Media Center, DVD Playback, and Microsoft’s Media Strategy

There is quite a bit of noise in the system after Microsoft’s announcement this week that Windows Media Center would be a separate add-on to Windows 8, and even more noise regarding the decision to remove DVD playback from Windows Media Player.  I’ve talked a bit about this topic before, but now seems like a good time to address it directly. Microsoft created Windows Media Center in an attempt to move Windows into the living room as an entertainment console.  The effort failed.  There are all kinds of reasons for that, my own perspective being that their refusal to target the custom installer market kept WMC from gaining the support of this very influential community  But let us not dwell on that.  WMC basically brought three things to the party.  First was an “8 Foot” UI necessary to make a PC usable by someone sitting at the living room couch with nothing but a TV-style remote control.  Second was DVR functionality taken from Microsoft’s brief offering of a TIVO competitor.  Third were the Codecs for consuming media types not part of Windows itself.  Microsoft has to pay per-unit licensing fees for these Codecs, which is why they weren’t initially in Windows itself.   Adding them would require Microsoft to raise the price of Windows, and OEM pressure to keep the entry-level pricing of Windows low forced Microsoft to offer Windows Media Center (WMC), and these Codecs, as a separate more expensive addition.   Initially Microsoft handled this by introducing a separate Windows XP Media Center Edition (MCE)  which it assumed would only be purchased to turn PCs into home entertainment consoles.  When MCE failed to catch on Microsoft started pursuing different strategies for offering WMC.  Starting with Vista and evolving some in Windows 7 Microsoft eliminated MCE and created more editions of Windows!  They split standard Windows into two editions, Home Basic and Home Premium, and put WMC into Home Premium.  Home Basic was, as far as I can tell, the cost-constant version of Windows while Home Premium took the place of MCE and cost more than Basic.  To keep OEMs from revolting Microsoft reportedly offered them a rebate of some of the cost difference between the editions in the form of co-marketing dollars.  So most Vista and Windows 7 consumer PCs, at least in the developed world, ship with WMC even though few users actually make any use of it.  And yes, everyone pays for WMC because they are buying the higher priced Home Premium edition rather than the Home Basic edition!

With Windows 7 Microsoft went one step further and added support for the Codec (for which Microsoft has to pay per-unit licensing fees ) necessary to play back DVDs into Windows Media Player, also only in Home Premium (and above).  Home Basic does not include DVD playback capability!  And no edition of earlier versions of Windows (such as the ever-popular Windows XP) include DVD playback capability.  Windows XP systems used third-party software, often included by the OEM, for DVD playback.  So beginning with Windows 7 users were paying for the Codec through their purchase of Home Premium.

Around the time Windows 7 shipped the media business was going through major changes in direction.  First, the HD-DVD standard that Microsoft was backing as a replacement for DVDs lost out to the Blu-Ray standard.  Microsoft had included HD-DVD support in Windows Media Center for Windows 7 but not support for Blu-Ray.  Meanwhile it became apparent that the use of DVDs and Blu-Ray (which never fully escaped niche status) for video distribution was peaking as user habits started to migrate to streaming services such as Netflix and network download services such as iTunes and Zune.  Not only that, Microsoft’s ongoing difficulties gaining support from carriers for WMC (e.g., DirecTV repeatedly claimed to be working on WMC support but it never actually shipped) was hitting home.  Some years ago Microsoft made clear that its focus was shifting to Internet TV over traditional cable/broadcast and Internet delivery of content over the use of physical media (i.e., DVDs).  With the cross-over in media consumption from DVDs to the Internet occurring in 2012 (and the extremely limited use of WMC for tuning into broadcast television) Microsoft was going to have to take into account the cost/benefit of including the DVD and other Codecs in Windows as it considered the Windows 8 edition structure and pricing.

Meanwhile on the other side of the aisle Microsoft is facing pricing pressure from devices such as the iPad and Android.  OEMs, whose margins have shrunk almost to “why bother being in this business” levels, have long been asking Microsoft to lower prices.  Not only that, the vast number of Windows Editions just caused customer confusion and I think there were pressures from many quarters to simplify them.  The easiest way to clean up the Windows edition structure was to remove the factor that caused them to become so complex in the first place, the added expense of the Codecs associated with Windows Media Center.  With these Codecs removed it becomes possible to merge Home Basic and Home Premium back into a single (standard) Windows 8.  While we haven’t seen any pricing yet, it is most likely the case that OEMs will be paying lower prices for the standard Windows 8 than they did for Windows 7 Home Premium.  It is a lot less clear how Microsoft will handle retail pricing, but I do think they need to respond to the pressure from Apple’s low upgrade pricing for the last few versions of OS X.   Microsoft could have moved the Codecs into Windows 8 Pro, but that causes pricing pressures on other parts of the customer base (e.g., businesses).  There are a number of reasons for buying Windows 8 Pro, and legacy media consumption is not amongst the most compelling ones.  Leaving the Codecs (and thus WMC) out of Windows 8 Pro allows them to price it so they will achieve a mix that maintains Windows revenue and profits (although Windows RT is likely to lead to loss of a few points of margin in exchange for much higher volumes).  I know some people don’t really care about Microsoft’s financial health, but if they don’t stay healthy then there just won’t be a Microsoft to kick around.   Simply put, with the number of WMC users fairly small, and the use of PCs for watching legacy media on the decline, the best option for keeping prices down for the majority of customers was to move the Codecs (and the WMC software that uses them) to a separately purchasable package.  And that’s what Microsoft has announced, while also making a point that the price should just be enough to cover the Codec licensing fees.  I rather like that option because I believe it will lower the price of Windows for the vast majority of users.  What I don’t like is that the Media package will only be available on Windows 8 Pro.  Users who on are on standard Windows 8, and require nothing else in Windows 8 Pro, will be required to purchase a Windows 8 Pro + Media upgrade.  And that seems like a hard decision for Microsoft to justify.

Now let’s talk about Microsoft’s Media Strategy and then I’ll come back to Windows 8 scenarios.  As far as I’m concerned the strategy has always been a mess, with media playback spread over three highly duplicative efforts.  The basic media playback capability in Windows is via Windows Media Player, which is used by just about all PC users since most web audio and video content is targeted for it.  Windows Media Center was all about the “8 Foot” experience.  And both of them suffered from the traditional Microsoft “build it and they will come” approach.  Acquiring media, for example, is very haphazard in both of them.  Microsoft then built the Zune client and service as an integrated easy way to obtain and play media.  At the same time the Xbox replaced WMC for the “8 Foot Experience” role in Microsoft’s strategy.  Some WMC functionality, such as photographic slide shows, has already been subsumed into other products.  Zune, or an upgraded and likely renamed replacement service, along with support for HTML5 Video, are now the core of Microsoft’s media strategy.  New Metro apps such as those for Vimeo, Slacker, Netflix, etc. are the supporting players.  WMP and WMC are legacy offerings and their use is already in decline.  During the life-cycle of Windows 8 their use is likely to “fall off the cliff” as the web moves to less Windows-centric data types and the use of legacy media continues its decline.  Microsoft will focus on the Internet and all its wonders.

Now let’s get back to Windows 8 and some scenarios that are likely to play out.  The first thing to consider is that very few people, outside real techie power-user types, upgrade existing PCs to new versions of the operating system.  For the last decade most new OS shipments have come with new hardware purchases.  That’s simply a fact.  So most users experience will be quite different from what Microsoft’s actions suggest.  For example, OEMs will make sure that any new system with a DVD drive (or any standalone DVD drive) comes with software that enables DVD-playback.  Yes it will most likely be third-party software, but that just takes us back to pre-Windows 7 days.  And given the continuing love for Windows XP (which always uses third-party software for DVD playback) that scenario seems adequate though not ideal.  The third-party software is usually clunky because it is a “lite” version of a heavyweight product the third-party wants to sell you.  But hey, with a shrinking number of both systems including DVD players and users watching DVDs even if they have a DVD player this will impact only a modest number of users.  Of course on systems that have Windows 8 Pro the OEM could just include the Media pack when a DVD drive is in the configuration, though they may choose a third-party package even in this case.  The bottom line is that no user buying a new Windows 8 system with a DVD drive is going to be unable to watch DVDs.

But the vast majority of new PCs sold are not going to have DVD drives!.  Take what are likely to be the highest volume PC form factors the next few years, Ultrabooks and Tablets.  They certainly won’t have them.  And just like floppies before them, DVD drives will become options on other form factors such as desktops and slowly fade from sight.  The Internet and USB Flash Drives will have replaced them for almost all usage scenarios.

What of those who do want to upgrade an existing PC from Windows 7 to Windows 8 and just want to retain functionality they already have?  You can purchase Windows 8 Pro + Media.  That’s as close as you are going to get.  Will this really be an attractive upgrade?  Well until we know what Microsoft’s upgrade pricing is going to be I really don’t know.  But I assume in most cases users will choose to stick with Windows 7 for this scenario, and as I’ve said in other posts Microsoft will be just fine with that.

Finally about those who really want a PC-based home entertainment center?   Well, Microsoft is giving you that option with Windows 8 Pro and the Media add-on.  Just be clear that it is a legacy option and has no strategic future.  Yes some enthusiasts will want to continue to use a PC as their home entertainment center long into the future.  For those a third-party offering like XBMC seems like a better long-term choice.  For the majority though, the Xbox 360 (and future family members) will become the home entertainment center that WMC longed to be.  And it will integrate with your PCs, Zune (or replacement), and third-party media services to create an overall entertainment environment that will make us all forget about the failed Windows Media Center.  At least that’s what Microsoft hopes.

 

 

 

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7 Responses to Media Center, DVD Playback, and Microsoft’s Media Strategy

  1. It seems strange referring to CD/DVD/Blu-Ray as legacy media when they are still the premier media for people who really want the best possible quality entertainment experience. Streamed content with lossy compression, random starts and stops, mid-screen whirling ‘streaming in progress’ icons, and draconian restrictions on use just do not cut it. Although saying that, yes, I realise the majority of consumers don’t care about these things. It is just sad to be moving backwards before we get to move forwards (presuming online offerings will improve).

    • Tom says:

      Paul — convenience will beat quality for most users. MP3s (vs. CDs), VHS tapes (vs. laserdiscs), cell phones (vs. land lines), etc. In all of these cases, the technology with inferior audiovisual quality won.

      Hal — presumably, the telemetry shows that Media Center users overlap a great deal with purchasers of the Ultimate SKU, as WMC never really made it outside the tech enthusiast community. Recall that WMC is not an application, but a separate hidden SKU of Windows called Pro with Media Center. To offer it for non-Pro would thus require a second hidden SKU of Windows, with attendant testing and support costs.

  2. Bob says:

    The tenets of most MS strategies:

    1) obscure
    2) confused
    3) failed

  3. Terrific piece! I completely agree with Microsoft on this one. WMC needs to be shown the door.

  4. Bob - former DECie says:

    I’m not sure I understand the rush to internet delivered video. All you hear from AT&T, Verizon, etc. is that people who are actually using tablets as they were intended to download/view HD video are bandwidth hogs and we have caps on all data plans except for Sprint. We have major ISPs such as Time-Warner and Comcast either implementing or experimenting with download caps on their ISP packages. This all seems to be playing into the hands of the above who would love to be able to make everyone pay-per-byte for everything just like the bad old days of limited cellular minutes and per minute long distance charges from the pre-breakup Bell and AT&T.

    Since there seems to be another “Bob” posting here a lot, I’m going to give myself a pseudo-GUID by changing my name.

    • halberenson says:

      There definitely is tension in the system on this point! The mobile and wired operators share one problem and the mobile guys have a unique one of their own. The shared problem is that the current business arrangement doesn’t really cover the costs associated with the capital investment they need to make to deliver the bandwidth needed to deliver video to all the people now trying to use it. Companies like Netflix pay a trivial amount to dump their bits onto the net and absorb all the bandwidth (for example, they pay to deliver one copy of a movie to a CDN node located right next to Comcast’s connection to the Internet Backbone here in Denver and then Comcast has to absorb the cost of delivering it to the hundreds or thousands in Denver who wants it on a Saturday night). Attempts to get Netflix to pay for the actual bandwidth they use are exactly what the battle over so-called “Network Neutrality” are all about. Consumers meanwhile pay $/month for nMb/s service, however that is not a guaranteed rate and is delivered by a shared infrastructure that is provisioned to assume that customers only ask for it in short bursts and are idle most of the time. Video destroys this premise forcing huge capital investment in shared infrastructure, which the operators keep trying to figure out how to pay for. Given the regulatory and legislative protection of “network neutrality” this leaves them with raising rates to consumers or limiting access. They can raise rates either by raising them across the board or switching to charging by the byte. That’s what mobile operators are switching to. So far the wired operators are focused more on limiting access via download caps in order to slow the demand growth on their networks. Basically they are going to penalize the people trying to watch lots of HD movies so they don’t have to screw with the vast majority of people who are content to watch the occasional SD movie on Netflix. But this is just a delaying tactic, eventually the business model will have to change so someone is really covering the costs of providing all the bandwidth consumers want to consume. The mobile guys are just addressing this first, because of their unique problem. They just don’t have the spectrum to meet the demand growth caused by video. So it isn’t just a cost problem to them, it is semi-hard wall. These things will slow the switch to Internet Video somewhat, but over time the business models will adjust. Personally I do think “network neutrality” should be reduced so that large senders cover more of the cost of usage when they flood the network. Sure the cost of Netflix, Hulu, Amazon’s video service, etc. will go up. But then the price today is artificially low (compared, for example, to equivalent content from your cable or satellite provider who cover all the costs of delivering content to your door).

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