The Xbox One has one major problemMay 22, 2013: 7:08 AM ET
Microsoft's Xbox One is being touted as the only peripheral your TV needs—except for your cable box, the only thing it apparently can't work without.
By John Patrick Pullen, contributor
FORTUNE -- When it comes to launches like Tuesday's Xbox One announcement, there's a term for the shiny, face-forward product image they'll be showing from now until unboxing day: the hero shot. But as Redmond executives went on about octa-core processors and infrared depth censors (which, don't get me wrong, are hugely important), I was anxiously waiting for a look at the box's backside, where I hoped to find the real hero: a co-axial cable input or a CableCard slot. Unfortunately, neither were to be seen.
To be clear, Microsoft's (MSFT) new Xbox is an achievement in electronics, computing, gaming, and networking. When it comes to game consoles, media streamers, or home theater PCs—with apologies to Sony (SNE), Nintendo (NTDOY), Apple (AAPL), and Roku—nothing else comes close. But repeatedly billed as an "all-in-one home entertainment system," the upcoming console from Microsoft not only appears to leave crucial television integration on the shelf, it also tethers users to their cable or satellite boxes. This makes the new Xbox much more than the one peripheral your TV needs—because it's actually two.
In order to enjoy some of Xbox One's most integral features, like its smooth-looking program guide or Skyping while watching TV, be prepared to pay extra, every month. It's all there in the fine print: "Supported television tuner or cable/satellite set-top box with HDMI output and HDMI cable required (all sold separately)."
Many aspiring Xbox One buyers will point out they already have a cable box, making the investment in Xbox One a wash. But in recent years, an increasing amount of users have been dumping their provider-supplied tuners for so-called CableCards. And with 70 million Xbox 360s worldwide, this was a huge chance for many more to join them.
CableCards plug into PCMCIA slots, giving third-party devices to access cable and satellite networks. Legislated into existence by the Telecommunications Act of 1996, there are currently 600,000 deployed in the U.S., up almost 8% from last year, according to a February 2013 report by the National Cable and Telecommunications Association. (By comparison, there are more than 39 million cable boxes in the wild.)
Last year's uptick in adoption might have something to do with TiVo (TIVO) Premiere launching bi-directional service in late 2012, which gave users access to on-demand services from providers like Comcast (CMCSA). I personally made that upgrade, and, ironically, since ripping out my cable box, I have never been happier with my television service. On Monday, TiVo announced its largest quarterly subscription increase in more than seven years, a gain of 277,000 cable subscribers. It's also been recently reported that smart-television manufacturer Samsung is eyeing the still-viable technology to go subvert cable's poor user experience and deliver better interactive services. And last summer, Bloomberg reported that Apple reportedly offered to work with Comcast on a new interface, but millions of people are still staring at the cable company's hideous blue menus today, so that obviously didn't pan out.
But if CableCard is good enough for TiVo and Samsung, why wasn't it feasible for Microsoft? That's a mystery, though it isn't a surprise. As unpopular as the protocol has been—and as ubiquitous as HDMI has become—Microsoft could even be forgiven for being forward-looking on this particular spec. But I imagine the move came as a result of boardroom negotiations with multi-service providers (MSOs), where Microsoft asked for program and scheduling information, and the television companies said, "Sure, as long as you draw them out of our boxes."
Set-top boxes represent a consistent revenue stream for MSOs. Standard high-definition boxes fetch providers anywhere from $8 to $10 per month, not including service fees, and providers have been using these charges to combat attrition caused by viewers cutting the cord in favor of over-the-top services like Netflix (NFLX) and Aereo. With the Xbox One, however, providers have an ally that both improves the user interface and guarantees box revenue—a win-win.
CableCards, meanwhile, only cost $2.50 per month, and the FCC has mandated that providers supply the first one for free.
But if Xbox One users want television DVR capabilities, it seems they will have to pay television providers even more (or get a third box), further undercutting the game console's all-in-one value proposition. Of course, Microsoft is touting Xbox One's 500 gigabyte hard drive and slick game DVR functionality, but they made no mention of television recording capabilities in yesterday's announcement. In fact, sandwiched between "core and casual games" and "sports and movies," Don Mattrick, Microsoft's president of interactive entertainment, sped right past "live and recorded television" in his remarks, burning a path to this question:
"Can we improve a living room that has become too complex, too fragmented, and too slow, by harmonizing your experiences?"
Well, I don't know, Microsoft. Can you?