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Fri 19 Oct 2007 04:00 AM

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Console wars

A look at the intense competition in the game console world, where launches are now bigger than in Hollywood.

It was the biggest event yet seen in the US$35bn global video game industry. Halo 3, the shoot-em-up sensation for Microsoft's Xbox 360, took US$a170m in the US alone in its first 24 hours on sale last month; it flew off the shelves in the Middle East too. The game blitzed Hollywood's blockbuster opening of the year, Sony Pictures' Spider-Man 3, which took in a comparatively miserable US$151m at the box office during its three-day opening weekend in May.

More than 1.7m Halo 3 units were pre-ordered in the US before it went on sale at midnight on September 25, making it the biggest pre-selling game in history. Halo 3 was released within a couple of days in 37 countries, including the UK, and 17 languages, matching the scale and sophistication of Hollywood's marketing armoury. Gaming is bigger than Hollywood, at least when it comes to individual launches. The overall film business, with more outlets and a greater range of spin-offs, is projected to achieve revenues of US$84bn globally this year, more than double the US$37.5bn forecast for the game industry, according to accountants PricewaterhouseCoopers.

But gaming is catching up fast: console, portable and PC game sales in the US hit US$13.5bn in 2006, up 18% on the previous year, according to NDP, a market analyst. US sales will hit US$16bn - US$18bn this year. More mouthwatering still is the profit mark-up on the games. Sony will see an estimated profit margin of 46% on Spider-Man 3, according to SNL Kagan, an entertainment research firm; Microsoft has the potential to see a profit margin of 90% or more on Halo 3. Although Spider-Man 3 will probably bring in worldwide revenues of US$1.4bn for Sony, eclipsing Halo 3, the game stands to make Microsoft a profit of more than US$500m - not far short of Sony's expected profit of US$628m on its blockbuster film.

The video games market has changed beyond recognition since the 1980s, when customers could choose between the charms of Italian pizza chef Mario (courtesy of Nintendo) or hyperactive blue hedgehog Sonic (from Japanese rival Sega). Back then the supporters of games consoles were fiercely loyal and crossing the Sega-Nintendo divide was nothing short of sacrilege; today, the Facebook generation is much less loyal. Sega abandoned the field to concentrate on arcade machines after Sony's PlayStation 2 wiped it off the map in 2001, around which time Microsoft also made a play for the market with its Xbox. But one thing hasn't changed: manufacturers remain locked in "console wars", an intense and often bitter battle to provide the best graphics and games.

Now in the "seventh generation" of video games, the major players are vying for the top spot in a market where overall revenue is expected to increase by 42% in 2009. By 2012, when the companies are expected to move to the next generation of machines, total sales of today's top three - the Nintendo Wii, Sony PlayStation 3 and Microsoft Xbox 360 - will total 210m.

For now, Nintendo is well and truly on top. In fiscal 2007, it reported an 89% increase in sales and a 77% rise in net income, pushing its market cap to 8.4 trillion. Astonishingly, it became the second most valuable Japanese company after Toyota last month. In the UK, the Wii has become the fastest selling console of all time, shifting over one million units in the 38 weeks since its launch. This success has been repeated across the globe; the Wii has sold 9m units worldwide compared to 8.9m for Microsoft's Xbox, despite the fact that the American company launched over a year earlier. It is also far more profitable than Sony or Microsoft's products: both lose money on consoles which they hope to recoup from game royalties.

The Wii - which costs around US$360 - makes Nintendo US$74 on every unit sold in Europe, US$49 in the US and US$13 in Japan. By contrast, Microsoft's Entertainment and Devices Division - which houses the Xbox business - lost US$693m in 2006 while the game segment of Sony's business produced an operating loss of US$1.97bn in fiscal 2007.

Nintendo's success story is simple. Its machine is cheap because it is comparatively unsophisticated. While hardcore gamers have bemoaned the product's below-par graphics and lack of feature-length games, the firm is happy to leave this market behind. Instead it has targeted the Wii at a new kind of consumer: the casual gamer. This buyer has neither the time nor inclination to spend hours mastering complex games, instead preferring to spend five or 10 minutes a day playing a simple, challenge-based game.
The Wii is easy to play and extremely tactile, thanks to the Wiimote, a remote control sensor which mirrors the player's actions. In a game of ten-pin bowling all the player needs to do is hold the Wiimote and swing it underarm. Similarly, in a game of tennis, swinging the remote like a racket makes contact with the virtual ball.

While Sony and Microsoft have spent millions researching and developing their latest chipset, the movement sensor on the Wiimote - which has been widely available for years - costs just US$5. The games are also cost-effective, with much more in common with 1980s hits like Pac-Man and Mario Brothers; in many ways, Nintendo's success has brought it full circle.

The harder task for Nintendo was changing the image of gaming. Until the Wii, video consoles were the preserve of coach potatoes and teenage geeks; they were also undeniably male. The Wii was targeted at three groups normally seen as outside the gaming world: families, females and the elderly. Remarkably, the console has been a big hit with residents in care homes for the elderly. As well as the Wii Sports suite, other games include Boogie - a game which lets users make music videos for their favourite songs - and a soon-to-be-released version of Guitar Hero, which allows players to strum a simplified cordless guitar along to famous rock songs; it's the kind of game that will fit the casual gamer like a glove.

Nintendo began targeting the casual gamer in 2004 when it launched its handheld games console, the DS; instead of releasing traditional gamer fodder, it developed software that would appeal to a broad market. Dr Kawashima's Brain Training Game - which consists of games that allegedly train a user's IQ - has been a massive hit, selling over 5m copies worldwide.

Other titles in the pipeline include one which provides step-by-step instructions on how to taste and choose wine and skincare software aimed at the female market. The strategy has worked. In the last 18 months purchases of the DS by female consumers have risen 42%, with sales to the over-30s up 127% and over-35s by 212%. If it continues to sell at this rate, it will soon become the world's best-ever selling console. The console wars have never been predictable, however, and Nintendo's success is far from guaranteed. In Japan, last week's sales of Sony's handheld console the PlayStation Portable (PSP) rose by over 600% to 95,000, comfortably beating the DS's 80,000. The surge had nothing to do with the machines themselves, but was spurred by the release of a new game: Crisis Core Final Fantasy VII. All it takes to radically alter the fortunes of the companies is a hit game in the right market. Microsoft is hoping that Halo 3 will do the same for the fortunes of its Xbox. Set in a futuristic universe, Halo has always been a big seller for Microsoft; its 2004 version generated US$125m in just 24 hours - yet another record. The two previous versions of the game have sold 15m copies; the current version retails at US$80. Royalties aside, the game is also likely to increase sales of the Xbox itself; on the strength of this game alone Microsoft could sell an extra 2m Xboxes before Christmas.

For Sony, there is no such hope. Although its PlayStation 3 console is undoubtedly the most technically sophisticated - with a cutting edge processing chip and a "Blu-ray" DVD player - it is also the most expensive, retailing at over US$800 in most electrical stores, twice the price of the Wii. Sales have lagged around the 3.4m mark, although it was released around the same time as the Wii, while game releases in the run up to the all-important Christmas period are thin. The jewel in Sony's crown - a virtual online world where gamers can meet and make friends - has also suffered a damaging setback. Initially planned for release this Autumn, Sony Home was expected to help the company strike lucrative sponsorship deals with big-name advertisers. But as with so much on the PlayStation 3, things have not worked out as hoped; Sony Home will now launch next spring, missing the holiday period. The only option left is to cut prices before Christmas, something the company is increasingly likely to do.

PlayStation 3's time could still come, however. As technologies such as High Definition TV and Blu-Ray DVD become more common, its features will start to stand out. It is here that Nintendo could come unstuck. Although its cheap and novel product is making impressive inroads, some of the millions of dollars its competitors have been spending on research and development are earmarked for the next generation of games consoles, expected in 2012.

The eighth generation will be the one where manufacturers offer graphics which are truly life-like, the long-promised virtual reality experience. The danger for Nintendo is that, by going back to its 1980s game plan to chase a new market, it will soon realise it has been left behind. But five years is a long time in the universe of the console wars. Until then Nintendo, the company that delivered us pizza boy Mario, looks set to reign supreme. This article first appeared in The Business.

It’s game onNot to be left behind, interactive entertainment research specialists DFC Intelligence has predicted that the global PC game market could be valued at US$13bn by the year 2012. Analysts at the US-based research firm believe much of the PC market's growth will come as a direct result of online gaming revenue, which includes in-game advertising, digital distribution and subscriptions. Another report published by the firm earlier this year showed that the PC market generated US$4.5bn in revenues in 2006.

DFC also claims the market for handheld gaming systems, such as the Sony PlayStation Portable (PSP), and next generation systems, like the PlayStation 3 and Microsoft's Xbox 360, are on the rise. Using a separate forecasting model, DFC estimates the total worldwide sales for PCs, handhelds and living-room systems will reach between 180 million to 210 million units by the year 2012. DFC, which published its first official report in 1995, also estimates that the entire gaming market, comprising revenue from console gaming hardware and software, dedicated handheld gaming systems, online PC gaming services and PC games, could be worth US$47bn by 2009. The industry was worth US$33bn last year.

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