By John Borland
Staff Writer, CNET News.com
December 11, 2003, 4:00 AM PT

Media moguls, loath to concede that such an important group of viewers was being drawn to other entertainment media, immediately blamed bad data and programming miscues. But analysts pointed to a far more troubling culprit in the form of growing competition from newer technologies such as the Internet, DVDs and video game consoles.

"What is frustrating to everybody is the big question: If they are not watching prime-time TV, what are they doing?" said Jack Loftus, senior vice president for Nielsen Media Research, the influential company that produces weekly ratings for the television industry.

Even before the fall in ratings, the growing popularity of digital entertainment devices forced traditional media industries to experiment with new business strategies. Increasingly, for instance, companies are inserting advertising messages directly into TV programming instead of during breaks in the action, which can easily be bypassed by digital recording devices.

But the new generation of media resists any blanket solution the TV industry might come up with. Unlike previous shifts in mass media--such as the graduation from radio to television--today's evolution in household entertainment involves a plethora of technologies that, in combination, take viewers away from broadcast and cable networks. DVD sales are exploding, broadband Internet connections are going mainstream, and electronic game sales rival movie box office receipts.

Games companies are planning consoles that tie together all these digital trends, converging diverse home entertainment features into a single box

"I think that will open up a wide variety of opportunities to us in very different kinds of directions," said Don Daglow, chief executive officer of Stormfront Studios, the company that developed Electronic Arts' popular "The Lord of the Rings: The Two Towers" game. "I think this is one of those fork points, where we'll look back years from now and say, 'That's where it all started.'"

Whatever the specific cause, television's uncontested sway over the prime-time hours may be going the way of the black-and-white screen. The main player in an average home spends more than two hours a day and four days a week playing video games, according to IDC. This doesn't simply represent children playing after school. A recent study conducted by IDC put the average age of video game players at 25.

Research has yet to show conclusively what that nine-plus hours of game playing a week is replacing--whether it is cut directly out of TV-watching time or whether it is at the cost of a combination of other experiences. Nevertheless, these are daunting statistics to traditional media companies, which are already engaged in bitter fights to hold viewers' attention.

"Digital media affects what we call the '4Cs': choice, control, convenience and customization," said Brian Monahan, an interactive media director at advertising agency Universal-McCann, which represents clients such as software giant Microsoft and chipmaker Advanced Micro Devices. "These are all very profound. It creates a much more difficult environment to get a message out. When users have more control, how do we succeed as advertisers?"

Video delivery
Others, however, believe that these new technologies will allow advertisers to reach new consumers and to improve the effectiveness of their messages.

"Video games are delivering an audience that old media are not likely to get on their own," said Steve Jones, head of the communication department at the University of Illinois at Chicago. "Video games have become very quickly understood as a good means of getting very precisely targeted audiences and motivating them to other kinds of media and other kinds of products."

But a successful transition will require flexibility and innovation on the part of an entertainment establishment that has become renowned for its intransigence in recent years, particularly where technology is concerned. The lines between traditional advertising and entertainment are blurring in ways never before imagined, as shown by the strategically placed promotional branding for real-world companies in online game scenes.

The film industry recognized video games' promotional power as early as the 1970s, when companies first licensed their titles to game producers--albeit with mixed success. The catastrophic flop of Atari's 1982 "E.T." game, which resulted in the unceremonious burial of millions of unsold cartridges in the New Mexico desert, remains the most visible landmark of the end of the first home console boom.

Today, such crossmedia "tie-ins" are routine but increasingly complex. The latest "Matrix" game from Atari includes video that was shot at the same time as the movie and features new story lines for its characters. EA's "Two Towers" game, released last year, puts games players in scenes almost indistinguishably blended with those taken from the movie itself.

Some elements of television are adapting to video games as well. ABC's "Monday Night Football" broadcasts last year and on cable network ESPN this year use EA's "Madden NFL" game to simulate specific match-ups or to recreate plays. EA's basketball and NASCAR racing games are tapped in similar ways during live broadcasts.

A few advertisers are venturing into video games directly. For several years, players in car-racing games have zipped past billboards that advertise genuine companies. DaimlerChrysler's Jeep division has purchased advertising space inside Activision's hugely popular "Tony Hawk" skateboarding games. And "The Sims Online" game, launched by EA late last year, includes mini-McDonald's restaurants in its virtual world, where characters can buy digital burgers and fries.

"Advertisers are looking for alternative platforms to television," said Schelley Olhava, an analyst at research firm IDC. "Games are such an immersive experience, and people play for so long, they really do have a captive audience there."

That point has not been lost on music companies. Some of the major labels have discovered effective promotion in placing their artists in games, especially when their songs are repeated constantly throughout the course of play.

Even tighter partnerships can be found in releases such as the latest P.O.D. album, which came packaged with the demo version of a PlayStation game. Most recently, AOL Music (Time Warner's popular online radio service) launched a Webcasting station in mid-November that is dedicated wholly to the music from the "Final Fantasy" series of video games.

Future on hold
As with any new initiative, none of these ideas guarantees success. The future will depend on the reaction of consumers, who have not shown much interest in all-in-one convergence boxes or technologies such as interactive TV.

So for now, the largest media companies are approaching games as simply another channel through which to sell a wide variety of entertainment content, rather than actively seeking to blend media.

"Even though the technologies are merging, so far, software (for media such as DVDs and game discs) is not," said Sanjeev Lamba, vice president of marketing for Buena Vista Games, Disney's video game division. "So we will still have to create separate software for each application. Even if you have a machine which is a hybrid game console, movie player and music player, you still will have to buy separate software."

Academics and game developers are more optimistic that the barriers between such media will be surmountable with an all-in-one device. One advantage these proponents cite is strong copy protection built into game consoles.

While games are routinely pirated, video game consumers are used to digital rights management in their purchases and are accustomed to seeing content locked down to a single box. The content protection on game devices could help persuade Hollywood studios or music labels to make next-generation consoles a key part of their on-demand movie and music plans.

Cameron Ferroni, general manager of Microsoft's Xbox Live online game service, anticipates quick support for Xbox Live from content companies, if the service embraces other media, because it offers a secure connection to a secure device.

"It's a 'buy once, use once' model," he said. "They know if they sell a song that ends up on this box, it doesn't end up on a file-sharing service."

Stormfront Studios' Daglow sees a day--maybe five or more years from now--when the interactivity of video games can be extended partly to television, if cable set-top boxes and game consoles are combined.

EyeToy focuses on gaming Ryan Bowling, spokesperson, Sony PlayStation

Games developers see the possibility of inserting viewers more directly into TV or film content, using camera plug-ins like Sony's EyeToy. If a DVD and a game are in the machine at the same time, for example, a viewer might be able to enter a "Matrix" movie virtually and play the part of the hero.

The University of Illinois' Jones sees the addition of TiVo-like hard drives as a potential boon to online games like Sony Computer Entertainment America's "EverQuest," in which events continue to occur, even if a given character is not logged on. A player going to work might be able to record what happens and later watch it on video to keep up with fellow adventurers.

All of this, of course, depends on what kind of features people ultimately want from their game consoles. But many game developers believe that they must prepare now out of necessity.

"Tomorrow is finally here," Daglow said. "The problem is once you're there, it's like a dog catching a car: What do you do with it when you catch it?" 

CNET News.com's Evan Hansen and David Becker contributed to this report.