11:15 AM -- Microsoft Corp. (Nasdaq: MSFT) announced a number of enhancements to its entertainment gateway box, Xbox 360. Notice I didn’t call it a gaming console. New features include:

These developments are in addition to their existing video capabilities, including a Netflix partnership that yielded 1.5 billion minutes of video downloads in its first three months. On paper, it adds up to a compelling video experience. Microsoft says it now has 20 million Xbox Live subscriptions, creating the world’s largest "living room social network." That’s a decent base to do interesting things with. Microsoft says 8 Mbit/s is the minimum broadband connection needed to take advantage of these new video centric services.

One could argue that Xbox 360 is a legitimate substitute for a subscription to multichannel video. That may ring true for some, but for most, it’s probably more of a complement, at least for now. When and if Xbox 360 and applications like it become a legitimate replacement threat to the subscription video model, telco TV providers should be ready. Being flexible will be key.

Perhaps Xbox 360 users won’t need/want a full blown 200 channel+ line up with all the bells and whistles that are prevalent today. Maybe a "lite" video subscription package (including live sports), combined with a robust broadband offering, will be just what the doctor ordered. Whatever the case, finding ways to engage this audience with the right mix of service offerings, rather than ignoring or trying to subvert them, is the proper course of action.

— Bernardin Arnason, Managing Partner, Pivot Group , and Chairman, TelcoTV 2008