Can Microsoft’s Next XBox Be More Than a Game Console?

Microsoft (NASDAQ:MSFT) is set to unveil its next video game console, and it could be taking a major step toward becoming a household entertainment staple. But there might not be as much room for consoles as there has been in the past.

The gaming industry is not the same as it once was. The lines that divide it from other areas of the entertainment industry and other device groups have been blurred, as capabilities in each area grow to encompass those of the other. Video game consoles are no longer limited in capability to only playing video games. While back in the days of Nintendo’s and Sega’s cartridge-based consoles, you couldn’t go sticking a VHS into the machines, nowadays consoles are allowing for far more interaction beyond just gaming.

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The first Xbox was a foray into the world of video game consoles and general entertainment centers for Microsoft. The device could play games — to the delight of gamers — and it could play DVDs, to the delight of any gamers’ family members that didn’t want to deal with swapping around cables in the back of their TV to watch a movie. It even managed to snag success in the face of competition from long-standing console-makers Nintendo and Sony (NYSE:SNE). The Xbox 360 was an even bigger leap in the direction of a cross-bred entertainment device, with capabilities for video games, YouTube, NetFlix (NASDAQ:NFLX), and more — with the unfortunate failure of HD DVD as a new standard being one of the bigger hiccups in the way of the Xbox’s move.

All the while, Microsoft has continued to face the competition of the other brands that have been in the gaming industry longer. Sony took similar steps with the Playstation 3 to make it a hub of entertainment, including Blu-ray capability, support for online video services, and even a full web browser.

Microsoft is said to be unveiling its next Xbox console on Tuesday, but the market is not the same as when the last batch of consoles were released. The new Xbox will face similar competition from Nintendo and Sony, but it also has to contend with constant competition from PC gaming, and now from tablets, mobiles, and web games.

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Games like those on Facebook (NASDAQ:FB), as well as tablet and mobile games, have been sweeping up casual gamers and taking them away from the hardcore gamer market that gaming consoles have typically been considered to target. In that regard, it may be harder than ever for new consoles to garner a solid customer base. Nintendo launched the Wii U in November, but it’s been struggling to have the mass appeal it had hoped, with only 3.45 million units sold in the five months after it launched, compared to the forecast of 5.5 million.

It’s possible that the next Xbox could run into the same sluggish market that Nintendo did. However, there are a number of fortunate points for Microsoft. The next device is suspected to function in a lot of new ways, interacting with the TV at greater lengths, as well as with tablets and smartphones. This could allow it to attract consumers that aren’t even interested in gaming. Also, Microsoft doesn’t even have to worry that much about its Xbox business.

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Microsoft’s Windows and software business has about a 60 percent profit margin, compared to just 15 percent for its Entertainment and Devices unit. Subscriptions to Xbox Live are also measly compared to the number of people paying for Microsoft’s software. Potentially the most significant thing about Microsoft’s push of Xbox is that it puts the pressure on Google (NASDAQ:GOOG) and Sony, and keep consumers time focused on Microsoft alone, which has a lot of competitive value for the company.

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