Console Makers: Move It or Lose It

[brockly]

The Big Three gaming companies are powering-up their laser guns, sharpening their swords, and gathering their robot armies for what could be one of the bloodiest holiday seasons in video game history. The epic battles will play out on TV screens around the globe, but could do real-world damage to the bottom lines of console makers.

Hotly anticipated blockbuster games are nearing release, and each next-generation console—Microsoft's Xbox 360, Sony's PlayStation 3, and the Nintendo Wii—has had at least a full year to ripen on store shelves. "This is the most competitive holiday season in the history of video games," says Pacific Crest Securities senior research analyst Evan Wilson.

Get ready for giants Microsoft and Sony to square off in a battle for the hearts, minds, and wallets of the hardcore gamer. (Although Nintendo has been extremely successful with its innovative Wii console, its focus on casual players has allowed the company to circumvent gaming's perennial "mine is bigger than yours" competition.) But the pressure is likely to weigh heaviest on Microsoft (MSFT), which had a year's head start on its console competitors and is the market leader with more than 11.6 million Xbox consoles sold. The company just slashed the price of the most popular version of its Xbox 360 console by $50 following an earlier $100 price cut by Sony on the PlayStation 3.

Microsoft has fallen almost 4 million consoles short of sales predictions the company made in 2006, with Nintendo (NTDOF.PK) and Sony (SNE) both doing substantially better in the first half of this year, according to numbers from those companies, Slowing sales and the onslaught of sharper competition has placed increased pressure on Microsoft to outperform rivals this holiday season. "It is imperative they get consumers into the store NOW," according to a July 31 report by David Cole, president of gaming research firm DFC Intelligence.

Make or Break Season
Despite feeling the competitive heat, Microsoft is counting on an impressive lineup of games due out later this year, including Halo 3, the third installment in its popular Halo franchise. The first two games in the series have collectively sold almost 15 million copies since November, 2001, and the third game has already racked up 1 million pre-orders. Microsoft announced on Aug. 9 a bevy of cross-promotions, from Mountain Dew's Halo 3 "Game Fuel" soda to exclusive Halo 3 videos on Comcast Web sites. Also on the roster is the epic science fiction role-playing game, Mass Effect. "It's almost an embarrassment of riches," brags Shane Kim, corporate vice-president at Microsoft Game Studios.

Microsoft may be the one embarrassed if it's not able to solidify its No. 1 position this holiday season. "If this lineup of titles can't move boxes off the store shelves come January," writes Cole, "we will have to seriously revaluate Microsoft's long-term position in the marketplace." If that happens, Cole believes Microsoft could be in danger of becoming a distant third in the battle for market share in the video game business.

Bad press regarding equipment malfunctions (including general hardware failures and accusations that the console scratches game disks) has dogged Microsoft, which means Don Mattrick—who took over the gaming division on July 30 after industry veteran Peter Moore left to head EA Sports—may have his hands full for the rest of the year.

Still in the Running
With about 4.3 million consoles sold since the PS3 launch last November, Tokyo-based Sony has lagged the furthest behind. But Sony Senior Vice-President for Marketing Peter Dille insists the PlayStation 3 will soon hit its stride and begin outselling its competitors. "The PlayStation 3 will not only [still] be relevant in 10 years, it will still be driving the market," he says.

That may not spell success for this holiday season. Although Sony has some noteworthy game launches coming up, including the reintroduction of the classic Warhawk franchise, two of its heaviest hitters—Metal Gear Solid 4 and the next Final Fantasy game—won't be on store shelves until next year. That could be a problem for Sony and provide a competitive advantage for Microsoft, says Pacific Crest analyst Wilson.

Meanwhile, there's Nintendo. While Microsoft and Sony have both targeted more traditional gamers, Nintendo has taken a different tack with its Wii console. By focusing on attracting nongamers with simple motion-sensitive controllers, the company has removed itself from a rat race that values blockbuster titles and increasingly complex gameplay and graphics.

George Harrison, senior vice-president for marketing at Nintendo of America, describes Microsoft and Sony's rivalry as a competition over who can spend the most money on games rather than attract the largest audience. (Microsoft recently spent $50 million on additional exclusive content for Grand Theft Auto IV, five times as much money as was spent developing the Xbox 360's current best-selling game, Gears of War, according to statements made by Epic Games Vice-President Mark Rein.)

Winning with the Casual Set
"We're happy to stay out of that," Harrison says. "Microsoft is going to get their Halo fans. Sony is going to get their Ridge Racer fans. We just feel that there's a whole audience that no one is talking to."

He could be right. Nintendo is set to reenergize its classic franchises with Wii games like Mario Galaxy and Super Smash Bros. Brawl, where the company's archetypal characters Star Fox and Link duke it out in an arena-style format. And although less than 10 million Wii consoles have been sold, Wilson expects sales to jump to 16 million by the end of the year.

And while at one point it seemed as if Nintendo were crazy to introduce a console without advanced technology or high-definition graphics, the naysayers are looking increasingly wrong. If the Wii takes the lead this holiday season, expect publishers to continue shifting development resources toward casual games to capitalize on the console's success