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Park Associates Forecasts $8 Billion Gold Mine in Connected Consoles

12 Sep, 2008 By: John Gaudiosi

By 2013 Microsoft, Sony and Nintendo will be generating more than $8 billion in online content and services revenue through broadband-connected consoles by 2013, according to a new report from Parks Associates, “Connected Consoles: Games, Media, and Beyond.”

Although this number includes revenue generated by downloadable games, microtransactions and dynamic in-game advertising, the report does single out digital video distribution.

“Among the different online revenue opportunities, digital video distribution and downloadable games and content are the most promising,” said Michael Cai, director of broadband and gaming, Parks Associates.

In the two years since Microsoft launched its Xbox Live Video Marketplace, the store has generated $250 million in digital video revenue, the company reports. Cai said Parks Associates’ consumer data shows that a large percentage of Xbox Live users watch premium content such as movies and TV shows in addition to free videos.

Microsoft boasts that it has the largest on-demand high-definition video library in the United States with more than 1,000 hours of content. At E3, the company announced a partnership with Netflix to add their 10,000 movies and TV shows to Xbox Live offerings.

“Based on our consumer data, approximately 16% of Xbox 360 households in the U.S. subscribe to Netflix, translating to a little more than 1 million households,” Cai said.
“Microsoft wants to appeal to the 7 million Netflix subscribers without an Xbox 360,
but the sales effect on Xbox 360s is probably limited. Consumers not interested in buying an Xbox 360 won’t purchase it because of the Netflix support.

“As a result of these challenges, this partnership may benefit Netflix more than Microsoft; the 8 to 9 million Xbox 360 households not yet subscribing to Netflix now have another reason to do so.”

Cai expects Sony to respond to this Netflix partnership with its own subscription-based partnership. He points to Blockbuster Online, which has 3.2 million subscribers, as one remote possibility. Another possibility is Starz, which recently announced its intention to close its own Vongo service and focus on its subscription-based Starz Play service.

“Sony had some early fling with Starz when it was launching the Sony Connect service, which is now folded, and it is possible the two companies will work together again,” he said.
Sony lags behind Xbox 360 in video offerings, especially HD videos, Cai said. He said one reason is that it just launched the service and is still growing its content library. Another reason is its focus on Blu-ray.

“After Blu-ray won the format war against HD DVD earlier this year, PS3 did not experience a significant sales increase, causing Sony finally to launch its own online video service in July 2008,” Cai said. “However, Sony is proceeding in a
controlled manner so that the potential cannibalization effect of its digital video service on Blu-ray movie sales is minimized.”

The majority of PS3 households bought a PS3 for gaming with Blu-ray support as only a side benefit, he said. Park Associates’ consumer data show that 83% of PS3 households play games on a weekly basis, compared to 38% who watch Blu-ray movies on a weekly basis. The report shows that 43% have never watched or rarely watch Blu-ray movies using the PS3. In addition among all PlayStation 3 households, only 2% watch Blu-ray movies at least weekly, but don’t also play games weekly.

“Consumers who are already interested in buying a PS3 may consider Blu-ray support as an advantage when considering purchase, but those who are not planning to purchase a PS3 won’t buy it because of the feature,” Cai said. “In fact the overall consumer interest in purchasing a Blu-ray player remains low because of the high cost, limited content availability, more expensive discs and no perceived improvement to video quality beyond that delivered by [upconverting] DVD players.”

Despite Sony’s backing of Blu-ray, Cai said, “Its digital efforts are nonetheless serious; Sony hired a former iTunes executive to head up its PSN video efforts.”

Cai noted three ways that Sony is differentiating its PlayStation Network Video Store from Xbox Live Video Marketplace. In addition to offering exclusive movies and TV shows from Sony Pictures, any content downloaded through PS3 can also be transferred to PSP for portable viewing.

“In the long run, both services will be successful,” Cai said. “By 2013 we forecast that Sony and Microsoft will generate more than $4 billion in digital video revenue. Despite Microsoft’s head start, PS3 video revenue will surpass that of Xbox 360 in late 2011 due to its larger installed base.”

Even Nintendo, which has yet to release a game console that has doubled as a video playback device, has begun branching out into video playback on its popular Wii console. The Japanese company is leveraging its Internet channels to enable new media service features. Through the downloadable Opera web browser, Wii users can watch YouTube and other flash videos on their TVs.

Additionally Nintendo is looking to expand Wii video content in the United Kingdom, according to Cai.

"Recently the company announced a partnership with the BBC that enables Wii users in the U.K. to watch TV content delivered through BBC’s iPlayer and BBC is considering launching a dedicated channel on Wii," Cai said.

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