* Digital distribution of content increasing
* Microsoft seen leading, but race still in early stages
* Race is more a marathon than a sprint
* People still buy entertainment consoles mainly for games
By Gabriel Madway
SAN FRANCISCO, Aug 20 Microsoft Corp's (MSFT.O) Xbox 360 and Sony Corp's (6758.T) PlayStation 3 are locked in a battle to control entertainment in the living room beyond video games, a competition that is only growing more intense with the increasing popularity of digital distribution.
The two rivals have tens of millions of users, making them well-placed to capitalize if a critical mass of consumers begins to move toward a single "digital hub" that offers a buffet of media, including movies, TV shows, music and games.
The all-in-one hub has been touted for years as the future of home entertainment, but consumers have been slow to change, still opting to play their content on a variety of devices.
Although analysts caution that it is still early in the game, they say Microsoft --- which had a four-year head start
-- is leading Sony, with steady revenue from paying subscribers -- is leading Sony, with steady revenue from paying subscribers and a strong slate of content deals, including partners such as Netflix (NFLX.O) and Facebook.
Although the companies do not provide sales data for their entertainment networks -- Xbox Live and the PlayStation Network
(PSN) -- Jesse Divnich, an analyst with EEDAR, said sales have more than doubled year-to-date. He expects their combined revenue to top $1 billion in 2009, with Microsoft well ahead.
"We're seeing the video game systems try to take control of our living room by offering all the different services and entertainment needs we have, all in one box."
Xbox Live and PSN both offer movies, shows and videos, on top of game downloads. Neither offers music downloads, although users can play songs from their libraries.
Xbox Live Gold members pay $50 a year for additional goodies, including online multiplayer gaming and Netflix access. PSN offers online gaming for free.
But Microsoft has over the years amassed a dedicated group of gamers, said Wedbush Morgan analyst Michael Pachter, who estimates 11 million people pay for Xbox Live Gold.
"Microsoft made it simple -- do online games, then move that online game player into watching movies and the next thing you know he's going to be tuning in to Internet television. They've been very smart about it."
David Cole, founder of research firm DFC Intelligence, said the PlayStation 3's Blu-ray player broadens its appeal, but he said people are still mainly buying consoles for games.
"There are so many devices that you can use to watch video or listen to music ... now I've got to go buy a game system to do that, and a fairly expensive one?"
RACE TO BUILD A BROADER PLATFORM
Many set-top boxes, along with Apple Inc's (AAPL.O) Apple TV, offer movies and shows, but analysts say video games give consoles an advantage.
The Xbox 360 is the No. 2 home console in the United States, and sales are showing strength in a difficult economy. The PlayStation 3 is No. 3 and has struggled, but Sony just slashed its price to $299, which should help boost sales.
Nintendo's 7974.OS Wii is the best-selling home console. Analysts say the Wii has a major opportunity to offer more content, given its huge customer base of families and more casual gamers.
But Nintendo has yet to position the Wii as a broader entertainment hub. "The focus is really about video games," said Cammie Dunaway, Nintendo of America's executive vice president of sales and marketing.
Microsoft and Sony are massive companies, with their game businesses constituting only one small part. But both emphasized their ability to leverage the strengths of the larger company to turn their console into the living room hub.
"I like our position in the race," said Shane Kim, vice president of strategy and business development for Microsoft's interactive entertainment business.
"This is the entire reason why Microsoft got into the Xbox business in the first place, why we made the strategic investment in Xbox Live ... to build a broader consumer entertainment platform."
He said recent deals with streaming-music service last.fm, pay-TV broadcasters Canal Plus and BSkyB show that the Xbox is becoming a one-stop media center.
Xbox Live launched in 2002 and has 20 million members with an installed base of more than 30 million consoles.
At the same time, Sony said its sheer breadth of expertise across technology and content gives it the edge in a battle that will be more of a marathon than a sprint.
"We're a software company, hardware company, music company, a movie studio," said Eric Lempel, director of PlayStation Network operations for Sony Computer Entertainment America.
Sony's PSN, launched in 2006, has more than 26 million members. There are 24 million PS3 consoles on the market, along with 53 million PlayStation Portables, which can also access the network.
Sony has said it plans to better utilize and expand the PSN platform. Lempel said the company has an array of devices -- from Vaio PCs to Sony-Ericsson phones -- that will be able to tap into the content on PSN, giving the company a broad reach.
(Reporting by Gabriel Madway, editing by Matthew Lewis)
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