LOS ANGELES—AC/DC and Metallica may be licensing tracks for Rock Band 2 and Guitar Hero, but there are signs the brief love affair between the videogame industry and the music business may be nearly over.

At E3 in Los Angeles this week, videogame makers from Nintendo to Activision announced new games that focused more on user-generated music—either from their own collections or songs they create—signaling a new direction that reduces costs while moving their businesses in line with broader trends around the personalized way music is consumed.
 
On Monday, Microsoft showcased a new karaoke game called Lips, which promised to be the "first game that lets you sing from your own music collection." Instead of using selections chosen by the developers, players will plug in iPods or Zunes to utilize their own libraries—similar to a feature in many Xbox 360 games, which allows MP3s on the systems hard drive to be used as the game soundtrack. While the music is still popular, it's no longer licensed, and therefore no longer a cost the developers have to absorb.

That theme continued on Tuesday night when Activision's press event showed part of an upcoming Guitar Hero game that will feature a music-editing tool called Music Studio, allowing players to create music, mix it together, save it, and share it with others. The songs will be uploaded to Guitar Hero Tunes, a new service that appears more YouTube than iTunes.

Also on Tuesday, Nintendo announced Wii Music, a game that uses the motion controller to simulate an array of instruments. Though the demonstration featured some of Nintendo's most popular tunes as sheet music, there also promises to be a mode where people can play instruments—from violins to tubas—without constraints.

But the final destination of music games is user generated—where the players become the composers. "We see that as the ultimate holy grail of the kind of software we're trying to develop," says Greg LoPiccolo, who is in charge of product development for Harmonix—the software house responsible for the original Guitar Hero, and now Rock Band, which he sees as a "weigh station" on the way towards that goal.

LoPiccolo reports that Harmonix is hard at work on several methods to let players create their own music. "We've had a little Skunk Works working for years," he tells Portfolio.com, adding that it's a messy process of experimentation. "We're waiting until we have something we feel is fit for presentation"

The original Guitar Hero had a freestyle mode that wasn't used in the final version, and subsequent experiments have had the same result: "It's doable," says LoPiccolo. "It's amazingly fun. It is doable, but it requires some breakthroughs."

So when could the market see the full user-created musical experience? "My estimate would be two to three years."

And does this mean, finally, the end of all those games with licensed music tracks?

"I wouldn't go so far as to say that," says a cautious LoPiccolo. "I think the reality you'll see come to pass is both of those coexist. Playing along to licensed music tracks pushes a different set of buttons."