Judy McGrath, the chairman and chief executive of MTV Networks, remembers the first time that she saw one of the pretend guitars that are used in the video game Guitar Hero. “I'm like, are you kidding me?” she recalled recently. McGrath, after all, is a pop culture maven who is on first-name terms with Bono (or whatever the equivalent is for someone who only goes by one name). Put another way, she helped to start MTV and probably has logged as many nights at real concerts and hanging with real rock stars as anyone.

But when she saw the virtual game demonstrated, she immediately saw its potential for music lovers to emulate their idols at home. Guitar Hero went on to be a sensation, selling nearly 19 million units in nearly three years, and Viacom, MTV's parent, bought Harmonix, the Boston company that developed it (but no longer owned it), in 2006.

Now MTV Networks has a bona fide hit of its own in Rock Band, a Harmonix follow-up that broadened out the guitar-playing concept to add drums, bass and vocals when it was introduced last year. (For the uninitiated: think of this as karaoke with instruments, in which you can play along without necessarily having musical ability but simulate the feeling of rocking out on stage and see an animated version of yourself doing so on a TV screen. In other words, it's a great way to while away a financial crisis with your mates.)

In less than a year, Rock Band has sold 3.4 million units, according to NPD, the research group. A beefed-up Rock Band 2 has been introduced in the United States, with rollout scheduled for Britain by the end of the year, but already Rock Band's impact on Viacom is dramatic. The game has stood out as one of the few breakout growth stories on the media company's recent earnings statements in a year when stock in the business, better known for its cable channels and Paramount film studio, has slumped. In its latest results, ancillary revenues were up 67 per cent in the first half of 2008, “principally driven” by Rock Band.

Less noticed and perhaps more meaningful is Rock Band's role in reviving some of the musical mojo that MTV has been accused of losing in recent years. The iconic channel was launched in 1981 with the promise that “you'll never look at music the same way again” and, for much of its existence, was a button-pushing arbiter of musical taste and American pop culture in general.

Over the past few years, it has become arguably as well known for ditzy reality TV fare such as The Hills and bisexual dating shows than for playing music videos (a strategy that has, incidentally, paid off in a big rise in ratings over the past year). Meanwhile, Viacom missed out on buying the music-centric social network MySpace three years ago to News Corporation, parent company of The Times, which was a blow to MTV's digital aspirations.

Van Toffler, who oversees MTV's music channels, sees Rock Band as much as a “music play” as a gaming experience; Toffler went so far as to argue that Rock Band could be “the new iTunes”, because a central part of the business model is to offer downloads of songs for players — about 500 by the end of this year. That is fanciful, of course: iTunes has sold more than five billion songs so far, but Rock Band has sold 21 million downloads in less than a year and is emerging as a legitimate new sales niche for musicians.

In addition to downloads, Rock Band has just announced that it will release a playlist consisting of 18 live songs by the veteran rockers AC/DC in an exclusive deal with Wal-Mart in the US — the sort of promotion that has typically been seen with CD releases (in a similar vein, its rival Guitar Hero recently did a deal with the band Metallica in which fans could buy and play along to the band's new album).

Over a recent lunch of enchiladas in a dark Hollywood cantina, Toffler and McGrath told me that they see all kinds of potential for expanding Rock Band beyond its core library of largely classic rock songs and into all kinds of new releases from newer bands or other genres. More interestingly, since these games show an animated version of yourself playing on a TV screen, there is a thought about melding one's onstage persona with other online virtual worlds that MTV has created. There is even the potential to link players to real stars in real time. “Imagine John Mayer is on stage and you can play with him at home,” Toffler said.

For Viacom, the big question is whether Rock Band can deliver cash along with musical cache to MTV. Viacom paid $175 million for the company, but agreed to pay earn-outs to its investors based on exceeding targets. At the end of last year, the company said in SEC filings that it expected the payments to total another $208 million, but the final tally will not be done until 2009.

Benjamin Swinburne, a Morgan Stanley analyst, estimates that Rock Band will generate as much as $600 million in revenue for Viacom this year, with 4.5 million units sold globally. At that level, he estimates that the game is at break-even now and will not contribute profits until next year (the company also has to split revenues with Elecronic Arts, the game's distributor). According to the analyst, the main source of profits for Harmonix now comes from licence fees for Guitar Hero, a product that it no longer has an active involvement with. Indeed, Guitar Hero, which is published by a division of Activision, has its own souped up version — World Tour, featuring drums and a microphone — set to make its debut this month.

With the battle of these virtual bands about to go into full roar, I asked McGrath if Rock Band is the new MTV. She nodded, but then thought for a moment and reconsidered: “MTV is the new MTV.”

— Richard Siklos is an Editor-at-Large at Fortune magazine

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