Now, don’t get me wrong– I admire the Mac, Apple & Steve Jobs as much as anyone.  Jobs is one of those rare execs, like Andy Grove, who transcends silos and disciplines.  But, I predicted that Apple TV would be a bust, and I was right.  It was a closed-system, too expensive, and the functionality just wasn’t compelling enough to warrant widespread adoption.  Plus you had to use iTunes to gather your content.

Fast forward two years to today–earlier this week, actually.  At the Electronic Entertainment Expo or ‘E3′ for short (I wasn’t there this year, though I went in the late 1990s, to the LA shows, when they still had beautiful spokesmodels, and tech company employees making fools of themselves because of the spokesmodels and people handing out free pens, foam dolls and logo-ed frisbees), Microsoft announced a deal with Netflix (I’ve been a happy member since 2001) to offer movies on demand via the Xbox 360.  Now this is a natural fit.  Why? I’ll tell you:

1. Netflix is offering many instantly viewable movies anyway, with or without Microsoft. You can watch a streaming film on your laptop any time if the movie is available for instant viewing–not all are.

2. Microsoft has an IP-enabled, high-definition media-center PC, better known to the world as ‘Xbox 360′ which can easily receive an IP-based high-definition video stream over a network connection (wired or wireless, though MS stupidly charges $70-90 for a wireless dongle–here’s an idea, Microsoft–if you want people to pay for Xbox Live, why don’t you give away the Wi-Fi dongle at cost?).  This box already sits (most likely) in your entertainment center, and is hooked up to a large-screen HD display.

3. Netflix has about 5M subscribers and there are at least 10M Xbox 360 owners in the U.S.  I don’t know the overlap between Netflix subscriptions and Xbox 360 ownership, but I’m willing to bet that at least 500K to 750K have both, if not more.

So, you have a marriage of an appliance that is already in your living room waiting for content to display with a source of content, and the only thing that is needed for the two to work together is for MS to agree to feature Netflix on its system–which happened this week.

What, you say is the downside–because, of course, with MS there always is one (and I say that as a shareholder for well over a decade)?  The downside is that, in addition to being a Netflix subscriber (I am) and an Xbox 360 owner (I am), you have to be an Xbox Live gold member (I am not).  Why am I not an Xbox Live Gold member, you might ask (you would have to be pretty bored to wonder about this, granted)?  Because I don’t need to pay to play games with strangers.

Now I can understand why MS wants people to be Xbox Live Gold members, since it’s the only way the company can profit from featuring Netflix on Xbox.  However, I am unlikely to pay more to save Netflix shipping costs–so, while I still think that this partnership is going to succeed where Apple TV failed, there is still more money involved in making the service work than I have a taste for.

The key is though that I think Microsoft will finally succeed where other more pure–play video-over-IP companies have failed.  Essentially, Microsoft is and will be offering a very capable box that can play back any video content, plus serve up webpages, plus play back state-of-the-art games.  I used to work as a VC, and supported the digital set top box group at Intel.  The head of engineering, a guy named Mike Richmond had a great saying–"interactive television is the future and always will be".  I thought for a long time that he was right, but now believe that Microsoft, Sony and possibly Nintendo will succeed where John Malone, Jim Clarke, Rupert Murdoch, and others failed: trojan-horsing IP TV via the game console. 

What if Microsoft were to make a deal with LiveNation and show simulcasts of concerts in real-time or for later playback and charge $20-25 per Xbox 360 per show?  Could be interesting, and it’s something that Steve Jobs can’t really compete with.