Game console wars escalate in 2001, focus on versatility

DSN Retailing Today, Jan 1, 2001 by Doug Desjardins

Sony Entertainment Corp. emerged as the clear winner in the battle for market share this holiday season, but the game industry giant won't have it so easy during the next go around in 2001. By the time the next holiday season arrives, Sony will be facing the launch of new generation systems from Microsoft (X-Box) and Nintendo (GameCube) and an evolving market where game consoles have become multimedia machines that enable users to do everything from surf the Web to play DVDs.

"Over the years, the game business has been in a cyclical sales pattern that was dictated by the shifts to new platforms," said industry analyst Tom Adams of Adams Media Research in Carmel, Calif. "But now that may be changing with the emergence of multifunctional, set-top boxes that do everything."

The fourth quarter of 2000 will probably be best remembered for what consumers couldn't buy. Sony's Playstation 2 was primed to be the hottest gift item of the holiday season, but production problems created a shortage that made it virtually impossible to find. And there's no telling when consumers will be able to simply walk into a store and buy one on the spot.

"That's hard to gauge because it's all based on consumer demand," said Sony spokeswoman Stephanie Iwamasa. "The production schedule [shipping an average of 100,000 to stores per week] will remain the same going into 2001, and the rest will depend on the marketplace."

Despite the PS2 problems, Sony dominated the market through sales of PSone, a repackaged version of the original Playstation that retailed for $99. Though final sales figures for the fourth quarter won't be available until early January, trends for October and November indicated that Sony will capture about half the market on console sales through combined sales of PSone and PS2.

The other half of the market was shared by Sega's Dreamcast and Nintendo's N64 systems, with Nintendo probably getting a slight edge on Sega.

Dreamcast proved to be the biggest surprise. The system posted strong sales during the holidays (it accounted for 26% of console sales the third week of November) and profited largely from the unavailability of PS2.

Nintendo 64 continued to chug along and maintained its sizeable share of the market with some help from the debut of its newest installment in the "Legend of Zelda" series.

Overall, the holidays provided a big boon for the game industry. On the strength of fourth quarter sales, the industry is expected to generate revenues between $7.2 billion and $7.5 billion for 2000 compared to $6.9 billion in 1999.

"In a way, everyone sort of won this year," said Matt Gravett, game analyst for PC Data, an independent research firm based in Reston, Va. "It was supposed to be a down year because some of the big players were in a transitional phase, but overall sales are probably going to be up about 12%."

Picking a winner in 2001 will be a crapshoot. Two systems have already raised the bar in terms of multi-functionality, and another pair will arrive later this year to try to top their rivals.

Sega ushered in a new era in video game consoles in September 1999 when it introduced Dreamcast. The console was not only the first 128 bit system to hit the market, but the first to incorporate a modem and Web browser into its hardware.

Playstation 2 upped the ante in October 2000 when it introduced its next generation system. In addition to playing both new and old Playstation games, the system features a drive that can play DVD movies and CDs.

"It really makes sense for Sony to create a system that takes advantage of all their resources, since the company has a huge movie and music library," said Gravett. "The PS2 is really a true home entertainment system."

The new generation of game consoles will definitely have a dual appeal, said Doug Lowenstein, president of the Interactive Digital Software Association. Hardcore gamers will still be interested mainly in the quality of graphics and the games that come with the new systems, while more casual fans will be looking for something more.

"It's the second tier of buyers who are more likely to look for the options," said Lowenstein. "They'll be looking at the systems that have the most functionality and see them as a way to own a major home entertainment system that has everything they need at one price point."

The challenge for rival manufacturers Microsoft and Nintendo is to introduce systems that don't mimic Playstation 2 but create the impression they're providing something even better.

"They need to make themselves unique and separate from PS2," said Gravett. "It's a matter of them saying 'We do everything they do, and we also give you this.'"

Exactly what the new systems will feature is still not set in stone. Both Microsoft and Nintendo have made their basic parameters public, but will probably keep their systems a work-in-progress for as long as possible (both will probably be unveiled at the annual Electronics Entertainment Expo this May in Los Angeles).