Is Microsoft Corp. (Nasdaq: MSFT)'s Xbox 360 on a path to replace the consumer set-top?

According to Microsoft, that's not really the intent. But it is clear that giving the Xbox more to do in the livingroom will give set-top makers more to worry about in the coming months.

At CES, Microsoft announced its Xbox 360 will soon be available to act as an IPTV set-top box in Microsoft-powered IPTV networks. Carriers will be shipping those special Xboxes to subscribers before the end of 2007, Microsoft says. (See Microsoft, Verizon Aren't Playing Games.)

With its software running the IPTV network, personal computers, handhelds, and now having Xbox as an option as a set-top replacement, the notion of "end-to-end" video solution is taking shape.

Should set-top vendors be worried? Well, they're not fretting just yet.

Scientific Atlanta 's director of video products for IP subscriber networks, David Alsobrook, says the set-top box market is a big one, and even if some households use the Xbox as their "master" set-top box in the living room, they'll still need more for the other TVs in the house.

"One thing about set-top boxes like ours is that they have a much bigger hard drive," Alsobrook says. Alsobrook points out that SA set-top boxes, unlike the Xbox, were purpose-built to act as the master set-top box in the living room.

Timing will also be an issue, Alsobrook says. "You've got this confluence of events that has to happen in order to sell IPTV Xboxes." For one thing, he reckons the overlap of people wanting to add IPTV at the same time they want a new gaming console is probably pretty small.

AT&T's other set-top box provider, Motorola Inc. (NYSE: MOT), declined comment on the implications of the IPTV Xbox.

Paul Brunato, spokesman for CPE maker 2Wire Inc. , says Microsoft's jump into the IPTV set-top box business only underscores the diminishing appeal of the set-top box business.

"There are all these different types of set-top box manufacturers now; we are kind of moving away from the set-top box market because the set-top box in itself is becoming commoditized," Brunato says.

2Wire's only set-top box, the MediaPortal, is a hybrid broadband/satellite TV device used in AT&T's Homezone service. (See Homezone Debuts in OH, TX.)

Microsoft's IPTV-enabled Xboxes will be just another end-point in the home, one that will be sold through service providers by the end of 2007, according to Microsoft TV spokesman Jim Brady. (See Telcos Should Watch Apple's iTV .)

Brady says the way the IPTV-enabled Xbox reaches the market will depend greatly on the service providers offering the IPTV service. The preferred model might be one where service providers distribute the IPTV Xbox, and maybe even subsidize it, much like they already do with set-top boxes. (See Microsoft to Sell VOD on XBox.)

SA's Alsobrook says the cost will be a key consideration for carriers. "So if you are AT&T, do you subsidize a regular set-top box, or do you subsidize an Xbox 360, which will cost a lot more? Since the operator subsidizes the CPE there's a financial issue there."

Microsoft has announced five carriers in commercial deployment with its Microsoft TV IPTV Edition middleware, which would be required for the IPTV-enabled Xbox to work. They include AT&T Inc. (NYSE: T), BT Group plc (NYSE: BT; London: BTA), Club Internet (French subsidiary of T-Online International AG ), Deutsche Telekom AG (NYSE: DT), and Swisscom AG (NYSE: SCM).

— Mark Sullivan, Reporter, Light Reading