I just recently rewired my network in my family’s living room. As a result, our Xbox 360 is now permanently connected to the Internet. After booting up the unit, I started playing with a few of the new features introduced by Microsoft. Amongst the updates, I was pleasantly surprised to see that movies and TV episodes can be purchased for viewing on the Xbox 360. Microsoft is moving in the right direction and I believe they could storm the market if they approach the average user in the right way.

Before we dig into my point of view, I’d like to discuss how Internet and media inter-mesh on the Xbox 360. Via the Marketplace, I can browse through different TV shows and movies. I select and purchase the videos I want, which are then downloaded to the Xbox 360. The size of the download can vary depending on the running time and quality of the video. An episode of Smallville will be much smaller than the HD version of Superman Returns. The larger the download, the longer it will take to transfer the video to your console. Because the video needs to be stored on your Xbox 360, you’ll need to have a large enough Memory Stick or Hard Drive.

Right now, the Marketplace only has a few hundred TV episodes and movies. I predict that Microsoft is going to make an even bigger push in the very near future. A good example is the impending release of the Xbox 360 Elite. This model will come with a black cover and an HDMI output. On top of that, it will come bundled with a whopping 120 gigabyte hard drive. This is a huge improvement over the 20 gigabytes available currently… and the most telling sign of the direction Microsoft is moving. Game profile information is very small. In most cases, a memory stick is sufficient. But when you start downloading content, that’s where 20 gigs may feel a little cramped.

The one drawback to Microsoft’s game plan is how they monetize the system. In order to purchase games and TV shows and movies, you need to by Microsoft’s monopoly money. You get about 80 points per dollar which can be purchased in 500 point increments. The basic design of the system is so that Microsoft always wins. It’s very difficult to end up with a zero balance on your account. I really enjoy the fact that I can download TV episodes and movies. However, I think that the price for TV shows and older movies is a bit high. While Microsoft will benefit from it’s current revenue model, it would do better to incorporate two other data models as well.

The first revenue model has been in place for decades. Commercials. To be honest, I have no problem with commercials on TV. I accept it as a part of life. This could be incorporated into the downloadable TV shows. Of course, Microsoft would need to make it possible to disable the fast forward button during commercials. That’s a given. (Imagine how much money Microsoft could make if there was a bar on the bottom of the commercial saying you could skip the commercial set for only 20 credits. They’d rake it in!) In fact, offer both commercial and commercial free versions. Let the user decide if they want to dish out money for an uninterrupted episode of Grey’s Anatomy.

The second revenue model has only recently become a mainstream money maker. Subscriptions. A key example would be my Netflix subscription. I pay a monthly fee and Netflix mails me the movies I’ve preselected and put into my movie queue. I get a new DVD each time they receive one that I’ve mailed back. Microsoft could easily incorporate this. They could in essence download movies (much quicker then sending them by mail) from a movie queue. After you delete a previewed move from your hard drive, they let you download another. However, I would point out that many DVD enthusiasts purchase the DVD because they have access to the extras. Either include the extras or make the subscription price and terms more appealing.

There are two key factors to taking over the market. Overall, it’s determined by the company/person to get to the market first and then second, be so easy and affordable to use, that it attracts the largest portion of the market to become the standard. (TiVo anyone?) If Microsoft can use these features to attract more followers to the Xbox crowd, they’ll make money hand over fist.