What Hardware Transition? How Software Maturity Will Play Out

Any talk of a hardware transition slump in the industry is premature, if the latest forecast of console sales worldwide from StrategyAnalytics is any indication. With nearly 90 million advanced consoles in place by the end of this year, there is still a lot of room for growth into 2005. Expect an expansion of 58% this year alone, says analyst David Mercer, with a drop-off to 25% growth in 2004 - none too shabby. Clearly, Asian penetration will peak this year, with the North American base leveling in 2005. Europe is the growth opportunity for publishers, because the excitement surrounding newly-bought consoles is coming later there.

More to the point for the game publishers, we think the customary "hardware transition" slump between console generations will be softer this time around for a number of reasons:

* Current-gen consoles are robust enough to support compelling title development longer. These consoles are far from being visibly constrained by the hardware.

* Online play essentially adds a half-generation to the current platform, reinvigorating players' experience with the hardware even when the dazzling technological capabilities of a PS2 or Xbox grow stale. This is especially true for the hardcore gaming segment. Rather than getting bored with current hardware and looking to a next-gen platform, they will be busy exploring the current generation's online capabilities.

* It ain't just gamers anymore. Gaming has gone mainstream, penetrating audiences it hasn't had before and carving out niches among segments that care more for game play experience than hardware dazzle. Over the next few years, publishers finally have a relatively stable platform from which to drill into these market niches with targeted titles (i.e. party titles, younger child games and educational ware, low-key, non-twitch adventure titles, puzzle titles).

* Hardware companies are smarter this time around, recognizing how tantalizing previews of next-gen hardware can kill sales of their current platforms prematurely. We are almost two years into the PS2's life cycle and PS3 is still all vague rumors about blue-ray DVD and zillions of internal processors. Good. Hardware vendors need to keep the next-gen blueprint close to the vest and let the current platform settle in with users and developers.

* The next generation of hardware will be harder to sell and it will suffer from the monstrous success of the current generation. How do you get 80 million users in North America to upgrade? Take a lesson from the PC, where home users have resisted upgrades in the last few years because they decide that what they have is good enough. With rendered 3D graphics of HDTV quality, 5.1 audio, and broadband connectivity already available, what truly compelling and unique selling points can the PS3 or Xbox2 (YBox?) muster?

Shakeout and Settle In

Our line is that we see a shaking out and a settling in. Nintendo will not be able to overcome its late slow start in this console generation. Strategy Analytic predicts GC sales will fall 4% in 2003. With no viable online strategy, a relatively shallow title pool and disappointing console sales, it is unlikely to eclipse Microsoft's unstoppable determination to be the lone loyal opposition to Sony dominance. As it is, the title mix is unfocused and too reliant on ports interspersed with whatever Shigeru Miyamoto is producing. Sorry, Mario.

Strategy Analytics' analyst Mercer advises Nintendo to abandon its proprietary software strategy and develop the excellent and singular titles it does produce across the other more popular platforms, but we can't agree that this is realistic. With the incredible success of the GBA, and its own long tradition, Nintendo isn't ceding the console war. It might be able to hang on until the next generation of hardware if it carved a clearer software niche, perhaps as the kid's console or the RPG console.

With Xbox Live at 350,000 subscribers and Halo 2 poised to be a system seller this Christmas, 2003 is shaping up to be what 2002 was for the PS2 -- the year when the games started living up to the hardware hype and gamers started seeing the platform's distinct benefits.

Xbox sales will rise 14% this year, StrategyAnalytics says, but we think publishers will be wise to leverage some of that platform's unique strengths: that hard drive for game add-ons and storage and the brilliant in-game Dolby Digital audio. Add the built-in support for HDTV resolution, and having the right titles that exploit these goodies could make the Xbox the console of choice among the growing legion of home theater owners. Xbox should emerge as the "Wow" platform, while PS2, still holding the overwhelming majority of the market, is a great place for publishers to broaden their reach into new game play niches.

Contact: David Mercer, Strategy Analytics (Europe), +44 1908 423 610, dmercer@strategyanalytics

Global Console Installed Base Forecast (in millions)
               2000  2001  2002  2003  2004  2005   2006   2007   2008
North America  1.2   11.1  26.8  42.9  54.5  61.4   67.8   74.9   80.6
Europe         0.8   5.5   16.1  28.9  37.6  43.1   48.9   53.7   54.5
Japan          3.6   8     13.3  17.2  18.9  20.1   22.1   23.1   23.1
Total          5.7   24.6  56.3  89    111   124.7  138.9  151.7  158.1
Growth Rate          333%  129%  58%   25%   12%    11%    9%     4%

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