The TV Game(Rated M for Mature:May Contain Big Industry Battles) | @GeorgeWinslow

CORRECTED Nov. 11 at 8:27 a.m.

This holiday season, the biggest contest in the gaming world will be the
no-holds-barred marketing battle between Microsoft’s Xbox One and Sony’s PlayStation 4. But the mega marketing
campaigns for dominance of the $26 billion
global gaming console business will
also highlight the larger issue of how the
TV industry is wrestling with its own gamechanging
technologies: The rise of over-the-top video and the growing popularity
of Internet-connected TVs and devices.

While much of the coverage has focused
on Apple, Amazon and Google, the
last generation of gaming consoles in many ways have
been the unsung heroes of the streaming video revolution,
playing an early role in connecting TVs to the
Internet and the rise of popular over-the-top services.

“Netflix is the biggest example of their impact,”
says Bruce Leichtman, president of the Leichtman
Research Group, who notes that Netflix usage shifted
from the PC to the TV after the service launched on
Xbox 360 in 2008 and on PlayStation 3 in ’09. “Today,
80% of Netflix users stream content to TV, and half
of that occurs over game consoles,” Leichtman says.

Nielsen reports about 94 million Americans used a
gaming console each month in the second quarter of
2013, while market research company Horowitz Associates
reports about half of all broadband homes
have the ability to stream TV programming from
their Internet-connected game consoles to the
TV. Says company president Howard Horowitz:
“They are by far the most popular way to stream
video to a television set.”

Half a Billion Competitors

But the over-the-top revolution that gaming
consoles helped forge also created daunting challenges
for new consoles, which will come into a
landscape where market researcher NPD Group
says there are already well over a half-billion Internet
connected-devices in U.S. homes.

“The dynamics of the market have changed
dramatically since the release of Xbox 360 and
PS3 in 2005 and 2006,” says Brett Sappington,
director of research at Parks Associates.

Further complicating matters is the
fact that many large tech companies,
consumer electronics manufacturers,
telcos and cable companies are pushing
their own streaming technologies into
the living room. “You have some of the
biggest companies in the world pouring
billions of dollars into trying to figure
out how to use the power of the Internet
to fundamentally transform the TV experience,” says
KC Estenson, senior VP and GM of

In addition to the game console makers, these players
include smart TV manufacturers such as Samsung
that are beefing up the apps on their connected TV
sets; tech and online companies such as Google, Apple
and Amazon that are said to be developing their own
pay-TV services; and operators such as Comcast and
Time Warner Cable that are deploying or developing
Internet-connected set-top boxes that can bring pay
TV and OTT content to the TV.

That makes the launch of new gaming consoles
this holiday season a kind of preliminary skirmish in
a much bigger battle for control of the living room
in 2014. “The amount of activity in this space has
increased geometrically just in the last six months,
and you will see a lot more next year,” says
PwC principal Chris Lederer.

PwC is predicting strong sales of the consoles
as hard-core gamers upgrade their systems,
with consumer spending in the gaming
console sector jumping from nearly $8.8 billion
in 2013 to more than $11.0 billion in 2017.
But that is slightly less than the $11.1 billion spent
on game consoles in 2008, and other analysts worry
about their longer-term prospects.

“I worry that we saw the apex of the market with
the last generation of game consoles,” says James Mc-
Quivey, VP and principal analyst at Forrester Research.

One problem is that the hefty processing power
needed to satisfy serious gamers makes the new $400
and $500 consoles much pricier than a $50 Roku box.
“The only people who are going to be buying game
consoles to stream video are going to be gamers,”
says Anthony Woods, founder/CEO of Roku.

That makes alliances with TV players and content
makers a crucial way to differentiate their offerings,
analysts note. “Content will be king for the success
of these boxes in a way that hasn’t been the case in
the past,” says McQuivey.

Strategy Play

In the battle to win over users, Mike Vorhaus,
president of Magid Advisors at Frank N. Magid Associates,
explains that “Sony and Microsoft have
adopted two very different strategies.” While
Sony has been focused on gamers and working
to undercut its rival on price, Microsoft is pitching
Xbox One as both a gaming console and a
home entertainment device.

Parks’ Sappington expects the PS4 to initially
outsell Xbox One in the U.S. because of its lower
price and its appeal among gamers. But after
strong holiday-season console sales this year,
the large installed base of existing consoles
could slow their adoption.

To attract new users, Microsoft has been working
to address one of the biggest problems in the
emerging OTT world — the difficulty of accessing
video from different sources. “Today, you have to switch between devices and inputs” for streaming
players, set-top boxes and game consoles,
creating a lot of headaches for users, says Ben Smith,
head of product for TV at Xbox One. “We wanted to
make that go all away…so that all my favorite channels,
all my games, TV, video and music are all in one place.”

In pursuit of that goal, Xbox One includes features
that provide access to live TV from a multichannel
provider; a unified search page that brings together
content from all the different apps; personalized
channels; and the ability to “snap” between games
and video. “It offers a very seamless experience
where I can be playing Madden [the football game]
and snap to the ESPN application on the right side
of it to stay tuned into what is going on in the sports
world,” says Raphael Poplock, VP of games and partnerships
at ESPN, which is offering an updated version
of its Xbox 360 app on the Xbox One at launch.

Operators like Time Warner Cable, Comcast and Verizon
have embraced using game consoles and other
connected devices to improve the services they offer
subscribers and to better compete with OTT services.

Mike Angus, senior VP and GM for video at Time Warner
Cable, notes TWC rolled out an authenticated app
on Xbox 360 last summer with an array of live channels
and on-demand content as part of a broader strategy to
make content available on more devices. “It gives you
the ability to use voice and motion controls and offers
consumers a much richer experience,” he says.

To further entice consumers, Microsoft last year
hired former top CBS executive Nancy Tellem as the
head of a newly created studio to lead an ambitious
plan to create original content.

As part of that effort, Microsoft made a deal to
work with Steven Spielberg on a TV series based on
the popular game Halo, along with signing a wideranging
alliance with the NFL. “This partnership will
completely redefine the way fans experience the NFL
in their living rooms, with a variety of interactive features
and a fantasy football experience that is integrated
into live viewing,” says Wil Mozell, senior VP,
Xbox Entertainment Studios.

Microsoft has also worked hard to sell content
partners on the value of the Xbox platform, and the
company has been willing to adapt to the traditional
business models of programmers and operators. “If
they were not willing to entertain a model that is core
to us, which is the authenticated model, we would not
have a service together,” says Poplock.

Virtual Players

A very different approach can be found at Sony. Its
studio has been active in producing and distributing
content for over-the-top players, and its Crackle adsupported
OTT service offers a wide array of original
and library content. But PlayStation has generally focused
on a smaller selection of the most popular OTT
offerings — Netflix, Hulu Plus and others that can be
found on most connected devices.

This may dovetail with long-standing rumors that
Sony is looking to launch a virtual MSO that would
deliver a pay-TV subscription service over its connected
PlayStation consoles. Sony declined to make
executives available to discuss its strategies.

In recent years, the difficulty of getting rights to
a wide range of content from programmers that are
loath to cut deals that might jeopardize the $70 billion
subscription pay-TV market has slowed the development
of the virtual MSO.

That conundrum is particularly problematic for
Apple, Amazon and Google, who have long been rumored
to be developing some kind of a virtual MSO.
But programming rights might be less of an issue for
Sony. “Because of their large user base, the consoles
offer a Trojan horse for a virtual MSO that in many
ways is more powerful than what Apple or Google
can offer,” says Leichtman. “If you don’t have all the
programming, people have less reason to buy a new
device. But if they already have a console, they may
be willing to sign up for a less-complete package of
programming. As a content owner and producer, Sony
is in the best position of anyone to do this.”

"If you look back a few years you wouldn't have expected Microsoft to have gotten such a head start" in content alliances, "because Sony is a content producer and has a studio," says Jonathan Doran, principle analyst at Ovum. "But its strategy for next generation TV seems very fragmented, and it's hard to understand what direction they want to go."

He cautions, however, that the prospects for game consoles maintaining their dominant position in delivering over-the-top video to the TV set is clouded, given the fact that consumption of video is rising much faster on other devices.

One potential threat comes from pay TV operators themselves.

As reports continue to circulate that Amazon is looking to launch some kind of set-top box or device with a streaming service in 2014, and both Google and Apple are said to be talking to programmers about the launch of their own TV services, operators are working to bring some of the advantages of over-the-top delivery of video into their offerings.

In addition to their TV everywhere efforts, several — notably Dish, Verizon and Comcast — already offer their own streaming services, and some operators — including Comcast, Time Warner Cable and Cox — have been testing or deploying set-top boxes with Internet connections that could deliver cloud-based services with video and interactive features.

In the company's third-quarter earnings call, Comcast President and CEO Neil Smit noted that deployments of its X1 platform that offers cloud-based services has produced "a meaningful" reduction of churn and that it had also boosted VOD viewing and paid VOD transactions.

Time Warner Cable meanwhile is testing its own Internet connected box, reports Angus. These cloud-based platforms will allow them to very rapidly make changes in the services, navigation and features they offer, "just like you can on the Web," he says. "You can change the guide experience and add new features and functionality."

But the rollout of these boxes may not have much of an impact on their alliances with game console manufacturers. Angus stresses that working with consumer electronics manufacturers is part of their strategy for both delivering more content to more devices and at the same time improving the overall experience.

"Our strategy is a combination of deploying rich set-top box experiences and then finding how we can deliver a similar experience to an Xbox, Roku or iPad," he says. "And we want to integrate that experience so that if I have something on my DVR, I can pull that into my Roku or Xbox and access it as well so I have a very seamless whole home experience."

At least in the short run, these alliances also provide operators and programmers with valuable experience in developing next generation TV services.

Still, it will take a while for more advanced set-top boxes to make their way into a larger number of homes, which makes the game consoles a more appealing platform for developers.

"Comcast has been the most aggressive in upgrading boxes and developing an app platform," says Jeremy Legg, senior VP of business development and multiplatform distribution at Turner Broadcasting. "But it is still early days. It is hard and expensive to replace millions of boxes."

Legg and other programmers also stress that there are a number of questions about "what kind of content and what kind of experience" they would want to deliver over-the-top to the TV screen, where they already have channels delivered via the set-top box.

Sean Knapp, CTO at Ooyala adds that content providers already have a lot of experience with video on PCs, tablets and smartphones, "but the 10-foot experience for the TV is just starting to open up" and "a huge battle is developing for the start screen on the TV set" that has long been controlled by the pay TV operators.

"The spoils are...a share of the broadcast TV industry," Knapp says. "Right now, it is hard to predict who will gain the edge."