Big Game Hunting - Company Business and Marketing

Industry Standard, The, March 7, 2001 by Eric J. Savitz

As Microsoft strides onto the scene, the videogame business is poised for an upturn -- and a three-way shootout.

MICROSOFT DOESN'T SETTLE FOR SECond place. The office desktop? Redmond owns it. Internet browser? Bill Gates and company won that years ago. A new generation of Web services? Already miles ahead. Now Microsoft is ready to jump into a new arena: your living room.

Later this month, the tech titan will finally unveil the Xbox, its high-profile entry into the videogame business. Venturing far from its home turf -- operating systems and business soft ware -- Microsoft is taking dead aim at a multibillion-dollar market now dominated by a pair of well-entrenched giants, Sony and Nintendo. It's shaping up to be a costly three-way hardware war that's destined to speed the convergence of entertainment and computing, expand the ranks of game players beyond 14-year-old boys and extend Microsoft's reach deep into the consumer market.

At the outset, the mission is to capture the imagination of gamers. But the real payoff is several years away, when the game console turns into an all-purpose entertainment device, complete with CD and DVD players, Web browsing and interactive TV. And the contest, which Sony kicked off last October with the U.S. debut of its PlayStation2 console, is about to get a lot more exciting.

The next round will play out at the annual E3 electronic entertainment trade show in Los Angeles. On May 16, the day before the show opens, Microsoft will reveal the Xbox's launch date and price. (The rumored debut is early October; pricing should be in line with PlayStation2's $299.) Within hours of Microsoft's event, Nintendo will hold a splashy shindig to hype a new console of its own, the Gamecube. E3 will also be abuzz with anticipation of Nintendo's Game Boy Advance, which makes its U.S. debut June 11. And the air of anticipation will only build as developers introduce a slew of new games for PlayStation2.

It all adds up to a renaissance for the videogame industry -- one you can expect to hear a lot more about. Microsoft, for instance, has pledged to spend $500 million advertising and marketing the Xbox in the 18 months following its launch -- the largest product push in the company's history. "We intend to make a seismic impact with the launch," says David Hufford, Xbox's marketing manager.

The big bet makes sense. Microsoft has long dabbled in consumer markets; it provides Internet content via MSN sites like MoneyCentral and Carpoint, for example, and ranks among the top 10 providers of PC games with titles like Flight Simulator and Age of Empires. But with Xbox, Redmond sees a chance to dramatically increase its consumer business. "For our first 25 years, Microsoft focused on business applications," notes Hufford. "In the next 25, we're going to be touching the consumer more."

That doesn't sit too well with Sony. Though the company lost money on games in its fiscal year ended March 2001 due to costs associated with the PlayStation2 launch, in fiscal 2000 games accounted for a third of Sony's operating profits. This year the company is counting on a rebound, so it's not about to give up control of the TV to Microsoft. "We're very proud and protective of the market share we've established," says Jack Tretton, senior VP for Sony Computer Entertainment of America. He adds that after a slow start

-- Sony was unable to satisfy demand at Christmas -- the company has already shipped 3 million PlayStation2 units in the United States and 10 million worldwide, on top of 80 million first generation PlayStations. Total number of Xbox users? Zero. Microsoft has some catching up to do.

In addition, Tretton says Sony "won't be dwarfed in marketing spending." So figure on another half-billion for a PlayStation2 ad blitz.

Then there's Nintendo, which will spend $75 million on the Game Boy Advance launch this year, according to Nintendo of America spokeswoman Beth Llewelyn, who won't give details on Gamecube plans. She does say that the company's ad spending worldwide on its two systems over the next 18 months should be close to what Microsoft has budgeted.

All of this has software firms drooling. "We're just licking our chops here as third-party publishers," says Brian Farrell, CEO of THQ, publisher of the WWF Smackdown wrestling games. "Think of the consumer awareness. This is going to be a war for hearts and minds, for living rooms and kids' bedrooms everywhere."

The industry could use a boost. Sales have been soft for a year: Sony has been increasing PlayStation production slowly, Sega is exiting the console business and the Nintendo 64 platform is aging. U.S. videogame title revenues in 2000 were roughly the same as in 1999, at about $6 billion -- and 2001 won't be much better, though unit sales continue to grow.

But the industry isn't worried. It expects big things in 2002 and beyond. The conventional wisdom is that each console generation produces 50 percent more revenue than the one before. If that holds true this time, it won't be long before the gaming industry tops the $7.7 billion that Hollywood raked in last year at the box office - a big market indeed.