Microsoft's Xbox Gamble: Micropayments, Personalization, and Digital Media

Microsoft likes to claim that it takes "bet the company" leaps into new markets, but I'd argue that the company's billions in cash, and its tradition of deep R&D spending, probably offset any risks it's supposedly taking. That said, everyone's favorite software giant isn't afraid of tackling new challenges. Microsoft has been at the forefront of mobile-device development for almost a decade, and its Tablet PC efforts have rejuvenated an interest in pen-based computing that had been missing in action since the early 1990s. But you won’t find a more clear view of Microsoft's potential company-changing future than in the work it has done with Xbox, its video game franchise. If Xbox is ultimately successful, that product line might do what even Windows has been incapable of doing: Give Microsoft a foothold in the living room.

The original Xbox was a pure gaming machine, designed along the thinking of Jonathan "Seamus" Blackley, who argued against a competing theory in the company—that the Xbox should be an all-in-one digital entertainment device, a Trojan horse of sorts that would get Microsoft entrenched in consumers' homes. Blackley watched as his creation sputtered in the market, although it eventually went on to sell millions of units and launch the Halo series as one of the most successful video game franchises in modern computer history. Blackley left Microsoft shortly after the original Xbox shipped, sensing that the next Xbox would be less about games and more about integration.

That next Xbox, called Xbox 360, just shipped to the first customers this week. And as Blackley feared, Xbox 360 isn't just an incredible video game machine, with testosterone-laden specifications designed to send fanboys straight into a tizzy. No, Xbox 360 is much, much more than just a game machine. In fact, it's primarily aimed at the no-gaming crowd, although we're not hearing Microsoft discuss that aspect of the device very much. Maybe Blackley was wrong after all. Tired of games? Here's what else is going on with Xbox 360.

Community
Most PC users are familiar with email and instant messaging (IM), features which are—at heart—simply communications tools. Before Xbox 360, there weren't really any similar features aimed at video games, although the closed community offered by the first-generation Xbox Live service was close, with its friends list, messages, and other IM-like features. Xbox 360 ratchets this functionality up a notch by offering free Xbox Live communications features and by letting users create voice and, eventually, video messages that can be shared among Xbox Live subscribers. But the biggest change with Xbox 360 is that these communications features are pervasive.

Whenever your Xbox 360 is on, whether you're in a game, using the Xbox Dashboard, watching live or recorded TV, or enjoying other digital media content through the system's Media Center Extender (MCX) and Windows Media Connection functionality, your friends can communicate with you (if you want them to). The resulting sense of community stands in sharp contrast to the isolation one usually experiences when sitting in front of a video game machine. And because these features will eventually extend to the Windows Live Messenger IM service, Xbox 360 users will soon be able to directly communicate with millions of users worldwide, at any time, all from the comfort of their couch.

Here's how it works: If you're using your Xbox 360 and are connected to your home network via Ethernet or wireless networking, you're online. And that means your friends can contact you at any time. So you might get a pop-up invitation to deathmatch Call of Duty 2 while watching TV. Or perhaps a message will arrive while you're working your way through the single-player experience in Quake 4. Either way, you can choose to act on that notification as it arrives or wait until later. And if you don't want to be disturbed, you can simply configure Xbox 360 to not interrupt you.

Online Shopping
Thanks to a new Xbox Live feature called Xbox Live Marketplace, Xbox 360 users can access a wide range of online shopping features through a unique payment method call micropayments. Rather than charge your credit card each time you make a purchase through the Marketplace, you buy bundles of currency called Microsoft Points, then deduct from your balance each time you make a purchase. For $6.25, you get 500 Microsoft Points, and for $62.50, you can get 5000 Microsoft Points.

So, what can you buy with Microsoft Points? Right now, the purchases fall into some set categories:

Game Downloads
You can download game trailers (typically free), Xbox Dashboard themes (generally 150 MP), Gamer Pictures (20 MP), and eventually software updates (free).

Memberships
Although it's possible to purchase retail versions of Xbox Live Gold (the paid version of Xbox Live), you can also buy or extend memberships online for $7.99 per month or $49.99 per year.

Demos and Trailers
Microsoft is providing a variety of free movie, music-video, and game trailers in gorgeous WMV-HD format. Not sure if you want a particular game? Watch the trailer, right from the Xbox 360.

Themes and Gamer Pictures
If you're looking to personalize your Xbox 360 experience, you can download a wide variety of custom themes (150 MP) and Gamer Pictures (20 MP), as well as picture packs (40 to 200 MPs).

In the future, the online shopping experience will get even better. Publishers will start producing serialized games, in which you purchase individual levels, one at time. But the best thing about Xbox 360's online shopping features is that they aren't limited to hard-core gamers. Anyone with a free Xbox Live Silver account can make purchases (or download free items) through the Marketplace.

Digital Media Integration
Xbox 360's digital media features are without parallel in the video game world. Users with Windows XP PCs on a home network can stream digital photo slideshows and digital music through the Xbox 360 using a simple UI. Those with Media Center PCs have an even better experience: Xbox 360 functions as an HDTV-capable Media Center Extender (MCX), streaming recorded and live TV shows, photos, music, and video, all using the famous Media Center interface.

However, it doesn't stop there. If you connect a digital camera or MP3 player—such as the Apple iPod—to an Xbox 360, you can stream or copy content from those devices as well. You can even substitute a game's soundtrack with music from your iPod if you'd like. (Note that Xbox 360 can’t play music purchased from Apple's proprietary iTunes Music Store, however.) And, of course, Xbox 360 plays DVD movies and audio CDs, too. It could literally be the only digital device you need in your living room.

Brave New World
With brains and beauty, Xbox 360 neatly steps past the capabilities of traditional video game machines, offering a wide range of other functionality that should appeal to a much wider audience. Xbox 360 is a fantastic game machine—see my Windows SuperSite review for details—but it's also a lot more. If you've been wondering whether digital convergence would ever happen, look no further. Xbox 360 has raised the bar.