Weeks before the launches of Sony’s PlayStation 4 and Microsoft’s Xbox One, the gaming-console industry stands at a curious crossroads: Its platforms have served up just as much, if not more, traditional entertainment like movies, TV shows and music than they have games.
“For the first time in a new cycle of consoles, the primary discussion isn’t around game graphics. [It’s] around entertainment,” M2Research chief executive Wanda Meloni says. “Sony and Microsoft are focused on building audiences, and a broad offering of content, especially music and video, is critical to that.”
Through the years, Microsoft and Sony have amassed millions of users on their networks. Microsoft’s Xbox Live has more than 48 million people who actively use the service each month. Sony has more than 150 million registered users on its PlayStation Network, though it isn’t saying how many of those remain active.
In the realm of connected media devices attached to the largest screen in the house, Sony, Microsoft and Nintendo were among the dominant contenders of the past decade outside of cable and satellite set-top boxes. One in two U.S. households owns an average of two consoles, according to the Entertainment Software Assn. While gamers don’t have to connect their consoles to the Internet, about 76% of Xbox 360 owners and 82% of PlayStation 3 owners do, IDC analyst Lewis Ward says.
Last year, the field appeared to clear when Nintendo, whose Wii U console launch proved lackluster, essentially dropped out of the entertainment portal race to focus solely on games, leaving Sony and Microsoft.
But a funny thing happened during the last few years — competition for the living room intensified. Connected media devices proliferated, from connected TVs and Apple TVs to Rokus and Google Chromecasts. And more are on the way. Intel announced a media device, OnCue, for 2014, and Amazon is said to be working on its own living room device. In addition, “micro-consoles” like the Ouya, Unu and Gamestick have cropped up, focused on streaming games and other content.
This matters to the music industry for three reasons, and all of them are good. The first is that these new devices represent absolute growth in the number of paths for digital music services to enter the living room.
“For content owners, this can be an opportunity,” Robert W. Baird & Co. analyst Colin Sebastian says. “These are exciting new platforms for music and other digitally delivered content.”
Companies like Vevo, Rhapsody, BandPage, Slacker and TuneIn have actively pursued distribution deals with over-the-top distribution services with the belief that to succeed, they need to go where the audience is.
Accessing music through a TV is no longer considered odd, especially since many living room TVs are often hooked up to the best audio system in the house. About 30% of Americans have listened this year to music through TVs that were connected to the Internet, either by game consoles or other means, according to a report by Edison Research.
Music services say consoles represent an opportunity to expand their footprint in the living room.
“The TV has replaced the family stereo as the nexus of music entertainment in the home,” Pandora chief technology officer/senior VP of product Tom Conrad says. “It has the best speakers. It’s where the family comes together for entertainment. So it’s right to think about the future of music as being TV-centric.”
SoundCloud chief executive Alex Ljung points out that consoles have become one of the main routes to “smart” TVs, building a bridge for Internet services to the living room. “In some ways, game consoles were the first and still by far the largest user base for smart TVs. It’s a way to take a screen and connect it to the Web,” he says. “In that sense, the console enables us to get to the TV.”
The second reason why consoles matter lies in the calculation of royalties. Music delivered through Internet-based services has historically generated higher absolute royalties in aggregate than music delivered by cable and satellite TV companies. While per-stream rates established by the Copyright Royalty Board for cable, satellite and Internet conduits aren’t directly comparable to one another, it’s well-known that Pandora, an Internet-based service, is the largest single contributor to SoundExchange, which collects music royalties under statutory licensing. Should listening to Internet music on TVs in a home environment become as popular as mobile, rights holders stand to gain.
The third opportunity for music, albeit a smaller one than during the heyday of “Rock Band” and “Guitar Hero,” games themselves represent a vehicle for licensing and distribution. This year and next, a handful of titles will incorporate music as a central feature in their experiences, including Ubisoft Entertainment’s “Just Dance 2014” and “Rocksmith 2” and Harmonix’s “Fantasia.” As with movies, games require increasingly sophisticated scores and soundtracks, particularly for console titles that heavily emphasize cinematic environments and character development.
Perhaps the best source of licensing revenue this year will come from “Grand Theft Auto V,” which licensed 240 tracks and commissioned original songs from A$AP Rocky, Flying Lotus, Twin Shadow, Neon Indian, Yeasayer, OFF! and Tyler, the Creator, among others. The game, which has so far generated more than $1.3 billion in retail revenue since its release on Sept. 17, also features 15 in-game radio stations hosted by well-known DJs, including Bootsy Collins.
Inspired by the “GTA” radio feature, some streaming music providers including Rhapsody have explored the possibility of integrating their services into gaming worlds. Gamers spend about four hours per week on average playing, according to a 2012 survey by PricewaterhouseCoopers. Some even turn off the game’s sound to pipe in their own musical selections.
Still, expectations for next-generation game consoles should be tempered by the fact that music is just one item in a smorgasbord of content offered by these platforms. Similarly, living room platforms are regarded by music services as part of a broader mandate to have their content available “anywhere, anytime.”
About 70% of Americans surveyed this year by Edison Research listened to some form of streaming music on their smartphones, while 45% listened on their tablets and 30% on connected TVs. Whether consoles and other digital media platforms battling for primacy in the living room can substantially grow those numbers remains to be seen.
As for Sony and Microsoft, the “console as Trojan horse” strategy for owning the digital entertainment gateway to the living room will have its own challenges as the market for consoles is expected to shrink and as consumers find more choices from a variety of providers.
“They’re really running out of time,” Wedbush Securities analyst Michael Pachter says. “For years, they had the runway to themselves. We have so many alternatives now. Some of them are a lot cheaper than a $400 or $500 box.”
Google sells its Chromecast for $35. Roku players retail for as little as $50. Unu, which comes with an Android tablet, is expected to start at $200.
Yusuf Mehdi, senior VP of Microsoft’s Online Audience Business Group, says Xbox One, through its Xbox Live service, plans to compete on two dimensions. “You need two things to succeed,” he says. “Usability and killer apps.”