Tom Warren reporting for The Verge:

Microsoft is building an Xbox set-top box. Multiple sources familiar with Redmond’s plans have confirmed to The Verge that the company plans to introduce a low-cost alternative to its Xbox console, designed to provide access to core entertainment services.

In other words, Microsoft is building an Apple TV competitor. I have to wonder, though, how well will it sell if Apple decides to ship an App Store for the Apple TV days after Microsoft announces their competitor?

Early last week Bloomberg published rumors that Microsoft would no longer be releasing new versions of the Zune. Later that day Dave McLauchlan, senior business development manager for Zune, addressed the rumors on the Anything But iPod forums.

From his forum post:

ALL consumer electronics products have a lifespan, and the Zune HD is 18mo old. We were completely frank about this year’s Zune hardware being the WP7 phones, and we continue to both sell and fully support the Zune HD line of products. And as I’ve promised – we continue to bring new apps and games to the platform. More of those are in the works, I promise you.

Reading between the lines of the above paragraph leads me to believe that Microsoft will continue to sell the Zune HD, but they don’t have any plans for a new device running the same OS. This, of course, is a good thing. Microsoft shouldn’t release any new devices running the same operating system as the current Zune. At least in their current form.

It wouldn’t be a bad idea to release a new Zune media player that would compete with either the iPod nano or iPod shuffle. But, that’s not something they should be focusing their time on. Instead, Microsoft should be designing a new Zune media player that runs Windows Phone 7 and is the first true competitor to the iPod touch.

Apple has owned the media player market for years and is continuing to do so. But, it amazes me that even with all of the activity in the mobile operating system market there still isn’t a single competitor to the iPod touch. Samsung has announced the Galaxy Player, but haven’t announced a price point or release date for the US. Kevin Tofel suggests in a recent article on Gigaom that the Samsung Galaxy Player is expected to be released later this spring. But, why isn’t their an announcement? Certainly they’re not opposed to announcing a timeframe for the device’s release. They could have said that the device would be released in the spring in their press release, but they didn’t. And, It’s baffling to me that the device doesn’t have a price point yet. The device is already on sale in the UK. Quite odd if you ask me.

And, then there’s webOS. The only other real competitor in the mobile operating system market. HP doesn’t have an iPod touch-like device and doesn’t seem to have any plans to release one. But, I think webOS is still in a better position than Microsoft is. At least they have a tablet in the works with a general release date.

Microsoft on the other hand, has a mobile operating system that is only running on smartphones. Zero tablets, zero media players, just cell phones. Which is a great start, but Microsoft is already years behind the competition. Microsoft has the opportunity to tackle the mobile OS market in a way that none of Apple’s other competitors have tried — following Apple’s actual path. Apple didn’t leap straight from the iPhone to the iPad. So, why does HP and every Android handset maker think that they can make that jump? The only explanation I can come up with is that they don’t think they can compete with the iPod touch, which might be true, but why would they think they could beat the iPad instead?

The iPod and the iPad are essentially the same product from a device maker’s standpoint. This is because of how they are sold. No one walks into a Best Buy because they’re eligible for a new tablet. But, they do walk into an AT&T store because they’re eligible for a new handset. And, most customers don’t make the decision on which cell phone to purchase until they walk in the door. People buy the iPad for no other reason than they want the iPad.

But, the iPad is successful because it was built on top of an ecosystem that was already established. And, a great deal of that establishment was because of the iPod touch. In September of last year Horace Dediu estimated that the iPod touch made up 37.7% of all iOS devices sold. The iPod touch brought another generation to this market that would have never been able to spend $200 on a cell phone with the additional cost of a monthly data plan. But, the iPad’s higher cost means it’s a harder sell than an iPod touch would be. And, Apple seems to have the edge when it comes to convincing customers to buy.

I believe Microsoft’s next move should be a Windows Phone 7 device without the cell phone functionality. That was Apple’s second step and it should be Microsoft’s too. It should be released in August, so that the media has a month to talk about it before Apple announces their iPod lineup going into the holiday season. And, the release of this Zune device should also mark the beginning of development on a Windows Phone 7 variant built specifically for 10-inch tablets.

It seems so obvious to me. But, I’m terribly worried that Microsoft is going to make the same mistakes that every Android manufacturer is making by skipping the crucial next step. The iPod touch accounts for a large portion of iOS market share, and that’s something that can’t be ignored. Microsoft is behind, really far behind, but building an iPod touch competitor would help them get up to speed very quickly. Especially if they leveraged the Xbox 360 and Xbox Live to market the device.

Microsoft could market the new Zune with Windows Phone 7 as a brand new handheld gaming console with tons of Xbox Live integration. This would convince a lot of developers to start building games for the Zune. Games that would also run on Windows Phone 7 handsets and many of those developers might stick around to build other applications as well. A move like this would only strengthen the platform and would help Microsoft build-up to a tablet OS release (hopefully) next year.

It’ll be a lot of work and it’ll cost Microsoft a lot of money. But, if they want to stay relevant in the mobile OS market, they don’t have a choice.

I’ve been off cable for almost 5 years now. All of the television content I watch comes from Netflix, iTunes, and an over-the-air antenna. I watch discs from Netflix with an old non-up-conversion DVD player and Netflix’s streaming content with my Nintendo Wii. I watch iTunes content with my first-generation Apple TV and record over-the-air television using one of Elgato’s TV tuners and export shows to iTunes where it then syncs to the Apple TV for playback.

My television setup is a little more complicated than I’d like it to be and is extremely difficult to explain to the occasional house guest. Because of this, I’ve been considering a simple cable package. When bundled with my Internet connection it would only cost me an additional $20 per month. I could still record all of my shows with the Elgato tuner and watch them on my Apple TV as I always have, just with a wider range of channels to record from. I’d also get the added benefit of being able to hand the remote to my girlfriend’s parents, point out 4 buttons to them, and be able to walk away without worry of additional questions.

I’d have the ability to watch shows like Top Chef, Mad Men, and Breaking Bad without waiting for the DVD release or paying $2-3 per episode in iTunes. And, that’s not mentioning the few television shows that I would like to watch but aren’t even available anywhere other than cable television.

But, I deal with these frustrations because I hope that all of my friends and family members would be willing to learn how to use my television setup. I like it. I’ve been using it for nearly three years and have enjoyed the freedom of having nearly all of my television content available through the Apple TV’s beautiful interface whenever I want to watch a show. And, It’s not really as difficult to use as it seems, especially if you ignore the DVD player and Wii.

But, my primary reason for skipping cable service is that I don’t want to give any more money to Time Warner Cable. A company that treats their customers like jerks and couldn’t care less about it. A company that charged my father $5 a month for 5 years for a cable box that he didn’t even have, and only offered him a $100 credit after he called them to complain about the charge. I’d get my Internet access from anyone else if there was a viable alternative. But, I’d rather pay a terrible company $50 a month than deal with 1Mb/s download speeds.

And then there’s the possibility of a cable-like internet television service. Like the Apple offering that was rumored late last year. Or the more recent rumor from Reuters that Microsoft is considering such a service.

Yinka Adegoke:

The software powerhouse has held talks with TV networks to create a new subscription-based TV service on its Xbox gaming console that would rival efforts by Google Inc, Apple Inc and Netflix Inc, sources told Reuters.

Hopefully someone like Microsoft offers a subscription service that can give me all the shows that I want, for a low price, with an interface that my friends and family will be able to understand. I was sort of expecting Apple to announce an option with the release of the Apple TV, but that wasn’t the case. Now, my hope is that there will be more substantial rumors regarding Microsoft’s offering before I bite the bullet and start paying for cable. Because, I’ll admit it, I like telling people how long I’ve gone without cable and I’d certainly rather give my money to Microsoft than Time Warner.

Engadget has published a great preview of the Xbox Live experience on Windows Phone 7. Microsoft is making the right move by putting their Xbox Live brand on Windows Phone 7. This is exactly the sort of thing Microsoft needs to be doing.

Franchises like Castlevania, Halo: Waypoint, Star Wars, Crackdown, and Guitar Hero will be included in the 60 or so titles available at launch.

Joshua Toposlky sums up his opinions nicely:

All in all, it’s a promising picture for Microsoft. The company has the clout, the community, and most importantly the cash to pull this off, but as with all modern smartphone platforms, success can’t be judged on one aspect alone. To make Windows Phone 7 really work, the folks in Redmond will have to hit the right note on not just gaming, but the basic user experience, hardware, applications, and carrier partnerships. Based on what we’ve seen of Xbox Live on these devices, we think the company can check at least one of those boxes off.

Xbox Live on Windows Phone 7 will in no way sway me towards the platform. But, I can completely understand why someone who lives in that world would want to continue living in it. If you spend a lot of time playing games on your Xbox 360 you’ll want to start paying attention to Windows Phone 7.