Our take...
The PlayStation video store has the potential to gain a significant share of the US online movie market, mainly due to the direct connection of PS3 consoles to the TV set. Microsoft has already demonstrated that games consoles can become major 'trojan horse' online video platforms – according to Screen Digest the Xbox Live Video Marketplace was responsible for over a quarter of all online movie rentals in the US in Q1 2008, following the launch of Apple's iTunes VoD services. By the end of 2008 Xbox360 is forecast to have a much bigger US connected installed base than its rival – 13.5m Xbox360 consoles compared to 8.8m PS3s.

While movies rented through Microsoft's console are restricted to playback through the Xbox360, SCEA is replicating Apple's ecosystem device structure, allowing content bought on one device to be transferred across to another in the company's range. Permitting users to copy video from the PS3 across to the PSP increases flexibility and is likely to encourage uptake of the store. Sony has the capability to extend this ecosystem to include more of its products.

The US PlayStation store is at odds with Sony's European online video services. While Sony is running the US store itself, offering movies which are playable on both the PS3 and PSP, the company has partnered Pay TV operators in order to get content to its devices – Canal Plus in France and BSkyB in UK and Ireland. More importantly the European services only allow movies to be transferred to the PSP; video cannot be bought on or transferred to the PS3. Until Sony extends these services to the PS3 uptake is likely to be much more limited than in the US.

Sony's launch of the US PlayStation store was announced the day after Microsoft revealed its new partnership with Netflix, offering the DVD rentailer's online streaming service through the Xbox360 to Xbox Live Gold subscribers who also have a Netflix subscription. While continuing to offer movies through its own Xbox Live store Microsoft may be moving towards acting as a portal, offering video from multiple content providers on a single platform. While Sony's European strategy doesn't directly mirror this, the company has foregone operating its own store, allowing third party providers to distribute content to the PSP instead. Sony Computer Entertainment Europe (SCEE) has decided that pay TV operators are the best partners with content aggregation skills available and that it does not make sense for them to try to aggregate their own video content. . If the console companies do go down this road it stands in marked contrast to Apple, which is still the market leader in the paid-for online video segment. Apple has maintained exclusivity for its iTunes Store as the only outlet serving paid premium TV and movie content to its range of devices (the only exception so far has been DVDs carrying 'digital copies' of certain movies wrapped in Apple's Fairplay DRM). The iPod manufacturer has, however, allowed free non-premium content to be delivered directly to the iPhone, Apple TV and iPod Touch (as yet Apple's only partner for free content is YouTube).

For the games console manufacturers, there is an argument that it may prove more cost effective to leverage the expertise of entertainment companies such as Netflix or Sky who can use their existing relationships with rights holders to bring content to their platforms. By offering content from many of these third party providers, alongside its own, a device manufacturer such as Microsoft or Sony should be able to offer a much more extensive library than if they sought to strike the deals directly. However, in practice things have not always worked out like this: in the UK the Sony/Sky JV Go!View launched with ~40 movies, by contrast Apple's direct approach yielded 700 movies at launch. Significantly, partnering with a third party spares the console manufacture from bearing the content acquisition costs. This is especially attractive given the low-to-zero return for service providers in the digital downloads space, and the fact that paid-for digital downloads only act as value-adds propping up other profitable businesses (whether it's hardware sales, online DVD rental or pay-TV).

More pressingly, by launching its own movie download service, Sony is selling a product which is competing with the company's own Blu-ray discs. Offering the same titles on both physical discs and through the PlayStation store is likely to result in some cannibalization of physical product. However, this cannibalization may be limited. It appears that while digital rentals will be available in HD from the PlayStation store, digital retail is only available in SD format. Consequently Sony's online proposition will not be directly competing with Blu-ray in the more lucrative retail market. In any case, consumers who purchase physical products are believed to have little overlap with those currently interested in digital downloads, and so the short-to-mid term effect on Blu-ray may well be negated.