Xbox Live: How an Old Tech Company Built a Social Media Juggernaut

This week much of the country has been transfixed by the NBA playoffs, in which two 36-year-old superstars — Tim Duncan of the San Antonio Spurs and Kevin Garnett of the Boston Celtics — have been playing as if they found a time machine. Their success is a reminder that the conventional wisdom that basketball is a game for young people doesn't always apply.

The same phenomenon has been quietly playing out in the world of social media. Amid the flood of social media IPOs during the last 12 months, another "old guard" tech company has quietly built one of the most dominant, fiercely loyal and profitable social media businesses to date. You might have heard of it: The company is called Microsoft, and the social media business is called Xbox Live. Xbox Live is easy to miss. It's a $2 billion revenue business embedded within the $9 billion revenue entertainment/devices business of the $73 billion revenue of Microsoft overall. If Xbox Live was a standalone business, its 40 million members would be dwarfed by user base of Linkedin, Twitter, Zynga and Facebook. But while Xbox Live's membership is less than 20% of the size of Zynga (a comparable gaming company), it likely has nearly double the gross profit that Zynga generates. Not bad for the old guy.

I discovered Xbox Live first via my brother-in-law Joel, a technology executive and gaming enthusiast from Seattle, and my junior high buddies, Emmett and Reid, from Hawaii. I hadn't played video games in years, but Xbox Live was a game changer. We were able to play each other and talk to one another despite living thousands of miles apart. It was a way to compete with one another as we caught up. We could also compete as a team against others, much like playing pick up sports at the park or having poker night. I positioned it to my wife (who was less than enthusiastic) as a way of keeping up with my friends from home. This worked at first, although the jig was up when she would ask how Emmett's family was doing and I'd respond with, "Um...I forgot to ask, but his sniper skills are just fine."

What I love about the Xbox Live story is that it proves that you can teach an old dog new tricks. More specifically, it shows that big, established incumbents can drive category creation. Fair or not, Microsoft has long had a reputation for being a fast follower. They deserve credit for not only successfully competing in the brutal gaming arena with breakthrough product innovations Xbox 360 and Kinect, but also by breakthrough business model innovation via Xbox Live. Xbox Live not only provides big margins, it is an incredible defensive moat when the next-generation product platforms come out. It also provides new, stable profit pools beyond the volatile game/consumable business to tap into, such as home entertainment (e.g., by offering Netflix, HBO Go) or even as a direct retail channel for downloadable games or content. Since it provides ongoing subscription revenue, Xbox Live gives Microsoft significant mixed business model opportunities.

My hope is that more established, incumbent companies find the Xbox Live story inspirational and see category creation is a viable growth strategy for them as well. It only makes sense that the companies with the most resources and capabilities are in as good position as any to create new categories. And they may find that as they pursue category creation, they find the fountain of youth along the way.