Let the Games Begin: Console Makers Race for Market Share

By ALEX PHAM

May 17, 2001 12 AM PT

TIMES STAFF WRITER

With three electronics titans spending a combined $1 billion over the next year to impress the public with their latest gadgetry, the video game console business might seem pretty lucrative.

In fact, Microsoft Corp., Nintendo Co. and Sony Corp. all expect to barely break even or lose huge amounts of money on every one of the high-tech boxes they sell. For example, Microsoft, which will launch its $299 Xbox on Nov. 8, is expected to lose about $125 per console--as much as $2 billion over the next five years, according to estimates by Merrill Lynch.

So why do they bother?

The answer lies in the licensing fees console makers reap from game publishers, who must pay $7 to $8 on average for each disc sold. But publishers will put out games only for the console they think will sell best. Plus, any box maker who can establish a beachhead in American living rooms has the advantage in controlling the flow of entertainment--from games to movies to music--as such diversions move online.

As one game executive put it, console manufacturing is a “necessary evil” required to reap the rewards of high-margin software and entertainment business. And that’s why Microsoft, Nintendo and Sony are making mighty efforts this week at the Electronic Entertainment Expo in Los Angeles to show off their respective consoles.

Wednesday morning, Microsoft touted Xbox as the only new set-top console with a built-in high-speed Internet adapter--a key feature for playing games online. Hours later, Nintendo showed off the graphic punch of its Gamecube console. And in the afternoon, Sony announced key enhancements to its PlayStation 2 machine, including a 40-gigabyte hard disk drive and a separate Internet adapter.

Microsoft plans to ship as many as 1.5 million Xboxes this year in North America. Sony already has sold 3 million PlayStation 2s since its launch last October and plans to sell an additional 4 million by next March. Nintendo on Wednesday did not release sales projections.

The news conferences highlight how important the next year will be for console companies clawing for market share as millions of game players swap out their old hardware for the next new thing. The last time the video game industry saw such massive change was in 1995 and 1996, when Sony introduced its PlayStation console and Nintendo launched its Nintendo 64.

That last transition revealed how high the stakes are. Sega, once the industry leader, faltered with its Saturn console and was never able to regain its footing. In March, Sega dropped out of the hardware business when it ceased production on its Dreamcast machine.

“Installed base is incredibly important,” said Schelley Olhava, a senior analyst with IDG in Mountain View, Calif. “The larger your installed base, the more games you can sell. A larger installed base also gives publishers incentives to continue to make games.”

This year, the task of selling game consoles is complicated by the fact that the audience for games is broadening beyond adolescent boys. Data to be released today by the Interactive Digital Software Assn. show video games are more popular among older, more educated and wealthier players than in the past. And their diverse tastes are reflected in the fact that no particular genre of game dominates the market.

All three major console makers say their boxes appeal to this emerging mass audience.

“Online games have the potential to change the industry in the same way MTV changed the music business,” said Robbie Bach, Microsoft’s vice president in charge of the Xbox project. “We’re moving online games from the novelty it is today to a necessity for gamers.”

Satoru Iwata, head of worldwide planning for Nintendo, said the advantage to staying in the low- to no-margin console business is that internal developers can retain control over how games play on the system. Nintendo Vice President Peter Main called hardware development a “necessary evil” essential to the company’s core business of selling games.

“Hardware is there to serve the software,” Main said in an interview last week.

But Sony, the world’s largest consumer electronics company, has positioned PS2 as more than just another game machine. The company hopes to sell digital entertainment via the Internet and use PS2 as the hub in a consumer’s home entertainment system.

“Our business is such an integrated business between software and hardware,” said Kazuo Hirai, president and chief operating officer of Sony Computer Entertainment of America.

Times staff writer Jon Healey contributed to this story.

Let the Games Begin: Console Makers Race for Market Share

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