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Rumors have been swirling for months that Microsoft and Netflix were inching toward a partnership. Will it finally happen?
By Games editor
updated 2/19/2008 9:35:39 AM ET 2008-02-19T14:35:39

Will Microsoft offer Netflix movies over Xbox Live?

Bloggers and reporters have been buzzing about the possibility of a partnership for almost a year, ever since Netflix CEO Reed Hastings joined Microsoft’s board of directors last March. But there have been other hints that the two were inching toward a more formal marriage.

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The announcement, if it happens, will likely take place during the keynote address at the Game Developer’s Conference in San Francisco on Wednesday. The show, which is now 21 years old, is expected to draw over 16,000 game-makers from all over the world. People usually line up hours ahead of time for the keynote, delivered this year by Xbox Live exec John Schappert.

Microsoft has a history of making big announcements at the GDC. In 2000, Bill Gates took the stage to announce the original Xbox. And in 2005, J Allard (yes, just J) dropped major hints about the second Xbox, which would become Xbox 360.

Now it’s 2008. And Microsoft has made no secret of its desire to be a Big Entertainment Player — not just a software maker.

“(Microsoft) believes that home media is the gateway to Internet dominance, and although they would love the Media Center (product) to be the access point, they have had more success with the Xbox 360 and with Xbox Live,” says Michael Pachter, an analyst with Wedbush Morgan.

The biggest hint about a possible deal came last week, when a survey Netflix had distributed to its members started popping up on blogs. The headline of the survey read “Now you can watch movies from Netflix instantly by using your existing Xbox Live account.” And then, the question: “If, as part of your Netflix membership  you could instantly watch movies and TV episodes on your TV with your Xbox 360, how likely would you/anyone in your household be to do that?”

You don’t have to be Nancy Drew to catch this clue.

Early last year, Netflix rolled out its Watch Instantly service, which offers near-DVD-quality movies and TV shows streamed to your PC. Very cool, but who wants to watch a movie sitting at their desk?

Microsoft has been renting movies through its Xbox Live service for over a year, but its catalog is paltry: Just 300 movies compared with the 7,000 available through Netflix’s Watch Instantly service, and the company’s even larger 90,000-DVD full catalog.

Microsoft has tried to market the Xbox 360 as a family-friendly machine, but not everyone’s gotten the memo. Despite more mass-market game offerings and “Happy Feet” available for rental, the Wii is still outselling the Xbox 360 every month. In January, Nintendo moved 274,000 Wiis in January, compared with the 230,000 Xbox 360s sold in the same amount of time.

But Netflix is a household name. My parents have a Netflix membership. The company has fended off (at least so far) competitive attempts by everyone from Wal-Mart to Blockbuster. And it has 7.5 million subscribers, many of whom might be convinced to buy an Xbox 360 for the sheer convenience of true on-demand movies — and to not have to mail back those DVDs anymore.

“A partnership with Netflix gives Microsoft a partner that already streams movies to over 7 million subscribers through their PCs, and encourages these subscribers to sign up for the Xbox Live service in order to stream movies to their TVs,” says Pachter.

Microsoft has sold over 9 million Xbox 360s in the U.S., but not everyone uses Xbox Live. Some gamers (like yours truly) aren’t into playing online. And the catalog of games, movies and TV shows available for purchase and rental may not be to everyone’s liking.

For those who do have Live accounts — and Microsoft says it hit a 10 million-subscriber milestone in January, although each Xbox 360 can have multiple accounts — the inclusion of Netflix could entice those with free accounts to upgrade to the Gold membership, which costs $7.99 a month.

For Netflix, the deal would mean tapping into all those Xbox 360 owners who may or may not already be members of its service. And it strengthens the company’s arsenal as it competes with, which last year partnered with TiVo on a movie download service, and Apple, which launched Apple TV last year.

Microsoft would also love an opportunity to stick it to Apple, its longtime rival.

“This turns the Xbox 360 into something closer to Apple TV, which is very cool, and you get a game box with it, so why buy an Apple TV?” says Pachter. “You can see why they’d want to pre-empt Apple here.”

Microsoft won’t comment on the rumor. An e-mail query to Schappert netted only a “Stay tuned!” reply.

As for Netflix, they’re equally coy.

“Netflix intends to be in a lot of boxes that get into the TV, whether its game systems or set-top boxes or next-gen DVD players,” says company spokesman Steve Swasey. “We want to be in a 100 devices to get the Internet to the TV.”

Perhaps the Xbox 360 will be one of them. Stay tuned, indeed.

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