UpdateThe $99 Xbox is not a rumor anymore — it is right here.
When rumors of the Apple Television — an actual giant screen produced by Apple, not a black box that fits in the palm of your hand — and Google circling back around the TV again boiled over a couple months ago and mainstream reporters asked me about it, something funny happened basically every time: They asked how Microsoft could possibly catch up to Apple in the living room, since Apple's now sold a few millions of those Netflix and iTunes-streaming little black squircles. It's funny because Microsoft has something like 66 million Xbox 360s sitting in living rooms around the world, and they're streaming Netflix, Comcast, Verizon, ESPN3, HBO Go and a whole lot of other video, just like an Apple TV, but with even more stuff.
The Xbox 360 has been the best-selling console in the US for the last 15 months. And now the Verge reports that Microsoft is gearing up to sell the Xbox 360 (with a Kinect!) for $99 with a two-year, $15-a-month subscription (bringing the total to $460 over two years). It's obviously designed to more directly position the currently $299 Xbox 360 + Kinect bundle against Apple TV and Roku and whatever-other-box, moving it into the same pricing realm, the same plane of thought: "They're $99? So is the Xbox + Kinect, and it plays real games, and you can talk to it too." It's kind of like a 99-cent Big Mac (except better tasting?): The point is to get you into the store, where you'll spend money on a bunch on fries (movies), soft drinks (music) and Happy Meals (games) .
The new plan introduces subsidized cellphone-style pricing to a gaming console / media box — Microsoft fronts part of the hardware cost, and buyers make it up with subscription fees. The two-year contract with an early-termination fee mirrors a cellphone contract (or the late '90s and early 2000s of PC buying, where signing up for an ISP could knock some bucks off your PC's purchase price). Which seems weird, but consider that a lot of what Microsoft does is already effectively a kind of subscription service — businesses buy new versions of Windows and Office every few years — and subscriptions are more and more prevalent in consumer tech in general, as everything moves to services and platforms: You pay $10 a month for Spotify instead of a dollar per song or $8 for Netflix instead of $2 per TV show. Even Adobe's moving to subscriptions for the next version of its Creative Suite. The net effect is that you're locked in until you cancel; then you lose everything. So you'll probably stick around.
The subscription fee reportedly includes Xbox Live Gold, since that's the whole point of seeding the Xbox into as many homes as possible — getting people hooked on the service (which current users spend 84 hours a month using), not simply selling boxes that sit around collecting dust, rather than more of your money.
Microsoft's big announcement next month at E3, gaming's most important trade show, is reportedly its new music service codenamed "Woodstock." The thing about Woodstock is that it's going to be cross-platform, unlike Zune, so it'll be for Windows, iOS, Android and Xbox (and it'll work through browser for the Mac too). This is a big deal. One of Microsoft's major problems has been friction — it's been real easy to ditch Microsoft products and services, but always hard to come back, often because Microsoft stuff wouldn't play nice with the other stuff you picked up along the way, like that iPod touch. But the world is different now: It doesn't run exclusively on Microsoft products.
It's hard to understate how critical it is that with Woodstock, having an iPhone or Android phone doesn't preclude you from buying an Xbox for your living room because your Microsoft music service won't work on all your devices. Otherwise, you can start to see how everybody with one of those many millions of iOS devices just buys an Apple TV when they need a streaming box for their television, because they know it'll work with their phone (AirPlay is really cool), and eventually Microsoft isn't dominating the living room quite as straightforwardly as it is now. Plus there's that whole halo effect: If you like your $99 Xbox and Woodstock and Windows 8, hey, maybe you'll decide to stick around in Microsoft's playground and buy a Windows Phone, too. Or not, but a Microsoft exec can dream.