E3 Post-Game: The Big Get Huge And The Rest Start Scrambling

Electronic Gaming Business, May 21, 2003

Undisputed console king Sony and leading games publisher Electronic Arts flexed serious muscle in front of the 62,000 attendees at this year's Electronic Entertainment Expo in Los Angeles. Early post-show analysis suggests that the PS2 continued to have the most broadly marketable set of titles and strategic partnerships, while EA's hit-driven, franchise and licensing-fueled business model is setting a high bar for other publishers to reach.

Sony's glitzy PS2 Eye Toy and announced entry into the handheld market in late 2004 (see Data Filter) drew much of the press attention, but the company's partnerships with EA Sports and AOL to run their content over the PS2's online network may be the company's most important coups. EA told the Wall Street Journal just before E3 that it was not developing sports titles with Xbox Live functionality because Microsoft was unwilling to pay for it or give EA more control over the titles on its network.

The PS2 continues to hit the bulls-eye of the mass market, according to most analysts. "Sony's first- and second-party titles steadily improve year over year," says Billy Pidgeon, senior analyst, Zelos Group. "Third-party support along with a huge installed base ensures that PS2 will retain important exclusives throughout this hardware cycle."

Online console play is shaping up to be a key battleground between Sony and Microsoft, as this is the place where the companies can maintain user interest and innovation during the transition to the next generation of hardware, says Strategy Analytics senior analyst Nick Griffith. Microsoft countered the Sony/EA punch by announcing its own XSN Sports line of online sports titles, which emphasizes community and fantasy-league play. "I think that, even with the stronger EA titles behind it, Sony may not have it quite as much its own way as it would hope," says Griffith.

Despite Sony's obvious market dominance and the EA snub, Xboxes were highly visible on the show floor. Middle-tier and smaller publishers like Metro3D and Simon & Schuster Interactive told EGB they considered Microsoft an extremely supportive partner and that the platform's somewhat smaller library offered them a unique opportunity to poke through the title clutter. "Microsoft did have a lot of the products that I feel will attract the niche hardcore gamer," says Andy McNamara, editor-in-chief, Game Informer magazine. "It sets them up well for the next round of machines.

On the other hand, with few substantial announcements, no online component, and a lackluster list of upcoming titles, Nintendo failed to alter anyone's view that the legendary company was coming in as an also-ran in this generation of hardware. GameCubes were noticeably sparse on the show floor with few publishers discussing specific plans for the platform. "Nintendo talked a lot about how they were going to expand to a mass market, but their products looked very much like traditional Nintendo games," says David Cole, president DFC Intelligence. "It's like they are living in the 90s," adds McNamara.

Even Nintendo's star attraction, the best-selling GameBoy Advance, was the object of grumbles by third-party companies. Several publishers complained publicly and told EGB that without a major intellectual property license it was very difficult for GBA game titles to sell through in sufficient numbers and at a high enough margin to make money from the platform.

But if anyone had a worse show than Nintendo it was Nokia, whose launch of the handheld game/phone N-Gage met with widespread cynicism about the $299 price point and the willingness of publishers to develop for a hardware manufacturer with no game experience. "Nokia looked almost completely lost," says Cole. "The N-Gage does not have the look of a successful system."

Hit-Driven, Licensor-Approved?

As a number of executives from numerous companies reiterated throughout the show, gaming has become a true entertainment medium that is following all of the familiar mass market buying patterns of other hit-driven media. "Chart position is increasingly important in our industry," Carolyn Feinstein, vp of marketing communications, EA told a panel. "People buy by the charts."

For now, they are also buying by name recognition. "Licensing is driving this industry," says Bill Fulton, user testing manager, Microsoft. Nevertheless, with licensing fees crawling into seven figures, middle-tier publishers wonder how they can compete against a deep-pocketed behemoth like EA, which made a very big show of its Lord of the Rings and Harry Potter tie-ins. Likewise, THQ's library seemed dominated by its many Nickelodeon licenses.

The more affordable joint venture deal may soon replace straightforward licensing in the industry. On the heels of the release of its own Enter the Matrix tie-in with the new blockbuster film, Atari's vp of marketing Steve Allison told one audience that joint ventures are a good way to gain greater access to an intellectual property's assets for use in the game.

Similarly, Phillipe Erwin, vp, interactive entertainment at Warner Bros., thinks publishers should be crafting partnership deals with property owners in order to benefit from the consumer marketing power of a major media company like AOL Time Warner. "We're looking at this as an investment, how to help partners grow the franchise. It's not about minimum guarantees but marketing," he says.