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March 28, 2006

Eric Mankin on The 2006/2007 Video Game Wars

Eric Mankin of the Innovation and Corporate Entrepreneurship Research Center at Babson College sent out his weekly ICE Update newsletter yesterday, and it's a great one. I've posted it below. If you're not currently a subscriber to the newsletter, you can sign up by sending him an email.

Game Wars 2006 (and 7)
27 March 06

The major videogame battles coming up in 2006 and 2007 will be in consoles, the computer-like boxes that plug into your TV set. While Sony and Microsoft pursue a highly publicized product development strategy focused on massive computing power and multi-functionality, Nintendo’s approach is based on new kinds of game play.

My prediction: Nintendo will be the surprise winner in the battle between Microsoft and Sony.

Game Console Wars 2006 – three companies, two strategies

This battle has not yet begun. Both Sony and Microsoft have experienced significant start-up problems, so none of the systems are currently available at retail.

The Xbox 360’s scarcity

The Xbox 360 launched on November 22nd, 2005. Microsoft spent about $100 million promoting the product, to good effect -- PR firm Schneider & Associates found in its annual survey of most memorable product launches that the Xbox 360 was one of the top two most memorable launches of 2005.

Unfortunately, Microsoft hasn’t been able to produce enough consoles to meet the demand.

"[Microsoft] created demand for 5 million [units] and they delivered 607,000..." Michael Pachter, an analyst at Wedbush Morgan Securities, in The New York Times, Feb. 06

Production of the Xbox 360 has been slowed by persistent component shortages. Microsoft won’t specify which components are causing the problem -- the device has more than 1700 components supplied by over 200 manufacturers.

As a result, the product is currently unavailable at retail. If you want to buy one, you can pay 20-40% above list price on eBay.

Sony delays the launch of Playstation 3

On 15 March, Sony announced that it was delaying the launch of its competing game console, the Playstation 3, by about six months, from April to November. Ken Kutaragi, the head of Sony’s Game Division, said the delays were caused by problems in developing copyright protection technology for Sony’s new Blu-ray DVD format.

Like the Xbox 360, the Playstation 3 will be packed with technology. A Blu-ray DVD player will be included, as will a 60 gigabyte hard drive, wireless connectivity to other Sony devices, and a camera. The Cell processing chip at the core of the console, jointly developed with IBM and Toshiba, is capable of processing at speeds more than twenty times faster than its predecessor.

A “Red-Ocean” battle of the giants

Sony and Microsoft are pursuing similar strategies in their new consoles. As Reggie Fils-Aime, Exec VP of Sales and Marketing for Nintendo, noted in February:

"Microsoft is ... trying to get you to put a PC in your living room because they are fundamentally a PC software company. Sony is trying to get you to put an entertainment hub that has Blu-ray technology because that’s important to their movie business and the rest of their entire electronics business." Reggie Fils Aime, Interviewed by Peter Rojas, Engadget.com, 20 Feb 06

Both companies are pursuing “Trojan horse” strategies – they sell their consoles at a loss with the hope of making profits by selling additional products and services that use these consoles over the next several years.

The Industry’s Stalled Growth

In the meantime, growth in videogame consoles has stalled. US revenue in the industry overall grew about six percent from 2004 to 2005, due to strong growth in handhelds, like the Nintendo DS. But sales of videogame consoles declined by 12 percent, according to market researcher NPD.

And sales of videogame software for those consoles declined as well, by six percent. Electronic Arts, the market leader in videogame publishing, has warned that its sales will fall below expectations in 2006. At the end of January, the company laid off about 5 percent of its workforce.

Many analysts expect this kind of slow performance in a “transition period” between game systems. Consumers are reluctant to buy new games or hardware when a new generation console is on the horizon.

Nintendo’s management sees the problem as a more profound one -- the videogame industry has not expanded beyond its core market of boys and young men.

“This industry can no longer rely simply on more and more young men coming of age to try gaming, and being in the … “ten to twenty year old” demographic. The fact is that that demographic is shrinking and the next cohort, their younger brothers, is even smaller.” Reggie Fils-Aime, Feb 06

Nintendo’s Revolution

Nintendo’s new Revolution game system will probably launch in June 2006. The company acknowledges that it will not be as technology-laden as either Microsoft’s or Sony’s offerings. While Sony and Microsoft consoles are designed to be multi-functional entertainment hubs, Nintendo’s Revolution will focus on game play, with a newly designed wireless controller that contains motion sensors.

Nintendo hopes that the Revolution will enable it to expand the appeal of its videogames to new customers who currently don’t own any system at all.

The console wars of 2006 will offer two competing strategies across three companies. But these battles haven’t started yet -- both Microsoft and Sony must first overcome the technical and logistical problems that are plaguing their sophisticated systems.

More Information:

1. The New York Times story on videogame sales lagging was from 6 Feb 06.

2. The Business Week article on Sony’s delay of its PS 3 system ran on 16 March 06.

3. The interview with Reggie Fils-Aime was posted on 20 Feb 06 and comes from the engadget blog.

4. I wrote about Microsofts’ Xbox 360 in an ICE Update from May 05.

5. I also did an Update in Sept 04 on the previous round of game wars, between the Nintendo DS and the Sony PSP.

6. The April 2006 issue of Wired Magazine, edited by Sims creator Will Wright, is devoted to an aesthetic appreciation of video games.

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