Playing the convergence game

Video game consoles may well become the centerpiece of the digital entertainment experience in the home--but not this year.

"Convergence," the notion that a single digital appliance will handle multiple tasks, has been an industry movement for years. Recent signs have pointed to increasingly capable game consoles as the prime candidate for making convergence work, given their broad popularity with consumers.

But in the battle for the digital living room, a retrenchment is in order. Recent missteps indicate that the major players in the game console industry, such as Sony and Microsoft, are still searching for a convergence device that will click with consumers.

Some analysts even wonder if the entire convergence idea really makes sense. "Beyond the clock radio, what's ever worked better from putting two different functions together?" asked Schelley Olhava, an analyst at market researcher IDC.

But the industry's biggest players still believe in convergence. Sony, which dominates the video game market with its PlayStation 2 console, has pinned its hopes on the PSX, a multifunction device that combines a PS2 game player, a DVD burner and a TiVo-like personal video recorder, along with other entertainment functions.

There's more riding on PSX than meets the eye. The device is seen as something of a guinea pig for the entire game console convergence movement. Sony hopes that the device will eventually inspire enough geek lust to boost its revenue and to become the vanguard for a companywide convergence push.

One problem: Apparently, nobody told consumers. Initial response to the PSX, which went on sale late last year in Japan with a price tag close to $1,000, has been underwhelming, according to reports.

Production snags haven't helped the situation. Sony dropped several promised features--such as MP3 playback--from initial units to get them on the market in time, and it then had to temporarily halt production to clear out old models when it changed the configuration. A Sony representative declined to discuss Japanese sales figures.

The next step in Sony's plan for PSX had been to bring the device to North American shores. That debut has now been put on hold, a representative at Sony headquarters in Japan confirmed. The PSX's arrival in North America--originally slated to happen in time for the 2004 holiday shopping season--is now set for an unspecified date in 2005. Sony executives have said the delay will give them time to redesign the device to better suit Western consumer tastes.

None of this comes as a surprise to some industry analysts, who say the PSX faced a number of challenges, starting with its steep price tag.

P.J. McNealy, an analyst for American Technology Research, said $500 is a more realistic price for mass consumer acceptance, especially for a device whose utility is unproven.

"It's an emerging category--it's hard for people to do a straight comparison with what's out there," McNealy said. "It's the same as when DVD recorders came out, and people had a hard time getting their heads around it what the value was."

Price is an especially complex issue with a hybrid device like the PSX, said David Cole, owner of research firm DFC Intelligence. Game console makers typically sell hardware at a loss and make their profits from royalties on game software sales. That model gets shaky, however, when you start cramming nongame functions into the same box, Cole said.

"They've been able to get the price way down on game systems, because they can make it up on software," Cole said. "With these kinds of hybrid devices, you're selling to people who aren't necessarily going to buy a lot of games. But you can't necessarily expect to charge a premium over the existing products it's intended to replace."

Several left-field contenders are also hoping to make convergence stick. Consumer electronics manufacturer Apex Digital plans to enter the market late this year with the first device based on the Discover platform, which reads standard PC game discs and configures the games for display on a TV set.

The ApeXtreme plays Window games, dishes up digital music and photos, and plays DVD movies. Infinium Labs hasn't discussed nongame functions for its upcoming Phantom console, but the unit's broadband connection could be used to deliver streaming media as well as Windows games.

A different path for Xbox
Microsoft plans to take a more cautious route in turning its Xbox game console into a convergence device. The Xbox has already picked up some nongame functions with add-ons for karaoke and digital photos. Microsoft intends to take that a step further by the end of this year with an "Xbox Media Center Extender Kit" that will connect the game console with a PC running the Windows XP Media Center operating system.

Media Center is a version of the Windows XP operating system tweaked to handle digital media and entertainment needs. The software, which is only available preinstalled on new PCs configured for entertainment tasks, enables people to use a remote control to navigate music files, digital photos and other media stored on the computer.

• Play movies: Works. Xbox and PS2 are widely used as backup DVD players.

• Play music: Sort of works. Xbox has fairly popular capability to "rip" CDs, turning the console into a karaoke box.

• Surf the Web: Doesn't work. Promised alliances for PS2 with RealNetworks, Macromedia and America Online never happened.

• Conduct voice chat: Works. Xbox and PS2 have become the biggest consumer success yet for voice over Internet Protocol.

• Record TV shows: Might yet work. Responses to the first console to try it, Sony's PSX, have been muted.

As the Extender Kit promises to let an Xbox connect to both a PC and a television set, the console can act as a bridge between the two. For example, people will be able to use a TV to display digital photos and videos stored on their computer.

Jeff Henshaw, executive producer of Xbox digital entertainment, said Microsoft plans to have the Extender Kit--which will consist of a specially configured remote control and Xbox software--in stores in time for Christmas. The device signifies Microsoft's faith in a convergence approach centralized on the PC rather than on all-in-one electronics devices, Henshaw said.

"The way we look at it, we definitely see the PC as the hub for digital entertainment in the home," he said. "It's got the powerful processor; it's got the big hard drive; it's where the music gets downloaded and the content gets stored...PCs are definitely where innovation happens at the most rapid clip."

Centralizing on the PC also allows consumers to mix and match devices, including gear they may already have, Henshaw said. That's an approach more likely to woo consumers who are still wondering about the benefits of convergence, he said.

"We've learned over the years that by building a very open ecosystem, you offer more to the consumer," he said. "You'll be able to go to a lot of different vendors and connect these things in interesting ways, to consume media the way you want to."

Analysts say neither convergence approach is likely to set the market on fire immediately but that Microsoft has an edge, given the slow but steady growth in PC-based home networking.

"In the near term, I think the PC has the advantage," ATR's McNealy said. "At the end of the day, the American market is pretty PC-centric."

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Current convergence experiments are likely to have a bigger effect on long-term development of the game business, however. In particular, they're likely to influence the design of the next-generation game consoles expected to appear on the market late next year.

The tepid response to the PSX means that Sony is unlikely to take a bet-the-farm approach to convergence with the PlayStation 3, analysts have said. Instead, the electronics giant will at best offer multiple versions of the console--a games-only version around the standard $300 price point for new consoles, for example, and a media-enriched model for those with cash to burn.

"I think this is heading to multiple types of products," DFC Intelligence's Cole said. "You'll have a basic PS3 that just plays games and other (models) with different kinds of functionality. If you can do that right out of the gate, you might be able to get more consumers to bite than they've had with the PSX."

Olhava has doubts about that notion, given the game industry's reluctance to irritate mass market retailers with multiple product configurations. "I'm not even convinced we'll see different" models, she said. "This is an industry that prefers simplicity."

Relying on the PC allows Microsoft to take a more evolutionary approach to making the Xbox more useful in many ways, Henshaw said, which will be reflected in subsequent models.

"With Xbox, we definitely see broader nongaming scenarios taking off...and those types of features will become a more inherent part of the Xbox over time," he said. "Leveraging the power of the PC...lets us take advantage of a very powerful device in the home."

Or the next game consoles could act pretty much like the current ones, playing games and not much else. That's the way rival game maker Nintendo is leaning. Nintendo of America spokeswoman Beth Llewelyn said the company has no plans to cram consoles with nongame functions.

"There's been talk about convergence for many, many years, and it hasn't seemed to stick yet," Llewelyn said. "Consumers like dedicated video game systems. We think there's a huge market out there for game-specific devices."

That may be the smart way to go, Olhava said, given the track record for convergence experiments.

"Combining a lot of different features usually doesn't work," she said.