Of course, we are going to talk about the Xbox 360 in the month when its launch has dominated the interactive entertainment realm. Retrospective, perspective, prospective, and introspective pieces emanated from the mainstream and gaming press. Logically, most of the pieces focused on the 360′s hardware specs, launch line-up, or the shortage of actual machines.

For the record, we think that the Xbox 360 had one of the most well-rounded launch lineups ever, but that is not what will matter two years from now. In the long term, the digital distribution features in the new Xbox Live service, especially the Live Marketplace, should end up having a much larger impact on the future of gaming than any individual launch title. Ultimately, Live Marketplace aims to provide a new paradigm of paying for and receiving content.

Another November product launch did not receive anywhere near as much attention as the Xbox 360, but could be just as important in the long run. With the release of Mario Kart DS, Nintendo launched its Wi-Fi Connection service. The ease and simplicity of this free service provide us a glimpse of how Nintendo is thinking about online games for both its portable and console systems. Mario Kart DS shows that Nintendo may not be as far behind on the online game front as it is often assumed. In fact, in many ways, Nintendo is leading the pack.

What both Nintendo and Microsoft, in their very different ways, seem to be envisioning is to make the transition from offline to online play seamless, as easy as turning on the machine itself. Once that has been accomplished, Microsoft’s experience suggests that downloading content comes naturally. With the original Xbox Live service, over 60% of Microsoft’s subscribers downloaded a piece of content. 20% actually purchased one of the scant premium item offerings. With Nintendo’s incredible back catalog of games and iconic characters, a digital distribution system like Live’s Marketplace could be very successful. In short it is now clear that digital distribution will play a key role for both Microsoft and Nintendo systems (Sony has also gone on record as being a believer, but details are scarce). This month we thought we would go into some detail about these November product launches that provide us a glimpse of the future.

Xbox 360

DFC Intelligence has long believed that Xbox Live has come the closest to approximating what mass market online gaming will look like. It is simple, fairly clean, and allows rich(er) media interaction than most computer online games through the extensive use of headsets. It is easily the most successful cohesive online gaming service ever offered on a console.

With the Xbox 360, Xbox Live is about more than just playing online games. Digital distribution is now a key focus through what is called the Xbox Live Marketplace. Live Marketplace enables, through the purchase of prepaid cards or the use of a credit card, the purchase of all types of content including whole games right through the Xbox Live interface. In short, it creates a digital distribution outlet for smaller game developers as well as for other types of media producers. The service could even be used to download digital music and movies.

The basic concept is not a revolution by any stretch of the imagination. iTunes has been making a go at digital distribution for some time. Casual games, like those offered on the Marketplace, have been offered in downloadable form for years. What makes the Microsoft offering different is the integration between the various components of the package to form a platform for digitally distributed content: microtransaction ecosystem, hardware, and digital distribution delivery network.

Microsoft is releasing prepaid “point” cards for use with Marketplace at all its normal retail locations. While you’ll be able to buy any number of points with a credit card, the retail point cards will initially only be offered in one denomination, 1600 points for $20, in other words, $1 = 80 points. Casual games will be offered from around 400 points ($5) to 1,200 points ($15), with most popular games like Bejewled at 800 points ($10). Pictures, logos and screen saver backgrounds are available in a wide range of prices, from 20 points ($0.25) to around 200 points ($2.50). There will also be downloadable demos, trailers and music videos, many of which are free. The prepaid cards have the key advantage of not requiring a credit card and can make a good gift purchase. While we might associate prepaid cards with limited functions like international phone calls, this is a true retail-based online payment offering. Of course, how fast consumers will take to this new game concept remains to be seen.

In North America, the challenge has been building a microtransaction system to handle payments under $5. To some extent, Xbox Live Marketplace overcomes some of that challenge. If Microsoft is successful is gaining traction with its payment platform, it could really change the way people think about purchasing game, add-on, and other content. Instead of buying games in large $50 chunks, other types of purchase options become available. While this might seem far-fetched, when iTunes enabled consumers to purchase single songs instead of whole albums, it changed a 50 year old established pattern of production and consumption. In comparison, interactive entertainment seems like an adolescent industry. In Korea, consumers were used to paying-to-play MMORPG like Lineage. Then Kart Rider came along with a revenue model based on microtransactions. The game quickly became one of the most popular in Korea, helping Nexon to projected revenue of $250 million in 2005.

The Live Marketplace features are very tightly integrated into the Xbox 360 hardware and interface. For one looking to purchase a casual game, Microsoft offers a clean and simple alternative to the bewildering array of game portals and aggregators in the PC world. Sure buying downloadable casual games online is not new, but the slick virtual retail store that Microsoft has created with Live Marketplace integrates demoing games with downloading and purchasing games elegantly into its hardware package.

This isn’t the first time that a company has tried to use a game machine as a Trojan horse for new technology. Sony has made a habit of it by including DVD functionality in the PS2, UMD in the PSP, and Blu-Ray in the upcoming PS3. But Microsoft’s inclusion of Xbox Live Marketplace is not exactly akin to Sony’s media-disc shoehorning strategy. Sony is trying to promote new delivery forms for all media, while the Xbox 360 focuses on changing the way that people use their gaming hardware by streamlining the process. In this, it is more like the Nintendo DS’s ability to use WiFi to connect to other users over the Internet.

The Nintendo DS Revolution

Compared with the Xbox 360 launch, the release of Nintendo’s Wi-Fi Connection service was a quiet revolution. Nintendo launched the free Nintendo Wi-Fi Connection with Mario Kart DS the first title to make use of the new functionality. Playing a racing game online is not exactly a news flash. However, DS Wi-Fi connectivity is notable for its incredible ease of use. The Wi-Fi Internet portions of the game are seamlessly integrated into Mario Kart DS. Set up takes approximately 30 seconds in most cases.

There are several ways users can connect to the Wi-Fi service and play others online: 1) users that already have a home wireless network can simply turn on their DS and start playing others online; 2) home users with a broadband connection can buy a Nintendo Wi-Fi USB Connector ($40) and connect it to their home PC; 3) on the road users can connect their DS to Wi-Fi hotspots. As part of the launch, Nintendo also partnered with Wayport and McDonald’s to create 6,000 DS compatible Wi-Fi hotspots at McDonald’s across the U.S. They made similar deals in Canada and Europe. Of course, users can also play at their local coffee shop if it offers Wi-Fi.

What separates the DS’s online functionality from the PSP’s or any console is its out-of-the-box, simple wireless connectivity. The interface is streamlined and standardized so that an 8 year old (or even an 80 year old) can get on in seconds. Taken together, Nintendo’s take on online gaming is to bring purity and simplicity to what has always been a somewhat confusing process for mass market consumers. We think it really has the potential to reach a whole new audience. The PSP we would compare to programming a VCR to record, the DS is more like turning on the television set and playing a movie.

In December Nintendo will launch Animal Crossing Wild World for the DS. Animal Crossing is basically the Sims for kids. The original version, released for the GameCube in 2002, actually was a precursor of some digital distribution ideas. Animal Crossing could link up to the GBA for item trading and scanning in new items from the e-Reader attachment and card packs bought at retail (very close to the prepaid card/virtual item trading concept). Animal Crossing for the DS will allow users to trade items and chat with up to 32 friends through Wi-Fi Connection.

It is clear that Nintendo plans to carry on many of its Wi-Fi ideas to the Revolution, even if exact details are scarce. Nintendo has said that the Revolution will focus on Wi-Fi online connectivity. At the 2005 E3 it was revealed that the Revolution would offer a digital distribution service for classic Nintendo products that would make the system a “virtual console” that would allow users to download games. Early in November, Jim Merrick, Nintendo Senior VP of Marketing for Europe, hinted at a possible user-friendly digital rights management (DRM) solution that could work for downloading multiple types of media, probably to flash memory storage. If the DS Wi-Fi service is any indication, ease of use could be the ace up Nintendo’s sleeve.

Conclusion

Online connectivity for console systems is still very much in its infancy. Both a wired and a wireless connection have their challenges. The Xbox 360 will connect to wired Ethernet connection out of the box. Unfortunately, many television sets are not located anywhere near a wired connection and running cable costs hundreds of dollars. A wireless adaptor for the Xbox 360 costs about $100 (it appears wireless will be built into the Revolution). However, wireless is not without its problems and is very prone to inconsistent service, deadspots and higher latency. Furthermore, wireless standards are constantly changing.

Another big question that could be looming in the future is will console systems become easily hackable with online connectivity. As any PC user knows, the Internet has created a whole new challenge with anti-virus, spyware and firewall software. Are we heading towards a day when console systems face spam and virus attacks? Consumers are not likely to be very tolerant of this activity when it comes to console systems.

Xbox 360 and Nintendo DS owners probably did not purchase their consoles for their digital distribution capabilities, or even for online game play. There is no doubt, however, that in the future online capabilities will increasingly factor into many gamers’ decisions. As many PC game developers have discovered over the years, online-play cannot be ignored. This is starting to be true for console games as well. What remains to be seen is whether the next generation of consoles will be used not just for online play, but also for digital distribution and payment. If one or more of the three consoles can unite those three components in a user-friendly and compelling package, we might be looking at a very different interactive entertainment industry value-chain by the time the next next-gen consoles roll around.