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Next-Gen Battle Hinges on Studios

4 May, 2006 By: John Gaudiosi

The studios will play a big part in next-generation game console wars, according to a new report from Wedbush Morgan Securities.

“Notwithstanding the efforts of all three console manufacturers to deliver compelling exclusive content, we believe that the ultimate outcome of the console wars will be decided by the motion picture studios,” said Michael Pachter, senior analyst at Wedbush Morgan Securities, in the “2006 Industry Report — Flirting with Disaster, Will Sony's Battle with Toshiba Determine the Outcome of the Console Transition?”

“Should the studios embrace Sony's Blu-ray standard for high-definition discs, we think Sony will gain an insurmountable advantage over Microsoft. Should the studios embrace Sony rival Toshiba's HD DVD format, we think that Microsoft can maintain its first mover advantage and will dominate software sales for years to come.”

Sony's PlayStation3 will use Blu-ray Disc technology for all of its games, and will be backward-compatible with PlayStation and PlayStation 2 games, DVD and CD. Microsoft will release an HD DVD add-on to its next-gen Xbox 360 this fall, which could sell for as little at $100. It will play HD DVD movies, but all games will run on DVD-9 inside the console. Nintendo also has a next-generation game-only console due called Wii.

Pachter said that due to increasing multimedia functionality, the next generation of game machines will appeal to a much wider audience and drive the percentage of households that own at least one console from 52% during the 128-bit cycle up to 60% during the next cycle.

“We expect the dominant console at the end of the next cycle to be PS3, primarily due to our assessment that Sony will win the high-definition format war,” Pachter said.

Still, Xbox 360 will have an immediate advantage.

“We expect Xbox 360 to enjoy a first-mover advantage for the next two years, capturing approximately 42% of U.S. and European combined next-generation hardware unit sales through 2007. We forecast the PS3 and Nintendo's Wii to capture approximately 39% and 19%, respectively, of the next-generation hardware market in this same period.”

Pachter believes the ability to play DVD movies allowed Sony to take the driver's seat and never look back with PS2. Although PS3 is launching late this time around, Pachter believes the inclusion of Blu-ray inside the box will play a significant role in that console's ultimate victory.

The sales slump of recent current-generation games is about to give way to double-digit next-generation sales growth, the report said.

“We expect sales of interactive entertainment software to rebound over the next two years at a more dramatic growth rate than in the last cycle, with growth of 16% in 2007 and 17% in 2008,” Pachter said.

In the next-generation wars, Pachter believes that PS3 and Xbox 360 are far closer in quality and features than PS2 and Xbox. As a result, and due to increased development costs for next-generation games, he expects to see less third-party exclusives for these consoles. Nintendo's Wii could come out the winner with exclusive games.

As the game industry transitions from the current set of hardware to improved gaming consoles, he said current-generation game sales will decline by 30% this year and 50% in 2007.

Microsoft is expected to sell 9 million to 10 million next-gen consoles by the end of this year. Sony and Nintendo will likely have supply issues this year for their launches, but 2007 will begin the true growth of next generation gaming, analysts said.

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