Video Game Consoles for Next-Gen TV? Don’t Believe the Hype

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Video game consoles such as Microsoft’s Xbox 360 (s MSFT) and Sony’s PlayStation 3 (PS3) (s SNE) are going to evolve into "multimedia gateways" and will soon be receiving a lot of video, according to Dallas-based research firm The Diffusion Group (TDG). They argue that when it comes to on-demand video content, the consoles can go toe-to-toe with local cable or satellite TV operators. They are very bullish on the consoles, but not so much on standalone set-top boxes (and there are many) — precisely because such a stance doesn’t involve buying yet another set-top box.

According to TDG, by 2012, roughly 190 million households will use a next-generation game console — of them, some 80 percent will be connected to the Internet, and 75 percent of console-connected households will use video-based services at least a couple of times each week. Another report estimated that Microsoft will make $726 million from its Xbox Live Video Marketplace.

Having covered the technology industry for as long as I have, I take such bold predictions with a Mount Rushmore-sized pinch of salt. But I do agree with the overall thesis that consoles will serve as the center of your living room. We have numerous clues pointing to this.

For instance, Netflix’s (s nflx) service is being built into the Xbox. In addition to 12,000 movies available via Netflix, Microsoft Xbox Live has about 15,000 movies (1,000 of them HD); Microsoft Xbox has HD TV shows available for download as well. Sony has launched its own movie download service for the PS3 platform with over 1,000 movies, and Nintendo is working on its own version of the online video experience.

Despite all these positive signs for the consoles, in my opinion the big push for Internet video in the living room is going to come from embedded systems in the next generation of connected televisions and new Blu-ray DVD players. Where does that leave many of those standalone set-top boxes? Their investors aren’t going to be thrilled by my answer. Or TDG’s bold predictions.

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Interactive High Quality On-Damand IP delivery of Entertainment is the future. BYte Range / Rate adaptive delivery is available today for HD-like experiences with long form content. I’m thinking BD adoption will be too slow and net delivery will ultimately win. The question becomes whether its going to be Game Consoles or Service Provider boxes that are the hardware that renders and displays these web like bi-directional experiences.

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