Game on: the battle for your living room

The world's games console makers are in a frantic race to provide all your home entertainment

Remember the days when football fans had to ring up BSkyB, sign up for a satellite-TV subscription and then wait for a man in a van to come round to install a dish, before they could settle down to watch a Premiership match? Oh, the pace of life was so slow back then, a whole year ago.

These days, if you've already got a Microsoft Xbox under the television, you can get Sky's sports channels through the games console. If you've got a Sony PlayStation3, you can use it to get programmes via the BBC's iPlayer, rather than having to watch them on your laptop. Nintendo Wii users were told last week that they are going to be able to start streaming full-length movies over their console, thanks to a deal with Netflix.

It's been a while coming, but this generation of internet-enabled games consoles look like fulfilling their promise of becoming far more than a purveyor of shoot-em-ups to teenage boys. They are staking a claim to be a home entertainment hub – and just in time, because they face a formidable challenge from the home computer.

It is a ferment of experimentation that is changing the way we consume entertainment, and shifting the business models of entire industries in unpredictable ways. In the high-stakes battle between Sony, Nintendo and Microsoft, there is a winner emerging: the media content maker.

Disney-owned sports channel ESPN, which dominates sports broadcasting in the US, is in talks with Microsoft about signing up to a similar distribution deal as Sky has with the Xbox 360 in the UK, it emerged yesterday. That would bring live sporting events to Xbox users without them having to sign up to a premium cable-TV package that includes ESPN, and the monthly fee from Xbox Live subscribers would give Disney a new income stream from distributing ESPN that doesn't rely solely on negotiations with the tough-talking cable firms.

"Deals like these have been proliferating, with social networking and catch-up television also being added to these consoles" said Ed Barton, gaming sector analyst at Screen Digest. "It has always been a strategic imperative of the manufacturers to persuade people that this is not just a games console to be put in teenagers' bedrooms but a box that can go front and centre by the TV in the living room. Executives spend a lot of time thinking of incentives to get users to plug their consoles into a broadband connection – interactive gaming was just a Trojan horse for something much bigger."

It was Microsoft which kicked off the revolution with the launch, back in 2001, of the Xbox, the first console to come with a broadband internet connection, and the roll-out of Xbox Live the following year. Via Xbox Live, users could play online with others around the world and download games direct to the console. Now the service is chock full of games, movies, television and social networking opportunities and Sony and Nintendo have followed suit, with the PlayStation Network and Virtual Console, respectively. The product proposition now is not just a plastic box. Each manufacturer has had to develop an e-commerce platform and an online store, and then to fill that store with content.

Mass is critical. The reason these content deals have proliferated over the past year is that content providers have begun to sit up and take notice after what was a relatively disappointing start to new-generation sales.

Now, though, each of the three main consoles has dozens of millions of users across the world, with the total for the PS3, the Wii and the Xbox 360 having passed 100 million this year. In part thanks to a stripped-down, cheaper version of the PS3, the total installed base grew by 23 per cent in just the first nine months of last year and the figures have continued to climb thanks to Christmas sales.

Whereas, until recently, it was too fiddly to negotiate dozens of country-by-country content deals to stack the shelves of these virtual stores with local television shows and sporting matches, the dynamics have changed.

And if content deals are getting easier, it is just in time, because there is more competition for media content than ever. Roger Kay, founder of consulting firm Endpoint Technologies Associates, says the report that Xbox is reaching out to ESPN is hardly a surprise. "A revenue strategy based on sports content is fairly reliable. People who like sport like it a lot, and they are willing to pay for it. But people do have to go out and buy a games platform. Consoles have made some progress, but I think they are being challenged in general by the PC, both with PC-based games and in entertainment."

At the Consumer Electronics Show in Las Vegas this year, once again, exhibitors were previewing a slew of new ways to hook up your personal computer to the living-room television. Start-up companies such as Boxee have invented new interfaces that can easily pull video stored on laptops for viewing on the big screen, as Apple has tried with its Apple TV. It has also become easier to hook up computers directly to the latest televisions, some of which have internet connections of their own.

Screen Digest's Mr Barton says games consoles have a good shot at being the entertainment hub of the home, even in the face of this competition. They are already displacing one bit of hardware from the living room, and are gunning for another.

"The PS3 is one of the best Blu-Ray players on the market," he said. "This generation of console hardware is removing the DVD player that people characteristically had under the television. But the really big one would be the set-top box that you typically get from your pay-TV provider. There is little in a set-top box that a games console technically couldn't do. For now the two are sitting side by side, but to believe that pay-TV remains essential you have to assume it retains a monopoly of content for its set-top box. It is a monopoly that is now being eroded."

That is why the Wii-Netflix deal last week and the rumoured Xbox-ESPN deal speak to something very big indeed: not just the battle for content between these consoles, but the much wider War For Content between television, consoles and PC-based services.

On the PC-based internet, programme makers are experimenting with online distribution of their shows. Apple's iTunes store has long sold television and movie downloads and is rumoured to be considering streaming some content. YouTube, too, is looking to stream major studio movies, and reports yesterday suggest it may already have a deal to screen live cricket from the India Premier League next year. On top of all this, the major networks in the US have teamed up to create Hulu, an online centre akin to the BBC's iPlayer, where visitors can catch up on just-aired shows. Hulu is examining starting to charge a fee to users, to add to the revenue it already gets from advertising aired in the shows.

At the turn of the year, there was an almighty fight in the US between Fox, the Rupert Murdoch-owned broadcaster which makes The Simpsons and American Idol, and Time Warner Cable, the north-eastern pay-TV firm. Fox was demanding a sharp increase in the fees that TWC pays to carry Fox channels; TWC resisted, sparking an unseemly fight for public sympathy, complete with vicious advertising on TV and the internet. The compromise, though not made public in detail, kept Fox channels on TWC but at a much higher cost. It was in line with other agreements: cable firms across the US have got used to paying to carry the major networks, which once were free.

The satellite decoder and the cable box no longer have a monopoly on entertainment in the home. And that is changing the balance of power.

Network overload: Who pays to spin web?

That broadband internet has revolutionised the way entertainment content is distributed is not in doubt. But regulators are nervous that consumers might find themselves worse off, not better.

The Federal Communications Commission, the US media watchdog, yesterday held a public seminar to find out just what users know about who owns what parts of the internet experience – from the provision of services to the content that is being provided – as it builds its case for new "net neutrality" laws that would enshrine equal access to the wires for all different types of content.

Campaigners for net neutrality say a future Google would be strangled at birth if internet service providers – often the same companies that offer cable television – are allowed to give preferential treatment to their own content, or to media companies that pay high fees. Comcast in the US and BT in the UK have each got into trouble for throttling the connections of heavy users in the face of capacity constraints. On the other side of the argument, the internet providers say they will never be able to afford to add new capacity unless they can charge some media companies fees.

In 2010, net neutrality is a new battleground in the shifting balance of power between the owners of content and the firms they rely on to distribute that content.

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