Home entertainment solutions, such as the PlayStation, Xbox and Wii, are enabling services that could bring them in direct competition with IP set-top boxes. Today most IP STBs do not offer gaming at the level proposed by any of the Home Entertainment Solutions (HESs) like Xbox or Wii. Going forward there are two ways to look at it.
Either the HESs are going to become STBs or the STBs are also going to have HES features. It is expected that Sony and Microsoft will have their HESs also become reasonably priced STBs. Microsoft has already announced this type of plan and their announcement of Mediaroom (merger of their IPTV middleware and the Mediacenter) is certainly taking us in that direction.
We might also see STBs providing some basic gaming features but none of the STB manufacturers are gaming specialists and at best they will only add the odd vanilla game that you see in the US cable offerings. And that in no way enables a STB to compete with the Xbox or the Wii.
The issue for the HESs will be to keep the price affordable. Eventually we will have 3 tiers of STBs - the entry level (no gaming at all), the mid-level (basic gaming), and the high level (networked gaming / Xbox / PS). The prices will be commensurate with the services provided by the STB.