Game Consoles Morphing into Entertainment Gateways

Electronic News, Jan 22, 2001 by Brian O'Rourke

WITH SOME UNITS POSITIONED AS LIVING ROOM entertainment gateways, the video game console market will continue its growth over the next several years. Sales will soar from $4.1 billion in 2000 to $7.8 billion in 2004. Next-generation consoles provide ample opportunities for semiconductor, hard drive, DVD, networking and memory card manufacturers.

Sony's PlayStation2, introduced in late 2000, is pacing the game-console pack. The company's follow-up to the most successful product in video-game history -- its original PlayStation -- is already enjoying higher sales in the lucrative Japanese market over its first five months than the original.

PlayStation2 is equipped with the 295MHz MIPS-based Emotion engine, Sony's own CPU designed with Toshiba Corp., a 147MHz graphics processor that renders 75 million pixels per second, a DVD player, an IEEE 1394 serial connection, and two USB ports. Sony will use DVD discs for game titles and gives consumers the option of using the product for gaming, DVD movie playing and eventually Web surfing.

Some new consoles will come equipped with DVD, broadband connectivity and a hard drive for storage. Nintendo's Game Cube -- scheduled to debut in Japan in July and in the United States in October -- will come with DVD capability, though its custom drive will not allow movie playback. The Game Cube will be powered by a 405MHz Motorola Inc. PowerPC processor and be equipped with a 203MHz ATI Technologies Inc. Art X graphics processor.

Microsoft Corp.'s much-hyped Xbox will feature a 733MHz Pentium III processor and an Nvidia graphics processor. The product -- scheduled to ship this October -- will include a Fast Ethernet card, memory card slots, IEEE 1394 capability, a hard drive, DVD player and HDTV support.

These game consoles are evolving into low-end computers or home entertainment gateways capable of audio, video and high-speed Internet connections. Some may be able to support PC printers and other peripherals in the future. In a recent dramatic announcement, Sega said it was working with Inomedia to set up a voice-over-Internet-protocol network using the Dreamcast platform.

The versatility in new consoles can only help to boost sales.

Sega is pursuing a road never traveled in the game business, as it moves from its current role as a console manufacturer to that of an Internet service provider (ISP). Sega followed up on the 1999 introduction of its Dreamcast console with SegaNet, an ISP that features networked gaming. Sega contends that hardware technology is near a peak and future developments will be marginal.

The company believes the next frontier in gaming is interactivity. Sega is so convinced of this that it is offering a game console for free inretum for an 18-month subscription to SegaNet. The company may be dead right in its assessment. Online gaming will grow rapidly over the next three to five years to the point where it may rival packaged games in revenue. This development will make high-speed Internet access via consoles more important than ever.

Conceivably, online computer gaming could erode the console market, but that is unlikely. The new generation of consoles is so good in its graphics capability that online gaming will probably never be able to compete in that area.

A new console entrant, Indrema.com, is basing its product on the Linux operating system. Indrema's console, scheduled for release this spring, features a 600MHz x86 chip and an Nvidia graphics chip. It will also have a Fast Ethernet port, an AC3 decoder and a 10Gbyte hard drive. The company believes its open source console will have an advantage over competitors because it will be able to line up more game developers and quickly build up a portfolio of hundreds of games within a year of its release. But Indrema.com will likely not be able to match the marketing muscle of its competitors and could have difficulty getting buy-in from large game developers that make the most popular titles.

Sony, having led the console market from 1995 to 2000 with 47 percent market share, will remain the dominant player in the console market through 2004. Nintendo and Microsoft will be its fiercest competitors as Sega gradually phases out its console business.

Brian O'Rourke is a senior analyst with Cahners In-Stat Group, Scottsdale, Ariz.