The Big Ho-Hum: Handheld Fever, Revenue Hunting, and Aging Gamers Mark a Familiar E3

Electronic Gaming Business, May 19, 2004

Perhaps fitting for an industry so wedded to franchised properties, E3 2004 looked a lot like a warmed over sequel to E3 2003 with most of the stars of last year's expo providing the only points of interest this year. From the Sony PSP to Halo 2, Eye Toy to movie tie-ins, most attendees had already been around this block.

And also like last year, Entertainment Software Association president Doug Lowenstein lightly scolded publishers for the risk-aversion that was so evident on the show floor. "Seventy percent of male gamers want the game industry to rely less on licensed content and more on original content in the next decade," he recited from ESA research. "Developers and publishers who prosper in the next decade will be those who dare to break out of their comfort zones to create new kinds of games that meet the full range of diverse tastes populating the market."

The big disconnect between where the industry says it needs to go to satisfy consumers and where development energy actually flows may explain why Nintendo had such a surprisingly good E3 after last year's disappointing appearance. Lines for the demo showing of the dual-screen GameBoy DS were hours long, and crowds gathered around GameCube titles like Donkey Konga, which uses a unique drum controller. Meanwhile at Sony, not even the PR reps could point us to a first or third party title that offered unique and innovative game play. Microsoft's terribly cramped and chaotic booth was too focused on its new Xbox Live/EA deal (see Data Filter) and Halo 2 (again) for anything new to stand out. In that atmosphere, Nintendo seemed to emerge as the one company focused on getting out of the "comfort zone."

Give Us a Hand

The much touted battle of the handhelds between Sony's PSP and Nintendo's DS could well prove moot, as the two machines seemed positioned differently in the minds of many attendees and publishers. Pledging that Vivendi Universal Games would support both platforms, Michael Pole, SVP for Worldwide Development, says, "The PSP is pretty slick technology. The DS has a wealth of new features that drives creative thinking." The impressive technology behind the PSP is likely to skew older, especially since its puts a premium on recreating the PS2 experience and multimedia playback.

Many publishers saw the DS appealing to the younger demo and those who prized genuinely novel game play using touch screen and wireless capabilities. Like attendees, game makers seemed surprised at how appealing the Nintendo unit was once they tried it. While the DS does risk becoming a niche curio, interest in the novel game play of Super Mario 64x4 gave the platform credibility.

The revenue models for both handhelds could experience early bumpiness, however. SCEA CEO Kaz Hirai admitted to Reuters at the show that component costs would keep the PSP from being profitable in the early going, but that he expects a 10-year life cycle from the unit. He also hinted that while six to 10 launch titles were needed, the company may debut the unit with as few as six, "maybe with one or to great killers," he said. The development cycle for the PSP's planned early 2005 launch may be a problem for third parties, as EGB found no publishers committing to having anything ready by then. For Nintendo, the DS's profitability may be challenged by LCD availability and costs, president Satoru Iwata also admitted to Reuters.

Publishers say they are enthusiastic about portables in principle, but many like Graham Hopper, SVP and general manager, Buena Vista Games also say they will be looking carefully at the price points and demographics of both units before committing too many resources. BVG is one of the top publishers of GBA titles to kids and teens, but "our publishing strategy with the PSP will be careful matching of properties and targets," says Hopper. "We will get into the DS in short order," he adds.

Even as most publishers were gushing over the new handhelds, Jupiter Research issued its projections confirming the optimism; 85% of 18- to 34-year-olds expressed interest in portable game devices, according to analyst Michael Gartenberg. While handheld gaming among adults remains an unproven model, Jupiter feels that the 24-to-35-year old segment represents the biggest opportunity for the next-gen portables because of the high level of console gaming in this demo.

And because women are not well served by consoles, yet they enjoy quick casual titles, this could be a platform that the female gaming segment finally embraces. Jupiter thinks the addressable audience for handhelds should explode from 23 million today to 43 million by 2009, with total revenues for the platform growing from $1.6 billion last year to $2.7 billion in 2009.

Good Stream Hunting

While portable gaming was the dominant theme of E3, a quieter but perhaps more substantial undercurrent was the search for new and different revenue and distribution models for gaming. Sony's Hirai kicked off the theme at his media briefing with a vision of gamers buying new weapons, levels, special powers, and characters as add-ons they download from their connected consoles. Likewise, Microsoft announced it will move the fee-based casual gaming format of the Internet to Xbox Live later this year in its Arcade line of $10 downloadable casual games. "We view a future where mini-transactions are the norm," says Hirai.