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Price Giving Microsoft, Nintendo Edge in Game Biz

9 Oct, 2006 By: John Gaudiosi

The video game industry will grow from $29 billion globally in 2005 to between $42 billion and $44 billion by 2011, regardless of which platform is the most successful, according to a new report from research firm DFC Intelligence.

The forecast looks at multiple scenarios for each major platform. Prior to 2006, the firm argued that Sony's market dominance was so strong that without a clear distinguishing factor, the best Microsoft or Nintendo could hope for with their platforms was a close second place. Now, they have that clear distinguishing factor: price.

The Xbox 360 and Nintendo Wii now have a clear opportunity to challenge the PlayStation 3, the report says. Whether the two companies take advantage of this opportunity will depend not only on execution, but on how Sony reacts to any potential challenges to its market-leading position.

“Consumers will not make their decision overnight,” said David Cole, president of DFC Intelligence. “This is a battle that will play out over the next few years. We have stated that two key goals for Sony are keeping the PlayStation 2 market active, thus slowing the upgrade cycle, and becoming more price-aggressive by late 2007. At the 2006 Tokyo Game Show, Sony took some of the steps that we feel are necessary to make their best-case scenario happen.”

The new report paints a picture of a marketplace that can support three competing game platforms. In the past generation, there was one platform, PS2, that far outclassed the field. Cole does not see a scenario where any platform has that kind of dominance over the next five years. Even under the worst-case scenario, Microsoft and Nintendo do better with the Xbox 360 and the Wii than they did with the Xbox and GameCube. In the past, content creators could focus on the PS2 as a primary platform and from there look to other platforms for ancillary revenue. In the future, properly leveraging multiple platforms will be crucial to success.

“Not only do we expect a more even distribution in the installed base of console systems, but we also forecast console software as an overall percentage of interactive entertainment to decline,” Cole said. “Console software, as a percentage of overall revenue, is expected to decline from 47% in 2004 to only 34% in 2011. With the growth of online games, mobile games and PC games, the market becomes about much more than just the leading console system.”

The higher prices of PS3 ($500 to $600), Xbox 360 ($300 to $400) and Wii ($250) could lead to a slower upgrade path over the next five years, as fewer consumers make the jump to next-generation as quickly as they did the last round, when $300 was the top price for entry. As a result, PS2 is expected to remain an active system for several more years.

“Growth in this upcoming generation is not likely to substantially exceed growth in the previous generation,” Cole said. “It is not so much about system X selling 100,000 units more than system Y last month. Increasingly, consumers own multiple platforms on which they play games. There are many opportunities to reach a growing consumer base. Unfortunately, the market also is getting substantially more competitive, and the pitfalls are growing just as fast. Even the largest companies risk becoming overextended as they try to be all things to all people in all places.”

The real competition for next-generation consoles is expected to shift into high gear next fall, as Sony and Nintendo will have plenty of hardware and games to compete with Microsoft, which is enjoying a nice lead from its one-year head-start. The rise in popularity of portable game systems such as Nintendo DS and PSP also will play an important role moving forward as more gamers take their entertainment mobile and take advantage of greater Internet connectivity.

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