Microsoft Kicking Apple's Butt In The Living Room

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There are many things about Apple (AAPL) that Microsoft is jealous about. But Apple’s home entertainment business is not one of them.

Microsoft’s (MSFT) Xbox 360 and its Windows Media centre software are quickly looking better than anything Apple offers. One reason is that the company is opening up to new ideas for content, even those that are considered competition.

For example, today Microsoft announced that it’s going to build Netflix (NFLX) streaming support into Windows Media centre, a media dashboard built into most copies of Windows Vista. Netflix has also been in the Xbox 360 for months, and has attracted more than 1 million streaming subscribers to the console.

Netflix sort of competes with Microsoft’s Xbox Live version of iTunes, where it sells TV shows and movies. But who cares? Microsoft’s business is to sell Xbox 360s and Windows licenses, not make a few dollars off a movie rental.

Netflix support makes the Xbox 360 a more attractive movie machine than Apple’s sad Apple TV — currently ranked nos. 636 and 653 on Amazon’s best-selling electronics list. And it makes Windows Media centre more attractive than Apple’s “Front Row” media centre software. So that’s good for Microsoft (and Netflix) and bad for Apple.

What can Apple do? We’ve heard secondhand (a few months ago) that Steve Jobs won’t invest more in Apple TV hardware until its software is improved. That explains why Apple hasn’t done much with Apple TV hardware since early 2008. But it doesn’t explain why the company hasn’t done much with the software since then.

We’ve long hoped that the company might open up Apple TV and Front Row to other entertainment companies or developers, potentially including Netflix, video aggregators, MLB.TV, etc. Apple has as good a chance as anyone — Roku, Samsung, LG, Comcast, etc. — to be the company that connects your TV to the Internet. But so far it’s taken a back seat, limiting itself by staying exclusive with iTunes and YouTube as the video sources for Apple TV.

That’s what you expect from Apple — self-isolation, even to its own detriment. But it’s silly. While iTunes is a nice revenue generator for Apple, it is basically a breakeven business. Apple’s real, profitable business is to sell more Apple TVs, Macs, iPods, etc. Opening Apple TV would be a helpful step.

Apple admits its home entertainment business is a “hobby.” But right now, maybe “joke” is a better word.

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