“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.