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HIVE EXCLUSIVE: Game on for Mass Market

7 Sep, 2001 By: John Gaudiosi

While the video game industry has continued to grow its installed base of consumers with each new generation of gaming systems, games have mostly been considered a hobby or niche market for teenaged boys. With the launch of Microsoft's Xbox on Nov. 8, which will be backed by $500 million in marketing over 18 months, and Nintendo's GameCube on Nov. 18, which has $75 million slated to market its launch window this Q4, and the steady sales of PlayStation 2 (which launched last Oct 26), the next generation of video game systems is poised to delve further into the homes of the mass market consumer than ever before in its 20-year history.

“I think more important than video games becoming more mass market, over the next five to 10 years, consumers of entertainment content will have grown up playing video games as a primary source of entertainment,” said Doug Lowenstein, president of the Interactive Digital Software Association. “With the constant influx of new video game players and older players sticking with gaming, our industry will become a major form of popular entertainment. I think it's fair to say that as early as within the next three years, video game sales will beat out Hollywood box office ticket sales.”

Although still transitioning to the fifth generation of video game platforms, the video game industry is expected to bring in over $8.5 billion in hardware, software and peripherals sales this year in the U.S., according to analysis by International Development Group (IDG), a respected San Francisco-based firm that tracks the worldwide video game industry. But that's just the tip of the digital iceberg, according to video game analysts and industry experts.

“It's pretty likely that we might see video game sales in the U.S. of $12.8 billion to $13 billion next year,” said Anton Bruehl, president of IDG. “The key is for all three systems, GameCube, Xbox and PlayStation 2, to survive in the marketplace. Although historically there have always been two competing game platforms, I think that Sony, which is on top of the food chain, Nintendo, which is a video game veteran that has been doing this forever, and Microsoft, a titan that never gives up, are in this for the long haul, and have an unprecedented amount of revenue to keep all three systems afloat.”

“There's no doubt that this sector will grow leaps and bounds over this next cycle,” said James Lin, managing director and senior analyst for Jefferies and Co. “I see no reason why game sales won't hit $18 billion by 2006, as some have forecast.”

Lowenstein expects software sales, which does not include the sales of the video game hardware, to reach $10 billion to $15 billion in the next five years. After an increase of just under 10% for this year, Lowenstein expects to see very aggressive double-digit growth in the 20% to 30% range from 2002 through 2004.

“The installed base of gamers will grow as the industry reaches out to a broader audience and older demographic over the next five-year cycle,” said P.J. McNealy, senior analyst, Gartner G2. “With the game graphics getting closer to real-life and the stories becoming more like Hollywood entertainment, games are poised to reach beyond the 8-35 year-old male demographic.”

“As the graphics of the games continue to improve, so will the emotional content and depth of storytelling within the games,” said Lowenstein. “As video game creators become better at telling stories, there's the potential for interactive entertainment to become the number one form of entertainment in popular culture.”

“We believe the movie and video game industries will both continue to thrive in their own right,” said Nicholas Longano, senior v.p. of marketing, Vivendi Universal Interactive Publishing. “While the games business is poised to see one of its strongest holiday seasons with the launch of new hardware platforms and exciting new games, there is, and always has been, room for both forms of entertainment. In both cases, content is king and will continue to drive consumer spending. Actually, we view the movie industry as being synergistic, rather than competitive, to the video games business.”

In addition to game sales, the video game industry generated jobs for 220,000 people and nearly $9 billion in wages and federal and state personal income tax revenues, according to a report commissioned by the IDSA, "Economic Impacts of the Demand for Computer and Video Games." Even during the flat transition year of 2000, when consumers were waiting for the next generation of gaming platforms to launch, sales in the game software industry in 2000 grew at a rate of 14.9% per year, more than double the rate of growth of the U.S. economy as a whole and far outpacing sales growth in related industries. Game hardware, software and accessories sales totaled $6.3 billion in 2000, according to analysis by IDG.

“We're very optimistic on the shape of the next-generation market as we head into the holiday selling season,” said Peter Dille, v.p., marketing, THQ. “The launch of the GameCube and Xbox are going to further expand the market. With hundreds of millions of marketing dollars being poured into the category by Sony, Nintendo and Microsoft, consumers will have to live under a rock to avoid the hype.”

“We expect the fourth quarter to be a good one for video games,” said a spokesman for Wal-Mart, which accounts for nearly one-fifth of video game sales in the U.S. “New formats will provide lots of excitement and visibility to the category, but due to expected unavailabilities, or even shortages, our business will be driven by PS2.”

Sony will continue to lead in the game category with PlayStation 2, which has sold over three million units to date and is expected to reach 5.2 million by the end of 2001. Sony projects shipments of 20 million PS2 units worldwide by the end of its fiscal year in April with 7 million units allocated for North America.

“PlayStation 2 accounts for the vast majority of a very strong growth market,” said Andrew House, senior v.p., Sony Computer Entertainment America. “The ability to play games and DVD movies has helped sales in North America and I don't see that changing. Where things really get interesting is if you project out to the third year of the life cycle, which is traditionally the time of a system's greatest growth. PlayStation 2 is already selling two and a half times faster than the original PS One.”

Nintendo and Microsoft are expected to sell 1.1 million units each of their new systems this year with Nintendo forecasting worldwide sales of 4 million by March and Microsoft planning on shipments of 4.5 to 6 million units worldwide in the first eight months.

“This should be the most explosive holiday season in gaming history,” said Kathy Vrabeck, executive v.p., global publishing and brand management, Activision. “PlayStation 2 is selling at a much faster rate than PlayStation did in its first year and we expect that to continue. There is lot of consumer support for both GameCube and Xbox and they should both be able to sell all the hardware they can make.”

”All three manufacturers should sell every unit they can put on store shelves between now and the end of the year,” said Frank Gibeau, v.p., worldwide marketing, Electronic Arts. “There's a lot of consumer excitement which, coupled with gigantic marketing budgets, is going to make game consoles the hot toy for Christmas -- probably for the next three Christmases combined. I've seen forecasts of 150 million new units worldwide by 2004. If the games are good and the manufacturers sustain the marketing blitz, we could see a day when game consoles are as ubiquitous as VCRs.”

With the higher price points of the hardware and the games retailer for $50 each, the rental market is expected to play a bigger role over the next five-year cycle than it ever has. Many rental chains will add GameCube and Xbox to their list of game systems this November, which already include Game Boy Advance and PS2.

“The consumer will be faced with more choices than ever before and we believe that rentailers will play an important role in the decision process,” said Steve Lundeen, v.p., interactive merchandising for Blockbuster Video. “Due to the wider selection out there and the fact that each of these systems is a substantial financial commitment, it is much more affordable to rent first and then purchase once they are satisfied.”

With an installed base of over 25.7 million units in the U.S., Sony will continue to market its $99 PS One system, which has a library of over 1,100 games, with a new marketing campaign that launches in September and will focus on the system's low price point and large number of under-$20 software.

“Sega, while announcing the termination of new production of the Dreamcast platform earlier this summer, will still show some good life this fall, especially with Dreamcast software sales at very friendly consumer price points, likely in the $14.99 to $19.99 ranges, and the system selling for $79.99,” said Wim Stocks, senior v.p., sales and distribution, Infogrames. “Keep in mind Dreamcast is also a 'next-gen' platform, and at these kinds of price points, sales of software in certain retail environments will be very strong.”

As healthy as this year's sales will be, the real explosion will begin next fall, when Microsoft and Nintendo reach out beyond the core gamers to the mass market, as Sony is doing this fall.

“From a business perspective, we're all looking forward to holiday 2002,” said Peter Moore, president of Sega of America, which earlier this year bowed out of the hardware market to become a third-party game publisher. “Although there's a lot of anticipation for Xbox and GameCube this holiday, we don't believe they will ship more than one million units for each system by this Christmas, which is just the tip of the iceberg. Sega's excited about bringing its games to all platforms over the next five-year game cycle, which promises to be huge for the gaming industry.”

Bruehl believes that as the next cycle unfolds, there will be a higher dual-ownership of video game systems in one household.

“You could see a 12 year-old with a GameCube, a 17 year-old with a PS2 and a 19-21 year-old with an Xbox in the same household,” said Bruehl. “Each new system offers unique benefits in games, peripherals and online capabilities.”

While Sega was the first company to launch online console gaming with Dreamcast last year, Sony, Nintendo and Microsoft all have plans to expand console gaming to the Internet. Sony will launch PS2's online network this winter and Microsoft has slated the Xbox online gaming launch for late next summer.

“The next big step for the industry will be online gaming, which will really change the face of gaming, said James Bernard, marketing manager, Microsoft. “Xbox is poised to take the lead with a built-in ethernet port and hard drive that ship with every console. With an online game, a gamer can compete simultaneously with other gamers around the world. Online gaming also changes the way games are designed. Now, instead of a game with a finite beginning, middle and end, you can have games that are episodic. New levels, characters and weapons can be accessed online. In sports games, you would be able to access real-time player statistics, and even weather, in your favorite stadium on a given day.”

And so the gaming industry will have a new source of growth and revenue with online gaming, opening up the window for monthly subscription rates and new advertising opportunities. In addition to the DVD movie capabilities of Xbox and PS2, the built-in hard drive of Xbox and PS2 hard drive add-on also open up the possibilities for downloadable music and movie content, adding further to the convergence of video games with traditional forms of entertainment.

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