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Monday, December 19, 2005

Got game? Living-room consoles grapple for consumers' eyes, wallets

Got game? Living-room consoles grapple for consumers' eyes, wallets

"The holidays are here, so it must be time for another round of game-gear hype. Only one of the next-generation platforms is in production. Regardless of when they emerge, they all plan to evolve their capabilities beyond gaming with an eye toward being the home's entertainment centerpiece.

Three years ago, when EDN last covered gaming consoles in a Hot Technologies edition, that industry was at a notable inflection point (Reference 1). Sony had been shipping its PlayStation 2 in the United States for a little more than a year; the company had launched the PS2 in Japan almost eight months earlier. Microsoft's Xbox was a month old, as was Nintendo's GameCube. Fast-forward three years, and all three consoles are success stories to varying degrees and defined by varying measurement criteria. Look at the Xbox, for example; on the one hand, Microsoft has, according to a recent article, lost $4 billion over the last four years on the console (Reference 2). On the other hand, Microsoft reported in January that, by the end of 2004, the Xbox worldwide unit market share was 37%, up from zero two years earlier and against long-established console competitors (Reference 3).

The gaming industry had reached another crossroads as this article went to press in late November. Microsoft's Xbox 360, barring a last-minute introduction delay, will, by the time you read this article, have launched in all three primary geographies: the United States on Nov 22, Europe on Dec 2, and Japan on Dec 10, with the first wave of consoles likely sold out (Figure 1). Introduction dates for the Xbox 360's primary competitors are unknown; for now, Nintendo will say only that the Revolution unveiling won't be until some time after March 2006. However, the company recently asked game-industry insiders to mark their calendars for a May 9, 2006, press briefing-the first day of the E3 conference (Electronic Entertainment Expo, As for the PlayStation 3, a recently published interview with Howard Stringer, Sony's chief executive officer and chairman, hints at a spring-2006 rollout in Japan, with US consumers not getting their hands on the console until the end of next year (Reference 4). This year also marked the unveiling of several significant next-generation handheld gaming consoles (see sidebar "Next time, portables get their turn").

With every passing generation, the success-or-failure stakes get dicier in the $25 billion gaming business for both hardware manufacturers and content developers (Reference 5). Echoing Microsoft's monetary morass, the PlayStation 3's development costs reportedly heavily influenced Sony's 46% drop in corporate profits in the second fiscal quarter of this year, compared with that same period a year earlier (Reference 6). Mark Thomas, the senior ISV (independent-software-vendor) manager for ATI Technologies, succinctly pointed out in his presentation at October's SID (Society for Information Display) ADEAC (Americas Display Engineering and Applications Conference) that game-development costs are seeing a fivefold increase per generation. (Given the new consoles' significant hardware incompatibilities, those costs are on track to meet or exceed that pace in the games' next iterations.) Meanwhile, only one in 10 games ever turns a profit. And Reggie Fils-Aime, executive vice president of sales and marketing for Nintendo, shared equally disturbing statistics about retrenching trends in the core gaming market during an early-November briefing on the company's DS portable console's WiFi service. (Click here to view the statistics.)

With all of this gloomy news, why would any sane company seek its fortunes in the gaming business? Because the one title that is profitable can potentially far more than make up for the nine that incur losses. In the fourth quarter of 2004, the one quarter that Microsoft's Home and Entertainment division turned a profit, the group's fiscal triumph was the direct result of the mid-November 2004 unveiling of the franchise title Halo 2, which earned $125 million in its first 24 hours on the market and had, by press time, sold more than 8 million copies at roughly $50 a pop (Reference 7). One tempting title is often sufficient motivation for a consumer to take the console-purchase plunge. Granted, the hardware manufacturer may sell that console at a loss. But, once the consumer's on the hook, every subsequent game sale is a highly profitable enterprise, either directly-if the console manufacturer also sells the game-or through licensing revenue-if the game comes from a partner company. Microsoft forecasts that it will sell 2.7 million to 3 million Xbox 360s in the first three months the console is on the market and 10 million by the end of 2006. Over that initial three-month time frame, Microsoft believes it will earn approximately $1.5 billion in revenue from the sales of not only consoles, but also games, peripherals, and online-gaming subscriptions (Reference 8).

Short-term success is exciting, but pragmatic long-term vision is equally important. If Nintendo's data indicating atrophy of the core gaming segment is true, then future growth will need to come from expanding beyond that core by attracting new gamers into the fold, by broadening the console function beyond gaming, or both. From a high-level perspective, the three first-tier next-generation living-room consoles might seem to be "kissing cousins"; Microsoft and Sony based their systems on the same IBM-developed PowerPC core, as Nintendo likely will (Table 1). But peer closer, and you'll see significant differences emerge, reflecting each company's unique view of what's necessary for success in this next round of the console wars. There is, however, one other notable similarity: The words "living room" are key parts of each company's strategy. The company whose console becomes the entertainment nexus for the home has control and influence over and, therefore, obtains direct and indirect revenue from, all content flowing into and out of that home." [more]

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