Xbox Elicits Holiday Ho-Hums
Robin Luckey wants his money back.
The Seattle programmer was among the first to buy Microsoft Corp.’s Xbox video game console when it launched last fall. Now the machine gathers dust beneath his television. And none of the games that Microsoft plans to offer this holiday motivates Luckey to fire up his Xbox.
“I’d rather have my $300 back,” he said.
A year after Microsoft introduced its console, game critics and industry analysts are decidedly underwhelmed by the holiday lineup of Xbox exclusive titles -- games that can be played only on Xbox and not on rival consoles. Exclusives are important because they help sway consumers to buy the Xbox over competing machines.
“Obviously, they don’t have the killer [game] that makes people sit up and take notice,” said Shawn Milne, an analyst at SoundView Technology Group in San Francisco. “You need exclusives to drive console sales.”
The stakes are high. Consumers spend about as much on games as they do at movie theater box offices -- about $9 billion on hardware and software combined in North America. Microsoft spent hundreds of millions developing Xbox, its first entry into the competitive and fickle console market.
For manufacturers such as Microsoft, Nintendo Co. and Sony Corp., consoles are the high-tech versions of razors. They rarely make much money. But, like blades, the games for the consoles can be extremely profitable because manufacturers get a licensing fee from every title, regardless of who publishes it.
The next two holiday seasons represent the sweet spot for the industry, a time of expected double-digit growth. Sales of console games alone topped $4.5 billion in the U.S. last year. Analysts estimate that figure to grow between 20% and 25% this year and about 30% next year.
Shelf Space at Risk
But the growth won’t be evenly distributed among console manufacturers. Those that don’t attract buyers will quickly lose precious shelf space in stores such as Wal-Mart, Best Buy and Electronics Boutique.
Games sell consoles and games live or die on word of mouth. Last year, when Xbox debuted, the exclusive “Halo” took off. But little else did. A second Christmas with a lackluster lineup could relegate Microsoft to the growing pile of failed console manufacturers. Sega Corp., Atari Inc. and 3DO Co. have quit making consoles in the last decade after losing millions.
Few believe that Microsoft will surrender easily, but “the games that differentiate this machine just aren’t there,” said Geoff Keighley, an editor for GameSpot, a game news Web site.
There is plenty of buzz around “Grand Theft Auto: Vice City” for Sony’s PlayStation 2 and, to a lesser extent, around “Metroid Prime” for Nintendo’s GameCube. But there’s considerably less talk about “Splinter Cell,” “Mech Assault” and “Blinx: The Timesweeper” -- three marquee titles for Xbox this holiday.
Ed Fries, Microsoft’s vice president for games, said he isn’t bothered by the naysaying.
“I’m a little used to that,” Fries said. “People said ‘Halo’ wasn’t going to do well for various reasons, but it sold 2 million copies. When you have new, fresh titles, you’ll always have skepticism.”
Critics, however, point out that they see nothing in this year’s lineup that comes close to “Halo,” Microsoft’s exclusive bestseller last holiday. To be sure, people who have played “Splinter Cell” and “Mech Assault” say both are solid games. They’re just not garnering the same consumer anticipation as “Vice City.”
That Xbox has few exclusive titles that sparkle suggests Microsoft is having trouble persuading top game publishers such as Redwood City, Calif.-based Electronic Arts Inc. to devote significant resources to developing games just for Xbox, analysts said. Publishers privately acknowledge that’s the case.
It’s a function of pure economics. As a quick rule of thumb, publishers allocate their game development dollars according to the market share for each console. Microsoft is in a distant second, with a quarter as many Xboxes in U.S. living rooms as Sony has PlayStation 2s.
By the end of August, Sony had sold 10.8 million PS2s in North America, accounting for about 69% of the U.S. console market, according to estimates from game publishers. Xbox’s 2.7 million boxes represent 17% of the market. Nintendo follows with 2.2 million GameCubes, a 14% share.
“We have an excellent relationship with Microsoft,” said a senior executive at a major publisher. “But ultimately, it’s all about the installed base.”
Exclusive Offerings
Publishers would prefer to put their games out on all three platforms because the cost of transferring a game to multiple consoles is insignificant. But hardware companies dangle financial incentives in front of publishers to snag exclusives.
Microsoft budgets these incentives directly into its cost of doing business in an “opportunity fund.” The company, for example, can offer to help pay marketing or development costs in exchange for exclusive content or exclusive time windows during which only Xbox versions are sold. Microsoft also gains leverage by discounting the $7 licensing fee it charges publishers for each copy of an Xbox game sold.
But Sony plays that game too. The company this year announced that Take-Two Interactive Software Inc.’s hugely popular “Grand Theft Auto” franchise would be exclusive to PS2 until 2004. Although Nintendo also uses incentives to lure exclusive games, it relies less on them because the Japanese company already owns strong studios that can crank out games for its platforms.
Such one-upmanship is expensive. Microsoft last month purchased Rare Ltd., a British developer, for $375 million. Xbox games from Rare, however, won’t be out until next year -- too late for this holiday season.
If this year’s crop of games appears lackluster, next year is shaping up nicely for Microsoft. By generously sprinkling incentives from its “opportunity fund,” Microsoft will reap exclusive titles such as “Panzer Dragoon: Orta” from Sega; “Halo 2” from a studio it purchased two years ago; “Perfect Dark” from Rare; and “Doom 3” from Id Software Inc.
“Part of my job is to encourage people to develop for us,” Fries said. “But I’m not going to bribe someone to build something exclusive on my platform. I want to spend it on titles we think are important. There are some publishers who are inclined to develop for all platforms, and the only way you can change their mind is to dump a huge pile of money on them. I guess you can do that if you want to, but I’d rather see that money go to creating new content.”
That still leaves the next few months to worry about, when about half of the industry’s annual sales are rung up.
“Even if they have great games, it’s going to be very hard for Microsoft to compete,” said Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles. “Sony’s got a huge head start. If Microsoft has trouble getting people lined up this year, by 2003 they’ll be three years behind. By then, it’ll be awfully tough for them to convince retailers to give them enough shelf space. If I’m Wal-Mart, I’m going to want to concentrate on the top sellers.”
