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New Systems Expected to Launch Game Explosion

22 Nov, 2001 By: John Gaudiosi

While the video game launches of Microsoft’s Xbox ($299) and Nintendo’s GameCube ($199) won’t have much of an impact in retail sales this year, since hardware units will be in short supply, these new systems will usher in what is expected to be the biggest five-year life cycle in the 20-year history of video gaming, according to industry analysts.

Nintendo and Microsoft are expected to sell approximately 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 million to 6 million units worldwide in the first eight months.

Since both Microsoft and Nintendo have been working with retailers to keep pre-orders down, there should be more Xbox and GameCube hardware units available at launch this year than there were PlayStation 2s last year. But the new systems will still be hard to come by, as hardcore gamers who haven’t pre-ordered the systems will be waiting in line to be the first to buy the new systems.

With the higher price points of the hardware and the games retailing 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,” says 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.”

Even with the current economic woes and the post-terrorist-attacks climate, the video game industry, which is transitioning into its fifth generation of game consoles, is expected to bring in more than $8.5 billion in hardware, software and peripherals sales this year in the United States, according to analysis by the 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, who expect video game sales for next year to reach close to $13 billion and more than $18 billion by 2006.

“I don't expect September 11th to have any negative impact on games category,” says John Taylor, analyst for Arcadia Investments. “If anything, the trend at retail has been very encouraging. Weekly sales figures are right back where they were planned long before the attack, even though there was a month of slowness right afterwards.” He added that software sales have been very robust, as the big new PS2 games are doing very well (Grand Theft Auto 3, Silent Hill 2, Devil May Cry, Spy Hunter) and hopes are very high for Metal Gear Solid 2: Sons of Liberty (of which Konami is rumored to be shipping 2 million units in the U.S. alone).

“We're very optimistic on the shape of the next-generation market as we head into the holiday selling season,” says 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,” says a spokesman for Wal-Mart, which accounts for nearly one-fifth of domestic video game sales. “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 PlayStation 2.”

Sony will continue to lead in the game category with PlayStation 2, which has sold more than 3 million units to date and is expected to reach more than 5 million by the end of 2001, according to IDG. 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,” says 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.”

“This should be the most explosive holiday season in gaming history,” says Kathy Vrabeck, executive v.p. of 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,” says 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 an installed base of more than 25.7 million units in the United States, Sony will continue to market its $99 PS One system, which has a library of more than 1,100 games, with a new marketing campaign that launched in September and will focus on the system’s low price point and large number of under-$20 games.

“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,” says 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,” says Peter Moore, president of Sega of America, which earlier this year bowed out of the hardware market to become a third-party game publisher.

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