For digital content, consoles best route to living room

DIGITAL: Netflix: Xbox streamers were 'disengaged from physical media'

By Jennifer Netherby -- Video Business, 9/25/2009

SEPT. 25 | DIGITAL: Just as the PlayStation 2 was crucial to launching the DVD business, the latest generation of videogame consoles, led by the Xbox 360, are playing a pivotal role in the fledgling digital movie business.

The reason is simple: Xbox 360 is in an estimated 16 million U.S. homes, the PlayStation 3 is in 8 million, the Wii is in another 20 million or so, making gaming consoles the leading Internet-connected device already hooked up to TVs.

They’re expected to hold that lead until 2013 when connected HDTVs overtake them, according to Futuresource Consulting.

Studios say that both Xbox and the PlayStation are a key driver of digital movie and TV episode sales after Apple iTunes.

Xbox, which has offered movie rentals and TV show sales through the Xbox Live Marketplace since late 2006 and streamed Netflix Watch Now since last year, has a 31% share of the digital video-on-demand business, second only to Apple’s 52% share, according to Screen Digest. That’s all the more notable given that Xbox doesn’t yet have content deals with all the major studios. (20th Century Fox and Sony are the two holdouts.)

Meanwhile, rival PS3 is getting more aggressive in video, saying it has delivered 250 million game and video downloads to U.S. users since launching its service last year. However, Eric Lempel, director of PlayStation Network operations and strategic planning at Sony Computer Entertainment America, acknowledges a majority of those sales were for games.

There also are hints and hopes that the Nintendo Wii could add a digital-video component by the end of the year, which would add tens of millions more connected devices for delivering movies. Sonic CinemaNow started offering Hollywood films to Wii users in Japan earlier this year through a third-party provider, though the company wouldn’t comment on any U.S. plans, beyond saying gaming is part of its strategy. Determined Wii owners can already get video from Netflix, Amazon Video On Demand, Hulu and other online movie services using PlayOn software installed on a PC.

“We see game consoles playing a major role,” Sony Pictures Home Entertainment executive VP of digital distribution Sean Carey said. Not only are they connected to the TV, but Carey said, “the demo that typically buys these devices is that digital customer.”

For Xbox and PlayStation, that’s good news. For other movie services, it’s unclear what it means.

So far, Netflix is the only third-party video service available on any game console in the U.S. The company has an exclusive deal with Xbox 360, but for how long, neither side has disclosed.

Netflix chief financial officer Barry McCarthy told an investors conference in early September that game consoles are the “principle” device for Internet movie services to be on because of the large install base. “In a perfect world,” he said, “we would like to be on the Wii and the PS3 also.”

Both Xbox and PlayStation execs say they are open to adding other third-party services to their consoles, though both seem intent on creating a more curated experience for users rather than adding the broadest array of digital movie stores to their devices, as manufacturers of Blu-ray Disc player and HDTV have done.

“It’s not just about plugging partners in,” Xbox Live general manager Christina DeRosa said of the company’s strategy. “It’s about picking the best and developing the best service around it.”

Lempel said PlayStation would consider adding services that add convenience and are easy to use.

“We don’t want to have a lot of services competing on the PlayStation Network, but if it really brings a good experience to the user and expands our content offering, certainly we’d look at it,” he said.

For studios, game consoles offer another advantage over other living room devices: access to the hard-to-reach and harder-to-market-to core male 28-year-old videogamer demo.

“I don’t think a lot of our audience sits down at 8 p.m. to watch a TV show,” said Lempel. But they are watching on demand. South Park and Family Guy episodes tend to be top sellers on both consoles.

Netflix chief content officer Ted Sarandos said that some of the customers Netflix has signed up from its Xbox partnership weren’t watching movies on DVD before and don’t order DVDs through the service, though they are streaming movies from Netflix.

“They were disengaged from physical media,” he said.

For certain types of titles that appeal to its core base, Xbox’s share of business can be substantial.

Lionsgate president of digital Curt Marvis said the studio’s slate of action, horror and comedies are perfectly suited for the gaming crowd.

“As a studio, we do extremely well on the Xbox and PS3,” he said. “We view that as a very, very important marketplace for us.”

Magnolia Entertainment’s sci-fi Mutant Chronicles turned out to be a big seller on VOD, largely thanks to the Xbox.

“When you do deliver a young male title to us, our success in that demo tends to end with us punching above our weight,” Xbox general manager of content acquisitions and strategies Ross Honey said.

Nevertheless, Xbox execs believe the viewing experience, not content, is key to drawing in viewers. Honey points out that there are more places than ever before to get the same movies and TV shows. Instead, Xbox is focusing on things like its social networking “party mode” and other interactive features in development.

PlayStation Network is looking to license exclusive content and develop its own original content, Lempel said.

Sony’s biggest differentiator may be its large hard drive that can store plenty of digital movies. Unlike other video services where rental transactions outnumber digital sales, the opposite is true on the PlayStation, where 70% of digital transactions are movie purchases. However, that is likely partly because, for many films, the company only offers a purchase option.

Even as consoles stake their claim on the still small digital business, no one expects them to make it the overnight success DVD was. Digital, most believe, will take longer to build.

“It’s not going to be a groundbreaking shift to digital,” Futuresource analyst David Sidebottom said.