“Give me a little volume,” says Alex Rigopulos, in a cramped, windowless music studio in Cambridge, Massachusetts. The squeal of feedback fills the room. It’s time to rock—with Rock Band, the new videogame his company, Harmonix, has created.

Rigopulos, a lanky 37-year-old C.E.O. with wavy dark hair and bushy sideburns, holds a small, white, plastic guitar with five brightly colored buttons on the neck. To his left, a young blond woman in green sneakers and tight black jeans swings a microphone. On his right, there’s an unshaven nerd twirling drumsticks over a set of pancake-size drums, while beside him is a spiky-haired hipster with another Lilliputian guitar in his hands.

The group stares at a wide-screen HDTV that shows a cartoon band mounting a stage. With a rumble and roar, the Guns N’ Roses classic-rock song “Welcome to the Jungle” blasts from the speakers, and Rigopulos’ crew begins to play. The object of Rock Band is to perform in sync with the music. As the song unfolds, colored dots cascade down the screen, corresponding to the guitar buttons you’re supposed to press or the drum you need to pound. If you’re on vocals, you must sing on pitch and sync with the words scrolling by. A bar on the side of the screen rises and falls according to how well (or poorly) each gamer performs.

By the end of the tune, everyone is sweaty and has scored well, despite the singer’s hapless phrasing. “It’s sort of like being in a real band,” the young woman says. “Someone can suck, but the rest of the team pulls him or her through.” As one of the most innovative and anticipated games coming out this holiday season, there’s hope that Rock Band and its creators will help the videogame industry pull through too.

Despite the occasional uptick, the videogame business is stagnating. Software sales in the United States have idled at around $7 billion for the past three years. PC game sales, despite the success of titles like World of Warcraft, dropped from $1.1 billion in 2004 to $970 million last year. In May, the sector’s top publisher, Electronic Arts, reported a first-quarter loss of $25 million. In short, the industry has been searching for a way to grow beyond the traditional hardcore gamers who play WoW or Grand Theft Auto or Halo.

Enter Harmonix. Founded by two former Massachusetts Institute of Technology grad students, the startup is riding two trends that will define the future of gaming: digital distribution that expands the business model, and interactivity that gets gamers off the couch and attracts new breeds of players.

When the company’s last play-along franchise, Guitar Hero, was released at the end of 2005, it was an odd—and, at $80 to cover the included plastic guitar, pricey—offering. Guitar Hero pioneered the same essential design as Rock Band, but with just one instrument. The interactive component made the game fresh, and Guitar Hero became a sensation, most notably with a broader audience than the usual thumb jockeys.

Made for “barely seven figures,” Rigopulos says, Guitar Hero and its sequel, Guitar Hero II, sold more than 2.5 million copies, brought in more than $200 million in combined revenues, and gobbled up the major industry awards. Fans from Wall Street to Warsaw stage Guitar Hero tournaments and “Guitar-B-Cue” parties. The two games are must-have tour accessories for real rock bands. Detroit Tigers pitcher Joel Zumaya sat out the American League Championships nursing a wrist injury—from playing too much Guitar Hero. Viacom took notice of the games’ success and paid $175 million last year to buy Harmonix, making it the cornerstone of MTV’s videogame strategy. “It’s an obvious fit for MTV,” says Van Toffler, president of MTV Networks Music Group. “This is our music gaming play.”

The arrival of Rock Band, which will be sold and distributed by Electronic Arts, is reason enough for gamers to get twitchy. While Guitar Hero was a solo gig, Rock Band enables up to four people to play together, in person or online.

But to Harmonix, Rock Band is much more than a game. It’s a new platform for delivering music and building community online. “We’re not taking on Google,” Rigopulos quips. “MySpace and iTunes are enough for now.

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Rigopulos and his Harmonix co-founder, chief technical officer Eran Egozy, 35, are unlikely videogame moguls. The two met while working in the music division of M.I.T.’s renowned Media Lab. They also played together in the school’s Balinese gamelan orchestra. One of their projects engineered a way for classical musicians to augment their performances with computer-generated accompaniment. “[Many projects in the lab] were focused on expert musicians,” Rigopulos recalls. “What was interesting to us was everyone else—the other 99 percent of the population.”

So they made a gizmo that lets users manipulate musical sounds by twisting a couple of joysticks. In spite of its terrible name, Joystick Music, it became the hit of the department. Fellow students and visiting luminaries, including musician Peter Gabriel, lined up to have a go. Rigopulos turned to Egozy and said, “I want to start a company. What do you think?”

After founding Harmonix, in 1996, they released its first product—a consumer PC version of Joystick Music—with high hopes and an earnest tagline: “There’s a musician trapped inside everyone.” It tanked. During a trip to Japan, where music games like karaoke are a national pastime, the two realized they were in the wrong business. Instead of writing music software, they should be creating videogames. There was just one problem: Music games just wouldn’t stick in the United States. The team’s first couple of PlayStation releases garnered critical acclaim but few sales. Even a karaoke title failed to turn a profit.

When RedOctane, a fledgling manufacturer of videogame dance pads in Sunnyvale, California, approached them to create a music game with a guitar-shaped controller, they balked at the high price point and inventory risk. “No reasoned analysis would lead you to believe it would be successful,” Rigopulos says. But that was precisely what would make Guitar Hero a runaway success. Like the music it celebrated, it was an improbable hit, from the tiny whammy bar on the plastic guitar to the gleefully cheesy covers of ZZ Top and Megadeth.

Songs were carefully chosen for their “playability,” says Ted Lange, associate producer at RedOctane. “They need changes in verse and chorus and at least one good solo.” When master recordings were unavailable, a session band covered the songs for the game. Marcus Henderson, Guitar Hero’s real-life guitarist, re-creates the tracks with utmost respect. “I’m a method performer,” he says. “I get my ass in gear and do the research.” He recorded Nirvana’s “Heart-Shaped Box,” for example, with Kurt Cobain’s preferred equipment: a Fender Mustang guitar and a Boss DS1 distortion pedal.

Gamers went nuts for Guitar Hero’s new and intuitive interactivity. So did the major console manufacturers, who continue to glom on to its allure for nontraditional gamers. “It’s an experience people can understand and not get intimidated by,” says John Rodman, senior product manager of Microsoft’s Xbox 360. “A music game like Guitar Hero is the perfect entry point for an expanded audience,” says George Harrison, senior vice president of marketing and corporate communication at Nintendo. Or, as Toffler puts it, “Any knucklehead in his basement can play guitar in the game.”

Real bands were jazzed too. After My Chemical Romance first tried the game before a show, band members immediately called their manager, as drummer Bob Bryar recalls, and said, “Why aren’t we in this game? It rules!” (They got their wish in Guitar Hero II.)

“This is the new MTV,” Rigopulos says.

 

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Harmonix’s offices, a stone’s throw from M.I.T., have all the trappings of a typical videogame company. There are stacks of soda cans and coffee drinks by the magnet-covered fridge, dreadlocked and tattooed coders and artists slurping down instant noodles, and framed photos on the wall that show company geeks dressed up like Kiss.

But Rigopulos and Egozy, as they kick back in a corner office, say they see themselves differently. “We’re not a game publisher; we’re a music company,” Rigopulos says. “For us, Rock Band isn’t just a game. It’s a platform for experiencing music.” Rock Band comes preloaded with 40 or 50 songs that run the gamut from classic-rock standards—The Who’s “Won’t Get Fooled Again,” David Bowie’s “Suffragette City”—to popular contemporary singles such as The Hives’ “Main Offender” and Weezer’s “Say It Ain’t So.”

 

And that’s just a start. Additional tracks will be available for purchase and downloading online. Harmonix pioneered this videogame model with Guitar Hero II for the Xbox 360. The game comes packed with 74 songs, but axe freaks who tear through them can buy additional tunes for less than $2 each and download them to the 360’s hard drive. The licensing deals are different from those of TV and movies; instead of paying a single buyout fee, Activision, which published Guitar Hero II, pays a per-unit royalty to the label.

Record companies couldn’t be happier. “It’s people buying music, which is a great thing, and we should do anything we can to help that,” says Rob Stevenson, executive vice president of A&R at Island Def Jam Music Group. Monika Ebly, licensing and publishing coordinator at Victory Records, touts this emerging market as piracy-proof, since the songs are not in a format that can be played on iPods or other portable devices. “We’re not seeing a lot of revenues from iTunes, because people are still downloading music illegally,” Ebly says. “This is a way to put music in front of a new audience, and we’re guaranteed not to get ripped off.”

The payoff for bands is just as great: Veteran musicians can reach a younger generation, and Guitar Hero gives newer artists a fresh way to break out. Before “Six,” by the death-metal band All That Remains, appeared in Guitar Hero II, it was just another fledgling act on the Ozzfest. Now it has sold more than 100,000 records, and band members are greeted by a sea of devil-horn hand salutes every time they kick into their Guitar Hero number at concerts. Says lead singer Philip Labonte, “This has done as much for the band as the single we ran all last summer.”

Harmonix has even bigger plans for Rock Band: to make it the destination of choice for online music downloads, including songs for MP3 players, videos, and gameplay.

“You can imagine that you can purchase a playable song, and with another click, you can own [the MP3 version of] the song,” Toffler says. Harmonix plans to introduce new artists as well, just as MTV did for years in music videos. “Bands already want to release songs in Rock Band,” says Rigopulos. “It becomes like new radio for major bands, indie and unsigned.”

Of course, once players start downloading songs and creating their own bands, the natural thing to do is find a way to bring them together. That’s where MySpace-style social networking comes in. Rock Band creates a forum where players around the world can create profiles, interact, and swap music recommendations.
But there are potential stumbling blocks. “I personally think it’s being ambitious beyond its ability with Rock Band,” says Michael Pachter, an analyst with Wedbush Morgan Securities. Harmonix is unproven as a developer of peripherals; it needs to not only make workable instruments but keep up with production demand. Across the internet, gamers are grumbling, hoping there won’t be a prohibitive price point for Rock Band. Harmonix says it’s committed to keeping the price low and suggests that consumers will be able to buy instruments individually. The online component, though, is potentially more daunting. All internet activity is prone to delays, and the slightest hitch could cause players to jam out of sync.

Harmonix may also face competition from its own brand when Activision, which now owns the Guitar Hero franchise, releases Guitar Hero III—currently in development by Neversoft and RedOctane without Harmonix’s participation—this holiday season.

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At the end of every day at Harmonix, the gamemakers rise from their desks and take the elevator downstairs for what has become a company ritual: the jam session. A windowless storage room has been converted into a sort of mini CBGB. There’s a black-light poster with neon mushrooms on the wall. There are guitars (real ones) and battered amps, a tattered pirate flag, and a light system hanging from the ceiling. A beat-up drum kit floats in a sea of splintered drumsticks.

Yet despite Harmonix’s rapid expansion throughout the building, a few law and accounting firms remain. The other tenants haven’t taken kindly to the heavy-metal feedback pounding through the walls and have set a restriction, much to Rigopulos’ chagrin. “They told us we can’t play until after six,” he says.

Harmonix won’t be playing by anyone else’s rules for long: It will soon be leaving this building for a larger space in town. There’s no telling how much further it will go when Rock Band mania hits and the players take over. “You can smash as many of our guitars as you want,” Rigopulos says with a smile, “and we’ll happily sell you some new ones.”