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Consoles set stage for video revolution

November 23, 2006

The latest war between video game consoles could decide the fate of two entertainment technology battles as the hardware makers fight for control of the living room.

Sony and Microsoft are going head-to-head with their high-performance consoles, setting their sights on becoming the hub of home entertainment. Meanwhile, Nintendo seeks to carve out new territory in its traditional market while providing additional online features to make its new device more accessible to the average person.

The outcome of the game console contest is just one more piece of a puzzle that has left the media sector collectively scratching its head. As increasing consumer choices continue to pry loose the once-firm grip content distributors such as cable, satellite and music-recording firms previously held on how we watch movies and TV or listen to music, the power is tipping toward the individual, analysts say.

"We're going to continue to see the breakdown of dominance and control of the traditional gatekeepers," said Van Baker, vice-president of research at technology market analysis firm Gartner, Inc.

Microsoft tested its online video download services in May, featuring video clips of a documentary about the making of the video game Gears of War.

The shift has forced traditional outlets to explore new avenues to reach an audience that has grown ever-more fragmented with each new technology that grants them a choice of how, when and where they get their entertainment, Baker told CBC News Online.

"The media industry is experimenting with alternative channels of delivery, and we're going to continue to see that expand."

TV and movie downloads

The video game console networks offer yet another option for people to find their non-gaming entertainment, Baker said.

Microsoft Corp. is the first to demonstrate the potential that the game consoles have to become a gateway for more traditional media. Starting on Nov. 22, Xbox 360 owners in the United States could use the Xbox Live network to download and buy full-length television shows, and rent feature-length movies in both standard and high-definition resolution.

The company has signed with CBS, MTV, Paramount Pictures, and Warner Bros., among others, to deliver TV shows and movies through Xbox Live.

Xbox 360 video capabilities factbox

Television series being offered for download include crime drama CSI, remastered episodes of the original Star Trek and reality TV show The Ultimate Fighter that documents athletes' training regimes for bouts of the Ultimate Fighting Championship mixed martial arts matches, which are also available. Feature length films to be available by the end of the year include Superman Returns, M:I:III, the latest instalment in the Mission: Impossible franchise, and The Matrix.

Microsoft's first public test of its network's ability to let people download video to the Xbox 360 occurred the week of May 7, when it offered through the Xbox Live Marketplace online store free, three-minute high-definition video clips of a documentary film about the making of the science fiction action game Gears of War.

On Oct. 31 the company sent a software update through Xbox Live to Xbox 360 consoles that added a range of video playback functions to the game machine. The new capabilities include the ability to stream video in Microsoft's proprietary WMV file format from a computer running Windows Media Center software; the ability to play video files from CDs, DVDs and increasing the console's video output to full high-definition resolution, known as 1080p.

Sony Computer Entertainment Inc. is not far behind with the Nov. 17 North American launch of the PS3 in conjunction with its online store to let people download movie and video game trailers and buy original games. If the games division can take advantage of Sony's movie and music arms, the conglomerate could turn its idle inventory of content into a cash cow, according to Michael Pachter, managing director of research at Wedbush Morgan Securities.

But Baker said a lack of features in Sony's PlayStation Network (PSN) as compared to the more robust Xbox Live makes the Japanese firm's network less appealing to consumers, prompting the company to let PS3 owners use it free of charge, for now.

"It's free at this time because it doesn't deliver as much value as Microsoft's does," Baker said.

That could change in the near future. Microsoft launched its network a year after entering the console wars with the original Xbox, and has had four years to develop its services, observers say, noting that Xbox Live's features were similar to what Sony is initially offering.

Internet and HDTV key

While there is a disparity between the gaming rivals' offerings, they clearly intend to capitalize on rising demand for high-definition content that is likely to grow as consumers' ability to download and view it increases.

In the span of a year that ended in March, U.S. broadband internet adoption grew 40 per cent, rising to reach 42 per cent of households, and some 72 per cent of Americans were online, a recent study by the Pew Internet and American Life Project found.

Similarly, high-definition TV sales are projected to surge over the next four years. More than a quarter of U.S. households are expected to have one by the end of the year, according to a forecast by market research firm Jupiter Research. By 2010, when gamers will likely be faced with buying the future wave of consoles, HDTV penetration is predicted to surpass 63 per cent of American homes.

But high-definition gaming has little impact on those figures, the data suggest. About 43 per cent of people Jupiter spoke with planned to buy an HDTV simply for better picture quality while watching television. And 32 per cent of respondents said they would get one because wanted to keep up with current technology.

The number of people who planned to buy a console for gaming was a mere nine per cent of respondents.

Games rule

The data appear to support Baker's belief that the consoles are not truly the all-in-one entertainment devices for high-definition content that the marketing makes them seem to be, at least for the average consumer.

"Are they going to convince the non-gamer to go out and buy these things? No," Baker said.

"What's going on with online game consoles is an effort to broaden the value proposition for the household," he said. "To the degree that you can deliver services that are not directly tied to gaming, you make it easer for the gamers to convince the household to buy a console."

That perspective appears to be central to Nintendo Co. Ltd.'s approach.

In contrast to its diversified competitors, Nintendo, the only contender whose business is exclusively gaming, is offering users of its Wii console a more utilitarian online experience. At launch, the only online downloads for the Wii are classic video games from prior models of the company's consoles and other game makers such as Sega.

The Japanese games company doesn't see itself following in the footsteps of Microsoft and Sony, a spokesman told CBC News Online.

"We have no plans for video downloads," Farjad Iravani, a marketing manager at Nintedo of Canada Ltd. said, noting that the same outlook applies to music downloads.

However, the console will give Wii users the ability to check weather and news, send e-mails back and forth and browse the web. Through the Wii Connect24 service that keeps the unit constantly linked to the internet, the company will be able to add features and bonus content to games, he said.

"The Wii is first and foremost a gaming unit," Iravani said, echoing remarks by Microsoft representatives about the Xbox 360 and Sony spokespeople about the PS3.

Internet threat

That reluctance to identify the consoles as the core of the digital home, rather than machines for gaming and more, is based purely on the bottom line, Baker suggested. Simply put, the audience for these increasingly converged machines is still primarily composed of gamers.

But with interest in online video and audio downloads expected to grow, he believes entertainment companies have little choice but to rethink their business models.

"We've entered the brave new world of media," Baker said.

Baker thinks online services such as iTunes with its pay per item content purchase model, and subscription plays such as Yahoo Music and Rhapsody, will form the foundation of a new range of content, and revenue, streams for video and other media firms that give people access to entertainment without locking them into directly paying for a distribution as with CDs.

"I think we're going to see a mix," he said. "Some people like subscription a lot but the a la carte model iTunes is delivering is the most successful one right now."

DVD formats

With the contest for high-definition online dominance farther out on the horizon, the fight that many consumers and observers are watching is the one between two high-definition DVD standards, with Microsoft and Sony backing different formats.

The rivals' fortunes will be decided by their choices in next-generation DVD drives, Michael Pachter of Wedbush Morgan Securities said. Microsoft is backing Toshiba's HD-DVD format, letting gamers purchase an external drive to add the feature to its Xbox 360, which has a conventional DVD drive built in, and Sony's latest console includes the company's Blu-ray drive.

"I think the Blu-ray plan is the right plan. A lot of people are going to buy the PS3 because of it," Pachter said, pointing out that Sony's entertainment division has a wealth of films ready to release on Blu-ray format DVDs. "Anyone who has a high-definition monitor has to consider the option value of Blu-ray.... Sony has a huge back-catalogue of movies and if you watch DVDs, you have to look at the PS3."

Baker agreed that for those considering getting a player for the high-definition DVD format, there is value in the PS3, whose high-end version costs $659.99.

"If you look at Blu-ray, the PlayStation 3 looks better because a player alone costs about $1,000," he said.

The competing HD-DVD format will only succeed if studios embrace Toshiba's approach, Pachter said. That is potentially an uphill battle because unlike a diversified electronics and entertainment conglomerate like Sony, there is no guaranteed buyer for the HD-DVD technology; anyone who adopts it will have to be sold on its advantages.

Baker disagrees. "It's a [fair] playing field between HD-DVD and Blu-ray."

Still, Baker isn't convinced that the DVD format war will be critical to deciding the console battle.

"Is it a huge factor initially? No," he said. "Most consumers, in a format war, choose to sit on the sidelines and not spend any money."

But he believes, as Pachter does, that Blu-ray will come out the winner.

Pachter predicts that although Microsoft has an early advantage by being first to release its new console and could hold 42 per cent of the market by the end of 2007, Sony, which dominated the last generation, will catch up and bypass the Xbox 360 to keep its market dominance with the PS3.

Whatever the outcome, the experts appear to agree on one thing: Digital downloads are the future and this is likely the last time physical media will play a major role in any content fight.

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