. The VOOM set-top boxes could also be used as ATSC digital receivers, so a few of them are probably still in use, but most of them ended up in the scrap pile.

The lesson is that consumers should beware when being asked to purchase a set-top box, especially an expensive one. If the company offering the service goes out of business, changes strategic direction or is acquired, its set-top box is likely to become a paperweight. Apple and Roku have the right idea--none of their set-top boxes are priced over $100. It's clear that no one feels any particular responsibility to their customers if they discontinue their services, so caveat emptor.

Logitech's Google TV set-top-box price and availability date announced

According to Engadget, Logitech has announced that its Google TV set-top box, the Revue, will be priced at $299 in the U.S. and will ship on September 29th. Dish Network subscribers can purchase a single Revue at a discounted price of $179. My suspicion is that Logitech is going to have a very tough time of it this holiday season.

The Revue was clearly designed to be competitive with the last-generation Apple TV, but the new version, which will be shipping at about the same time, will be priced at $99. Roku's current-generation set-top boxes run from $59.99 to $99.99, although they have new-generation models in the pipeline that may be more expensive. Boxee's Boxee Box by D-Link has a $229.99 list price, but Amazon has it available for pre-order at $199.99.

Looking at the Logitech Revue's price, I don't see how it competes in the current environment. By basing its architecture on Intel, Google automatically made its partners vulnerable to price competition from companies using ARM processors, and that's exactly what's happening. If the price point for a viable add-on set-top box drops to $199 or less (and especially if it drops to $99), I don't see how Google TV set-top boxes will be able to compete without subsidies.

Pace to acquire 2Wire for $475 million

On the heels of passing Motorola in the worldwide set-top box business, Pace will acquire 2Wire for $475 million. 2Wire supplies DSL routers for AT&T and other service providers, and also supplies media management software. Pace has recently been chosen to provide next-generation set-top boxes to Comcast, so the addition of 2Wire will give Pace an excellent position in both the U.S. Cable and IPTV markets.

Big set-top box changes underway at Comcast

ESPN 3D, the cable network carrying 3D coverage of the World Cup in the U.S., is available to cable operators via both MPEG-2 and MPEG-4 compression. MPEG-4 is significantly more bandwidth-efficient than MPEG-2. and according to Cable360, Comcast customers who want 3D programming will have to use MPEG-4 compatible set-top boxes starting in August. Comcast has approximately 10 million MPEG-4 set-top boxes in the field, and 25 million set-top boxes that only support MPEG-2.

Most of Comcast's MPEG-4 set-top boxes are from Motorola, but the company is said to have chosen Pace to supply its next-generation set-top boxes. The Pace STBs will support MPEG-4 H.264 compression and Tru2Way applications, and they may be compatible with Switched Digital Video (SDV) services. Comcast's choice of Pace will have a major impact on both Motorola and Cisco in the U.S. market. Pace has been very strong everywhere but the U.S., but supplying the largest video service provider in the U.S. will dramatically increase its presence and shake up the market.

Pace passes Motorola on the set top, TiVo supplies Technicolor with PVR software

There were two big pieces of news in the set-top box business yesterday. First, CED reported that, based on preliminary numbers from IMS Research, Pace has overtaken Motorola to become the world's largest set-top box supplier overall (aggregating cable, satellite and IPTV shipments). If the final report confirms this finding, it's huge news. Motorola (and General Instrument, the company that Motorola initially purchased to get into the set-top box business) has been number one in STBs for as long as anyone can remember. According to IMS, the top five STB vendors are now Pace, Motorola, Technicolor (formerly Thomson,) Cisco and Humax.

In related news, TiVo will provide PVR software to Technicolor for its STBs. This announcement is potentially a huge win for TiVo, which has struggled in its efforts to get its PVR software deployed on set-top boxes other than its own. (There's a deal in place with Comcast, but the rollout has been incredibly slow.) Technicolor is the leader in supplying STBs to satellite operators worldwide.

FCC: Will AllVid be CableCARD Part Deux?

Last Wednesday, the U.S. Federal Communications Commission (FCC) issued a Notice of Inquiry concerning its plan for next-generation set-top boxes. The FCC's intention is to encourage a retail market for intelligent set-top boxes that can support just about any video service, including cable, satellite, IPTV and over-the-top Internet video content. The FCC tried to do the same thing several years ago with its CableCARD initiative, but even the Commission now recognizes that CableCARD has failed.

The original concept was to enable consumers to purchase cable set-top boxes from any of a variety of suppliers, and then rent a CableCARD that would be compatible with individual cable operators' conditional access, authentication and encryption systems. Somewhere between the original concept and actual implementation, the wheels fell off. CableCARDs could only handle one channel at a time and were one-way only, which meant that they couldn't be used for on-demand, pay-per-view or interactive applications. Two cards were required for DVRs in order to watch one program and simultaneously record a second program. The monthly lease price for CableCARDs wasn't all that much less than complete set-top boxes. Cable operators still required installers to come to customers' homes in order to set up CableCARDs, and few installers were trained on how to set them up properly. As a result, CableCARD was a bust.

In the FCC's new proposal, consumers would purchase a "smart video device" (set-top box) that would work for any "multichannel video programming distributor" (MVPD), including cable, satellite and IPTV operators, as well as Internet video providers. Then, each MPVD (except for the Internet video providers, who would connect via Ethernet or WiFi) would supply a "set-back" device, also called an "AllVid adapter", which would serve as a tuner and also perform conditional access, authentication and decryption functions. The FCC would like the AllVid adapters to connect to the smart video devices via Ethernet and to use standard IP protocol to send and receive audio, video and data, so technically, an AllVid adapter could be connected to a conventional network router and make video content available to any device on a home network.

The FCC's goal of "one box to rule them all" is laudable, but it's likely to have many of the same problems as CableCARD. First of all, despite the Commission's attempt to redefine terms, consumers would have to have at least two set-top boxes: The smart video device and one or more AllVid adapters. The AllVid adapters would be proprietary to each service provider, so for example, if a consumer moves from an area serviced by Comcast to one serviced by Cox Cable, they'll have to lease or buy a new AllVid adapter. AllVid adapters are likely to be even more expensive than CableCARDs, since they'll perform many more functions.

Two important goals of the new AllVid strategy are to make over-the-top Internet content an "equal partner" to video from service providers on television sets, and to prohibit service providers from limiting access to over-the-top content. However, service providers will fight hard against the new proposal in order to maintain content control in the living room. They're likely to argue that AllVid adapters will be set-top boxes in all but name, so why not allow them to continue to lease all-in-one set-top boxes to consumers? They'll also argue that they've just invested an enormous amount of money to implement the Commission's CableCARD mandate, and now the Commission wants them to throw out that investment and implement another unproven technology. Satellite and IPTV service providers, who were unaffected by the CableCARD situation, would be covered under the new plan, so it's likely that they'll oppose the FCC's recommendations as well.

If the FCC hadn't already tried and failed with CableCARD, I'd give AllVid a better-than-even chance of success, but in its present form and with CableCARD's experience behind it, I give AllVid very little chance of making it to market. AllVid would elevate over-the-top Internet video content from a bit player in the living room to an equal partner, and the incumbent service providers will do almost anything to keep that from happening.

You're only as good as your partners

According to the New York Times, Google has partnered with Intel, Sony and Logitech to port Android and a set of Internet-oriented applications to set-top boxes, HDTVs and other devices. Google is also said to be working with Dish Network to implement Android and similar applications in Dish's satellite receivers.

In any kind of industry consortium, you're only as good as your partners. Logitech, which is being called on to provide peripherals including a remote control, is an excellent choice, although their inclusion in the consortium seems like overkill, given that many companies can do remote controls well. The quality of the partners goes down from there:

• Intel has a terrible track record with consumer electronics; it repeatedly announces industry initiatives and partnerships, but very little comes from them, because Intel's chips are both overkill and overpriced for most consumer electronics applications.
• Sony has lost its market leadership in consumer electronics. The company's engineers strive to lock customers into Sony technologies, and that has made the company an also-ran in many markets. The company's fierce unwillingness to compromise on Blu-Ray delayed the entire consumer electronics industry from launching the technology for more than a year, and its arrogant overpricing and over-complication of the Playstation 3 allowed Nintendo and Microsoft to dominate the console market until very recently.
• Dish is a weak #2 in the U.S. satellite television market, and its repeated court losses against TiVo mean that the company may not remain a viable satellite receiver or set-top box manufacturer.

I would feel a lot more comfortable about this effort if Google had managed to attract a couple of ARM licensees and additional consumer electronics manufacturers such as Samsung and Panasonic. (Signing up Samsung would have gotten them both the ARM processors and additional consumer electronics clout.) Google may be planning to add more companies to the consortium, but if this is all they get, I don't see Google TV gaining much market traction.

Coming Wednesday: Open-Source Set-Top Boxes?

The FCC is going to release its long-awaited National Broadband Plan this coming Wednesday. Details of the plan are leaking out, and broadcasters are the group that stands to lose the most--see Harry Jessell's column on TVNewsCheck for an analysis of and link to a speech by Reed Hundt, a former Chairman of the FCC and one of the architects of the new Plan.

One element of the plan that's been leaked will also have dramatic impact on cable operators...at least if I understand its intent. The FCC will propose a new type of set-top box that will provide equal access to cable and Internet programming. The FCC tried to open up the set-top box business several years ago when it required cable operators to provide customers with CableCARDs (conditional access/tuner devices) that could be inserted into set-top boxes and HDTVs from consumer electronics companies. The cable industry fought implementation of CableCARD tooth and nail, and even today, most CableCARDs don'y allow subscribers to access pay-per-view and other two-way services. As a result, the entire CableCARD program was stillborn, and cable operators continue to equip their customers with tens of millions of proprietary set-top boxes.

On Wednesday, the FCC is likely going to propose that CableCARD be swept aside and replaced with software-based set-top boxes, HDTVs, home theater PCs and other devices that can provide customer authentication, decryption and tuning for digital cable systems without proprietary hardware. These devices will also have Internet connectivity, and will be able to provide access to Internet video in the same device and using the same user interface (interactive program guide) as cable channels. In essence, these new devices would elevate Internet video to the same level as cable channels.

I'm now diving into wild speculation, but here's what I think the FCC will also propose: These new set-top boxes and compatible devices could be purchased by consumers and used on any digital cable system. That means that consumers could move from area to area and use the same set-top box. They would no longer have to pay any monthly equipment leasing charges to cable operators, since the boxes would be configured and made compatible with different cable systems via software and firmware changes.

I know that all of this was supposed to happen with CableCARD and didn't, so why would it happen with this new scheme? It might not--the cable industry will fight it ferociously, especially the part where they have to give equal access to Internet video programming suppliers. The advocates for an open approach have nowhere near the political clout as the cable operators and broadcasters who are going to fight the Broadband Plan. However, the time has come for "soft" cable set-top boxes; the capability to do just about everything they need to do in software has long been there, and the cost of the processing power and memory they need is very low, especially compared to when CableCARD was first proposed.

Set-top boxes that don't require a truck roll in order to install, can be provisioned by consumers and can be upgraded and reconfigured in software would save an enormous amount of money for cable operators. Companies like TiVo and Arris could make a real business out of selling consumer set-top boxes. Any Blu-Ray player with an Internet interface and the horsepower to support Internet video applications could readily be adapted to become one of these new set-top boxes. In the long run, a software-based open design makes more sense for everyone.