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Response to Microsoft's Xbox One Console Lights Warning Flares

Richard Cox

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NEW YORK (TheStreet) -- Microsoft's main troubles in its traditional businesses have become clear. PC sales could drop by as much as 10% this year and a lackluster response to its Windows 8 operating system has prodded the company to begin work on a new version of the product (to be released later this year).

Where the company has shown consistent strength is in its entertainment division. Its latest release, Xbox 360, managed to overcome major technical issues and offer big processing power with superior online functionality. The unit sold over 75 million units and brought more than 40 million customers to its Xbox Live online gaming service, making it one of the most acclaimed gaming consoles ever.

But Microsoft's top positioning in these sectors is starting to look vulnerable, as the recently announced XBox One has been met with general disappointment in two areas:

Xbox One users must maintain broadband internet connectivity and login at least once every 24 hours in order to play the games they have bought, and game publishers can block users from lending games or giving them away.

In addition, rentals will not be supported when the new unit is launched.

There are also privacy concerns, since large amounts of private data (videos, photos, and even things like recorded facial expressions and heart rate) are uploaded and saved on outside servers.

But what is really putting Microsoft executives on the defensive is that Sony , its chief industry rival, has said users of its PlayStation 4 console will not face the same restrictions.

At this stage, it is clear that these two companies are focused on owning the living room, with devices that are capable of supporting video chat and premium cable television, in addition to interactive gaming.

The ultimate winner in these areas will be the company that is able to guide the consumer seamlessly into an interconnected, digitally controlled marketplace.

Microsoft's latest policy changes fail to make these transitions in a way that many of its core users do not like, leaving the door open for competitors to take market share from an already vulnerable company.

To counter the negative response and the subsequent PR challenges, Microsoft execs are turning the focus to digital delivery, with the hope that consumers will adjust to a console environment that does not rely on game discs.

The problem is that Microsoft's core consumer base is unpersuaded. Additional restrictions on previously owned content and internet connectivity requirements have made it easier for Sony to gain access not only to the gaming world's undecided voters, but to loyal Xbox users as well.

Microsoft's battles are already being fought (and possibly lost) on a number of fronts, and PR difficulties in one of its strongest areas is no doubt a cause for concern at the company's strategic levels.

As Sony and Microsoft move ahead, each on its own path to owning the living room, key challenges in defining the parameters for owning content lie ahead.

Early signs suggest that Microsoft is already on the defensive, so the next question Is whether we will see policy changes in an effort to stem the rising signs of customer discontent.

At the time of publication, the author had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.