Weekly Update

Taking the game out of game consoles

The battle for supremacy in the next generation of video game console is now on, but so far at least it’s not being fought with games. Instead, video has emerged as the main battleground.

According to the Wall Street Journal, Sony has reached a preliminary deal with Viacom to stream a bundle of Viacom networks (MTV, Nickelodeon, Comedy Central, etc.) to connected Sony devices, beginning with PlayStation consoles. Details are sketchy at this point, but Sony is also reportedly in talks with other major cable network owners and presumably with Viacom now in the bag it should now be easier to land Time Warner (CNN, Turner, HBO), Disney (ESPN) and others.

According to the report Sony is hoping to introduce its linear TV service early next year, within a few months of the launch of the PlayStation 4. That would give Sony’s game console an answer to the Xbox One’s ability to access and control linear TV via HDMI pass-through. Like Microsoft, Sony has also reportedly developed a sophisticated UI that integrates linear and on-demand channels into a single app for seamless discovery and switching. But the two console makers’ approach to linear TV integration differ in other important respects, however, that could go a long way toward shaping the future competitive landscape of the console business.

Microsoft’s HDMI daisy-chain approach keeps pay-TV service providers literally and figuratively in the loop. To take advantage of the integration, a user must first subscribe to a pay-TV service, in addition to subscribing to Xbox Live. It’s not a setup intended to encourage cord-cutting. Because the Xbox One is at the end of the HDMI chain, moreover, and does not have access to the pay-TV service provider’s conditional access keys, the arrangement sacrifices some functionality, such as the ability to control the TV set-top’s DVR.

The upside is that the Xbox One can be integrated with any digital pay-TV service from Day 1. There is no need for Microsoft to negotiate separate deals with pay-TV network owners, as Sony is now struggling to do, and all channels are available.

Sony’s solution is a pure over-the-top, multichannel service, which means painstaking negotiations and significant expense for Sony in the form of per-subscriber carriage fees.

On the other hand, since Sony, unlike Microsoft, will be selling the service itself, it will be able to bundle subscriptions in with the purchase of a PlayStation console. For the PlayStation 4, it’s not hard to imagine Sony eventually offering subsidized consoles with a one- or two-year commitment to a programming package, which could make its hardware more competitive against the Xbox One.

Such bundling would also allow Sony to amortize its own costs related to the PS4 over a wider range of revenue streams. As I discussed in my report, The Xbox One’s role in the TV ecosystem, both Sony and Microsoft face a far-shorter amortization window for the next generation of consoles compared with previous generations and gaming moves increasingly to mobile platforms and low-cost, cloud-enabled streaming consoles. To recoup the R&D and manufacturing costs associated with high-end consoles before sales of those consoles begin to wane, both the PS4 and Xbox One will need to support a broader range of revenue streams than the traditional income from game-software sales and royalties from third-party publishers.

Rather than try to compete directly with incumbent pay-TV operators, Microsoft is hoping to leverage their subscriber bases to build up its own footprint in the living room with an eye toward developing new, interactive video services around the Xbox One. Sony is looking to become a pay-TV provider in its own right in order to bundle that service with its hardware to accelerate the hardware amortization curve.

Gamers, meanwhile, are left hoping Sony and Microsoft put as much effort into new game development for their consoles as they are into non-game developments.