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Microsoft Corp. (MSFT - Analyst Report) recently acquired a home and entertainment technology startup, id8 Group R2 Studios Inc. for an undisclosed sum. The acquisition is an attempt by Microsoft to expand its presence in the home by combining entertainment with other functions.

Silicon Valley entrepreneur, Blake Krikorian started R2 Studios Inc. in 2011. It recently launched an application for controlling heating and lighting systems in the home from smartphones powered by Google’s Android OS. Through this acquisition, Microsoft also acquired some patents related to controlling electronic devices.

Other tech giants such as Google and Apple (AAPL - Analyst Report) were also looking to acquire this startup company. The interest shown by key industry players indicates increasing focus on home electronics with a view to create multi-functional hubs.

Microsoft, for the past few years, has been trying to evolve its Xbox 360 units into something more than just a gaming console. As a part of this initiative, it is now offering digital downloads and live TV apart from games. Thus, the acquisition makes sense for Microsoft as it can leverage its position in the home entertainment segment to expand into other areas through the acquired patents.

Technology companies have been eyeing the digital home entertainment market for some time now, not only because of the good growth prospects but also because of several new technologies (including the cloud) that makes this simpler. The introduction of high-definition (HD) technology has increased the popularity of interactive games and video on demand is making this segment more attractive to consumers. However, home entertainment units like audio equipment and video game consoles are being cannibalized by tablets and smartphones. Therefore, it makes sense for companies in the segment to offer combined technologies to market share and also offer growth opportunity.

Whether Microsoft can put the patents to good use to edge past other tech giants in the attractive home entertainment market remains a wait-and-see story.

Microsoft reported revenue, excluding deferrals, of $16.01 billion in the first quarter of fiscal 2013, down 11.4% sequentially and 7.9% from the year-ago period. Revenues also missed the consensus by 2.5%.

Microsoft, Apple and Google have a Zacks #3 Rank (Hold).

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