Cable Companies Prepare For A Run At The Video Game Market [REPORT]

on September 25 2012 12:19 PM

Less than a week after Microsoft Inc. (Nasdaq: MSFT) announced a bold new plan to wade into television-style content creation, a group of high-profile American cable companies are now preparing themselves to challenge video game consoles on their own turf.

A story released by Bloomberg on Tuesday reported that several large TV companies like AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ), and Time Warner Cable (NYSE: TWX) are all working to create new media and video game services that will deliver gaming content directly to television sets or cable boxes, rather than requiring users to purchase traditional hardware like consoles or PC towers.

According to the report, Time Warner Cable, AT&T's U-verse and Verizon's FiOS TV are all already developing these cloud-based gaming services. Comcast Corp. and Cox Communications are currently in talks to develop similar services soon.

Citing anonymous sources, Bloomberg reported the companies expect trials to begin for the cloud gaming services earlier this year in the hopes that they could be made available in 2013. While the development seems hasty, the timing is perfect for companies hoping to meet the big three console developers head-on in competition for the next generation of gaming hardware and services.

The news also comes as anticipation is steadily mounting for the much-rumored next-generation hardware from Microsoft and Sony Corp. (NYSE: SNE) to replace their current Xbox 360 and Playstation 3 line-up respectively. Nintendo Co. (PINK: NTDOY) already announced its next-gen console, the Wii U, earlier this month.

From a historical perspective, Nintendo chose to back out of the competition between Microsoft and Sony to woo a “core” gamer audience with impressive hardware and ever-increasing graphics quality, an arms race that Microsoft and Sony remain locked in to this day. The original Wii console, however, captured a wider family-friendly audience than either of these companies could ever dream of, which has more recently inspired both Microsoft and Sony to rebrand their consoles as home-entertainment devices.  

The benefits, video game hardware developers have realized, lie in the promise of making their products cheaper and more easily accessible to a general audience. Even before its announcement last week that the company was hiring high-profile Hollywood executive Nancy Tellem to lead its new TV-style content development, Microsoft was already taking its Xbox 360 console in a new, television-like direction. After a high profile redesign of their Xbox Live Arcade service (XBLA), the company integrated more television services like Netflix and Hulu into its device last September. Less than a year later, it followed up with a new subscription-based console package that offered users the Xbox 360 for a dramatically reduced price of $99 and access to XBLA for two-years for $14.99 per month.

The $99 console is actually more expensive over its two-year life span than the standard $280.96 console when the subscription is spread over two years. But that’s part of Microsoft's point: it realized that offering television-style subscription rates could net more customers in in the first place once the initial barrier to entry is lowered.

Only four months old, the subscription plan’s influence on the rest of the industry is already being felt. Valve Software, long an advocate for PC gaming even as console eclipsed the personal computer’s presence at the top of the market, announced a “big picture mode” for its digital distribution service Steam that allows players to access the platform through their TVs. Even Sony, often the most stubbornly resistant to change of the three big console developers, began to admit that it needed to offer cheaper hardware and more unique content.    

For cable companies, the benefit is two-fold. First, there is the revenue itself. According to the research firm NPD Group cited in Bloomberg, the console market was worth $24.1 billion last year in the United States alone.  

“It makes perfect sense why they would want to go after this market,” said Mitch Lasky of the venture capital firm Benchmark Capital in an interview with Bloomberg. But, he added, the new services would require “a ton of bandwith,” a need for online infrastructure that they may not yet be able to meet. 

The cable industry may be walking into a hornet’s nest if they race to market before they can guarantee the stability of their services. But that also leads to the second benefit for cable companies: television services already have the rapt audience, the massive budget, and the intellectual property and brand identity to make any entrance into the videogame market an auspicious debut.

As an analyst for Lazard Capital Markets told Bloomberg, “everybody has a TV.”

This also presents numerous opportunities for co-branding across video game and television services alike. Peter Blacklow, head of the Game Show Network’s digital division that makes games and social media content alongside the television channel’s work, said in a phone interview that his company has a natural advantage in the marketplace today since it was “cobbled together” from several different media entities.

“In many ways, we think of ourselves as a digital service provider first, and a game developer second,” Blacklow said in a phone interview.

But this co-branding gives the privately-held company a newfound ability to attract game development talent from an industry in the midst its own sea-change. Just last week, GSN announced that it was hiring Jeff Karp, a former Electronic Arts Inc. (Nasdaq: EA) executive that conspicuously left his position at Zynga Inc. (Nasdaq: ZNGA) during a long string of C-level departures from the struggling social gaming company.  

How this will come to effect the traditional videogame industry, however, has yet to be seen.

Frank Gibeau, president of Electronic Arts Labels, told Bloomberg that cloud-based gaming is a “big opportunity,” but didn’t go into detail about his company’s possible plans to move into that space any time soon. 

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