My thoughts were - say TV supplier's signal is passed through the XBone, during ad breaks does the bone overlay it's own ads? So the subscriber does not see the ads the supplier is being paid to show, and if so where does the MS stand from a legal point of view with respects to this ad blocking? If that's how it works....
Adding advertising to a subscription movie service is just fucking bonkers, who would use the service? How long did they think it would take for people to just use another streaming method?
No, you're over thinking it a bit. The X1 wouldn't overtake commercial breaks on TV, but if you wanted to pull up the Xbox guide to see what else is on during a commercial break, you can bet there would be a spot for an ad there.
Or if you searched Netflix through the Xbox UI, there could be an ad there as well.
Or if you were watching a Xbox Entertainment Studios production, the commercial breaks could be highly tailored to you based on what Kinect was gathering. You know how Hulu will sometimes ask you what ad you want to sit through, or asks if the current commercial is relevant to you? This could all be done on the back end without your input.
In my opinion, Microsoft's vision with the X1 was to make it a continuous part of your media experience, not just when you wanted to play games or watch Netflix. By adding their layer into the mix, that was a layer they could sell - and with Kinect just sucking up data left and right, they could offer advertisers very specific audiences.
Now, all of that opportunity for the Xbox One to make money is somewhat gone - Kinect is still in play, but it won't be on every Xbox going forward, and you don't know how many might just throw it in the closet now that it's definitely not necessary and developers probably won't do more than a passing inclusion of some Kinect feature going forward knowing it's a fragmented user base.
So now you have Microsoft trying to adjust the X1 as a mainly gaming box - something that it wasn't made to be. That's going to be the problem going forward - you can change the window dressing and the presentation all you want, but that thing was built from the ground up to serve a very different purpose. You're going to be fighting that going forward.